UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) |
|
x |
|
Quarterly report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 |
|
|
|
for the quarterly period ended April 30,
2015 |
|
|
|
OR |
|
o |
|
Transition report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 |
for the transition period
from to
Commission file number:
0-23255
COPART, INC.
(Exact name of registrant as
specified in its charter)
Delaware |
94-2867490 |
(State or other jurisdiction |
(I.R.S. Employer |
of
incorporation or organization) |
Identification No.) |
14185 Dallas Parkway,
Dallas, Texas 75254
(Address of principal executive offices) (Zip
Code)
(972)
391-5000
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark
whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES x NO o
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). YES x NO o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule
12b-2 of the Exchange Act.
Large accelerated filer x |
Accelerated filer o |
Non-accelerated
filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). YES o NO x
As of May 27, 2015, 126,522,148
shares of the registrants common stock were outstanding.
Copart, Inc.
Index to
the Quarterly Report
April 30, 2015
Table of
Contents |
|
Page Number |
PART I - |
Financial
Information |
|
|
|
Item 1 - Financial Statements (Unaudited) |
|
|
|
Consolidated Balance
Sheets |
|
3 |
|
Consolidated Statements of
Income |
|
4 |
|
Consolidated Statements of
Comprehensive Income |
|
5 |
|
Consolidated Statements of
Cash Flows |
|
6 |
|
Notes to Consolidated
Financial Statements |
|
7 |
|
|
|
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations |
|
|
|
Overview |
|
18 |
|
Acquisitions and New
Operations |
|
19 |
|
Results of
Operations |
|
21 |
|
Liquidity and Capital
Resources |
|
24 |
|
Critical Accounting
Policies and Estimates |
|
26 |
|
|
|
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk |
|
30 |
|
|
|
Item 4 - Controls and
Procedures |
|
|
|
Evaluation of Disclosure
Controls and Procedures |
|
31 |
|
Changes in Internal
Controls |
|
31 |
|
|
PART II - |
Other Information |
|
|
|
Item 1 - Legal
Proceedings |
|
31 |
|
Item 1A - Risk Factors |
|
32 |
|
Item 6 -
Exhibits |
|
44 |
|
Signatures |
|
45 |
Copart,
Inc.
Consolidated Balance Sheets
(Unaudited)
|
|
|
April 30, |
|
|
July 31, |
(In thousands, except share amounts) |
|
|
2015 |
|
|
2014 |
ASSETS |
|
|
|
|
|
|
|
|
Current
assets: |
|
|
|
|
|
|
|
|
Cash and cash
equivalents |
|
$ |
678,742 |
|
|
$ |
158,668 |
|
Accounts receivable,
net |
|
|
217,003 |
|
|
|
196,985 |
|
Vehicle pooling
costs |
|
|
24,655 |
|
|
|
24,438 |
|
Inventories |
|
|
8,107 |
|
|
|
7,259 |
|
Income taxes
receivable |
|
|
2,587 |
|
|
|
2,288 |
|
Deferred income
taxes |
|
|
5,053 |
|
|
|
1,803 |
|
Prepaid expenses and other
assets |
|
|
18,312 |
|
|
|
20,850 |
|
Total
current assets |
|
|
954,459 |
|
|
|
412,291 |
|
Property and
equipment, net |
|
|
683,956 |
|
|
|
692,383 |
|
Intangibles,
net |
|
|
19,715 |
|
|
|
25,242 |
|
Goodwill |
|
|
271,484 |
|
|
|
283,780 |
|
Deferred
income taxes |
|
|
29,116 |
|
|
|
36,721 |
|
Other
assets |
|
|
44,247 |
|
|
|
56,387 |
|
Total
assets |
|
$ |
2,002,977 |
|
|
$ |
1,506,804 |
|
|
LIABILITIES AND STOCKHOLDERS'
EQUITY |
|
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and
accrued liabilities |
|
$ |
154,255 |
|
|
$ |
152,156 |
|
Deferred revenue |
|
|
4,612 |
|
|
|
4,170 |
|
Income taxes
payable |
|
|
5,660 |
|
|
|
8,284 |
|
Current portion of
long-term debt and capital lease obligations |
|
|
64,921 |
|
|
|
79,674 |
|
Total
current liabilities |
|
|
229,448 |
|
|
|
244,284 |
|
Deferred
income taxes |
|
|
6,334 |
|
|
|
7,372 |
|
Income taxes
payable |
|
|
26,982 |
|
|
|
23,771 |
|
Long-term
debt and capital lease obligations, net of discount |
|
|
599,951 |
|
|
|
223,227 |
|
Other
liabilities |
|
|
4,294 |
|
|
|
4,651 |
|
Total
liabilities |
|
|
867,009 |
|
|
|
503,305 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
|
|
|
Preferred stock: $0.0001
par value - 5,000,000 shares authorized; none issued |
|
|
- |
|
|
|
- |
|
Common stock: $0.0001 par
value - 180,000,000 shares authorized; 126,521,598 |
|
|
13 |
|
|
|
13 |
|
and
126,143,366 shares issued and outstanding, respectively. |
|
|
|
|
|
|
|
|
Additional paid-in
capital |
|
|
422,194 |
|
|
|
404,542 |
|
Accumulated other
comprehensive loss |
|
|
(66,594 |
) |
|
|
(20,060 |
) |
Retained earnings |
|
|
780,355 |
|
|
|
619,004 |
|
Total stockholders'
equity |
|
|
1,135,968 |
|
|
|
1,003,499 |
|
Total
liabilities and stockholders' equity |
|
$ |
2,002,977 |
|
|
$ |
1,506,804 |
|
The accompanying notes are
an integral part of these consolidated financial statements.
3
Copart,
Inc.
Consolidated Statements of Income
(Unaudited)
|
|
|
Three Months Ended April
30, |
|
|
Nine Months Ended April
30, |
(In thousands, except per
share amounts) |
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
Service
revenues and vehicle sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues |
|
$ |
256,564 |
|
|
$ |
255,045 |
|
|
$ |
741,692 |
|
|
$ |
717,140 |
|
Vehicle sales |
|
|
40,578 |
|
|
|
54,677 |
|
|
|
122,094 |
|
|
|
158,899 |
|
Total
service revenues and vehicle sales |
|
|
297,142 |
|
|
|
309,722 |
|
|
|
863,786 |
|
|
|
876,039 |
|
|
Operating
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yard operations |
|
|
135,222 |
|
|
|
131,207 |
|
|
|
395,500 |
|
|
|
388,409 |
|
Cost of vehicle
sales |
|
|
34,503 |
|
|
|
46,263 |
|
|
|
103,694 |
|
|
|
135,996 |
|
General and
administrative |
|
|
32,650 |
|
|
|
40,515 |
|
|
|
106,956 |
|
|
|
123,454 |
|
Impairment of long-lived
assets |
|
|
- |
|
|
|
29,104 |
|
|
|
- |
|
|
|
29,104 |
|
Total
operating expenses |
|
|
202,375 |
|
|
|
247,089 |
|
|
|
606,150 |
|
|
|
676,963 |
|
Operating
income |
|
|
94,767 |
|
|
|
62,633 |
|
|
|
257,636 |
|
|
|
199,076 |
|
|
Other
(expense) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(5,917 |
) |
|
|
(2,104 |
) |
|
|
(12,515 |
) |
|
|
(6,599 |
) |
Interest income |
|
|
261 |
|
|
|
81 |
|
|
|
583 |
|
|
|
373 |
|
Other income, net |
|
|
(815 |
) |
|
|
708 |
|
|
|
4,919 |
|
|
|
3,301 |
|
Total
other expense |
|
|
(6,471 |
) |
|
|
(1,315 |
) |
|
|
(7,013 |
) |
|
|
(2,925 |
) |
Income
before income taxes |
|
|
88,296 |
|
|
|
61,318 |
|
|
|
250,623 |
|
|
|
196,151 |
|
Income
taxes |
|
|
30,733 |
|
|
|
20,441 |
|
|
|
88,252 |
|
|
|
68,507 |
|
Net income |
|
$ |
57,563 |
|
|
$ |
40,877 |
|
|
$ |
162,371 |
|
|
$ |
127,644 |
|
|
Basic net
income per common share |
|
$ |
0.46 |
|
|
$ |
0.32 |
|
|
$ |
1.29 |
|
|
$ |
1.02 |
|
Weighted
average common shares outstanding |
|
|
126,415 |
|
|
|
125,794 |
|
|
|
126,309 |
|
|
|
125,604 |
|
|
Diluted net
income per common share |
|
$ |
0.44 |
|
|
$ |
0.31 |
|
|
$ |
1.23 |
|
|
$ |
0.97 |
|
Diluted
weighted average common shares outstanding |
|
|
132,124 |
|
|
|
131,486 |
|
|
|
131,837 |
|
|
|
131,095 |
|
The accompanying notes are
an integral part of these consolidated financial statements.
4
Copart,
Inc.
Consolidated
Statements of Comprehensive Income
(Unaudited)
|
|
|
Three Months Ended April
30, |
|
|
Nine Months Ended April
30, |
(In thousands) |
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
Comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
57,563 |
|
|
$ |
40,877 |
|
|
$ |
162,371 |
|
|
$ |
127,644 |
|
Other
comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on interest rate swaps, net (a) |
|
|
385 |
|
|
|
523 |
|
|
|
1,334 |
|
|
|
1,415 |
|
Reclassification
adjustment of interest rate swaps, net (b) |
|
|
(266 |
) |
|
|
(354 |
) |
|
|
(872 |
) |
|
|
(1,098 |
) |
Foreign
currency translation adjustments |
|
|
(188 |
) |
|
|
9,720 |
|
|
|
(46,996 |
) |
|
|
25,015 |
|
Total
comprehensive income |
|
$ |
57,494 |
|
|
$ |
50,766 |
|
|
$ |
115,837 |
|
|
$ |
152,976 |
|
(a) |
Net of tax effect of
$(265) and $(274) for the three months ended April 30, 2015 and 2014,
respectively. Net of tax effect of $(791) and $(769) for the nine months
ended April 30, 2015 and 2014, respectively. |
(b) |
Net of tax effect of
$141 and $178 for the three months ended April 30, 2015 and 2014,
respectively. Net of tax effect of $473 and $590 for the nine months ended
April 30, 2015 and 2014, respectively. |
The accompanying notes are
an integral part of these consolidated financial statements.
5
Copart,
Inc.
Consolidated
Statements of Cash Flows
(Unaudited)
|
|
|
|
Nine Months Ended April
30, |
(In
thousands) |
|
|
2015 |
|
|
2014 |
Cash flows from operating
activities: |
|
|
|
|
|
|
|
|
|
Net
Income |
|
$ |
162,371 |
|
|
$ |
127,644 |
|
|
Adjustments to reconcile net income to net
cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and
amortization |
|
|
37,579 |
|
|
|
40,349 |
|
|
Allowance for doubtful
accounts |
|
|
(453 |
) |
|
|
936 |
|
|
Impairment of long-lived
assets |
|
|
- |
|
|
|
29,104 |
|
|
Stock-based payment
compensation |
|
|
13,290 |
|
|
|
17,262 |
|
|
Excess tax benefit from
stock-based payment compensation |
|
|
(1,279 |
) |
|
|
(1,219 |
) |
|
Gain on sale of property
and equipment |
|
|
(735 |
) |
|
|
(1,696 |
) |
|
Deferred income
taxes |
|
|
3,641 |
|
|
|
(12,609 |
) |
|
Changes in operating
assets and liabilities, net of effects from acquisitions: |
|
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
(21,763 |
) |
|
|
(9,161 |
) |
|
Vehicle
pooling costs |
|
|
(625 |
) |
|
|
(1,609 |
) |
|
Inventories |
|
|
(1,249 |
) |
|
|
1,439 |
|
|
Prepaid
expenses and other current assets |
|
|
1,480 |
|
|
|
(3,539 |
) |
|
Other
assets |
|
|
7,584 |
|
|
|
(12,133 |
) |
|
Accounts
payable and accrued liabilities |
|
|
2,042 |
|
|
|
15,269 |
|
|
Deferred
revenue |
|
|
445 |
|
|
|
316 |
|
|
Income
taxes receivable |
|
|
985 |
|
|
|
7,305 |
|
|
Income
taxes payable |
|
|
1,313 |
|
|
|
8,229 |
|
|
Other
liabilities |
|
|
(1,257 |
) |
|
|
1,747 |
|
|
Net
cash provided by operating activities |
|
|
203,369 |
|
|
|
207,634 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities: |
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(49,079 |
) |
|
|
(63,317 |
) |
|
Proceeds from sale of property and
equipment |
|
|
870 |
|
|
|
2,413 |
|
|
Proceeds from sale of assets held for sale |
|
|
217 |
|
|
|
858 |
|
|
Purchases of assets and liabilities in
connection with acquisition, net of cash acquired |
|
|
- |
|
|
|
(14,761 |
) |
|
Net
cash used in investing activities |
|
|
(47,992 |
) |
|
|
(74,807 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities: |
|
|
|
|
|
|
|
|
|
Proceeds from the exercise of stock options |
|
|
3,372 |
|
|
|
5,680 |
|
|
Excess tax benefit from stock-based payment
compensation |
|
|
1,279 |
|
|
|
1,219 |
|
|
Proceeds from the issuance of Employee Stock Purchase Plan
shares |
|
|
1,495 |
|
|
|
1,115 |
|
|
Repurchases of common stock |
|
|
(1,737 |
) |
|
|
(80 |
) |
|
Change in bank overdraft |
|
|
- |
|
|
|
(16,291 |
) |
|
Proceeds from the issuance of long-term
debt, net of discount |
|
|
698,939 |
|
|
|
- |
|
|
Debt
offering costs |
|
|
(955 |
) |
|
|
- |
|
|
Principal payments on long-term
debt |
|
|
(331,250 |
) |
|
|
(56,250 |
) |
|
Net
cash provided by (used in) financing activities |
|
|
371,143 |
|
|
|
(64,607 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency
translation |
|
|
(6,446 |
) |
|
|
981 |
|
Net increase in cash and cash equivalents |
|
|
520,074 |
|
|
|
69,201 |
|
Cash and cash equivalents at beginning of
period |
|
|
158,668 |
|
|
|
63,631 |
|
Cash and cash equivalents at end of period |
|
$ |
678,742 |
|
|
$ |
132,832 |
|
|
|
Supplemental disclosure of cash flow
information: |
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
9,705 |
|
|
$ |
6,599 |
|
|
Income taxes paid, net of refunds |
|
$ |
81,995 |
|
|
$ |
65,769 |
|
The accompanying notes are
an integral part of these consolidated financial statements.
6
Copart, Inc.
Notes to Consolidated Financial
Statements
April 30, 2015
(Unaudited)
NOTE 1 Description of
Business and Summary of Significant Accounting Policies
Description of
Business
The Company provides
vehicle sellers with a full range of services to process and sell vehicles over
the Internet through the Companys Virtual Bidding Third Generation (VB3)
Internet auction-style sales technology. Sellers are primarily insurance
companies but also include banks and financial institutions, charities, car
dealerships, fleet operators, and vehicle rental companies. The Company sells
principally to licensed vehicle dismantlers, rebuilders, repair licensees, used
vehicle dealers and exporters, however, at certain locations the Company sells
directly to the general public. The majority of vehicles sold on behalf of
insurance companies are either damaged vehicles deemed a total loss or 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. The Company offers vehicle sellers a full range of services that
expedite each stage of the vehicle sales process, minimize administrative and
processing costs and maximize the ultimate sales price. In the United States and
Canada (North America), the United Arab Emirates (U.A.E.), and Brazil, the
Company sells vehicles primarily as an agent and derives revenue primarily from
fees paid by vehicle sellers and vehicle buyers as well as related fees for
services, such as towing and storage. In the United Kingdom (U.K.), the Company
operates both on a principal basis, purchasing the salvage vehicle outright from
the insurance company and reselling the vehicle for its own account, and as an
agent. In Germany and Spain, the Company derives revenue from sales listing fees
for listing vehicles on behalf of insurance companies.
Principles of
Consolidation
The consolidated financial
statements of the Company include the accounts of the parent company and its
wholly-owned subsidiaries, including its foreign wholly-owned subsidiaries.
Intercompany transactions and balances have been eliminated in
consolidation.
In the opinion of
management, the accompanying unaudited consolidated financial statements contain
all adjustments of a normal recurring nature, considered necessary for fair
presentation of its financial position as of April 30, 2015 and July 31, 2014,
its consolidated statements of income and comprehensive income for the three and
nine months ended April 30, 2015 and 2014, and its cash flows for the nine
months ended April 30, 2015 and 2014. Interim results for the nine months ended
April 30, 2015 are not necessarily indicative of the results that may be
expected for any future period, or for the entire year ending July 31, 2015.
These consolidated financial statements have been prepared in accordance with
the rules and regulations of the U.S. Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with U.S. generally accepted accounting
principles (GAAP) have been condensed or omitted pursuant to such rules and
regulations. The interim consolidated financial statements should be read in
conjunction with the Companys Annual Report on Form 10-K for the fiscal year
ended July 31, 2014. Certain prior year amounts have been reclassified to
conform to current year presentation.
Use of Estimates
The preparation of
financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Estimates include, but are not limited to, vehicle pooling
costs; self-insured reserves; allowance for doubtful accounts; income taxes;
revenue recognition; stock-based payment compensation; purchase price
allocations; long-lived asset and goodwill impairment calculations, and
contingencies. Actual results could differ from these estimates.
Revenue Recognition
The Company provides a
portfolio of services to its sellers and buyers that facilitate the sale and
delivery of a vehicle from seller to buyer. These services include the ability
to use the Companys Internet sales technology and vehicle delivery, loading,
title processing, preparation and storage. The Company evaluates
multiple-element arrangements relative to its member and seller
agreements.
7
The services provided to
the seller of a vehicle involve disposing of a vehicle on the sellers behalf
and, under most of the Companys current North American contracts, collecting
the proceeds from the member. The Company applies Accounting Standard Update
2009-13, Revenue Recognition
(Topic 605): Multiple-Deliverable Revenue Arrangements (ASU 2009-13) for revenue recognition. Pre-sale
services, including towing, title processing, preparation and storage, as well
as sale fees and other enhancement services meet the criteria for separate units
of accounting. Revenue associated with each service is recognized upon
completion of the respective service, net of applicable rebates or allowances.
For certain sellers who are charged a proportionate fee based on high bid of the
vehicle, the revenue associated with the pre-sale services is recognized upon
completion of the sale when the total arrangement is fixed and determinable. The
estimated selling price of each service is determined based on managements best
estimate and allotted based on the relative selling price method.
Vehicle sales, where
vehicles are purchased and remarketed on the Companys own behalf, are
recognized on the sale date, which is typically the point of high bid
acceptance. Upon high bid acceptance, a legal binding contract is formed with
the member, and the gross sales price is recorded as revenue.
The Company also provides a
number of services to the buyer of the vehicle, charging a separate fee for each
service. Each of these services has been assessed to determine whether the
requirements have been met to separate them into units of accounting within a
multiple-element arrangement. The Company has concluded that the sale and the
post-sale services are separate units of accounting. The fees for sale services
are recognized upon completion of the sale, and the fees for the post-sale
services are recognized upon successful completion of those services using the
relative selling price method.
The Company also charges
members an annual registration fee for the right to participate in its vehicle
sales program, which is recognized ratably over the term of the arrangement, and
relist and late-payment fees, which are recognized upon receipt of payment by
the member. No provision for returns has been established, as all sales are
final with no right of return, although the Company provides for bad debt
expense in the case of non-performance by its members or sellers.
The Company allocates
arrangement consideration based upon managements best estimate of the selling
price of the separate units of accounting contained within arrangements
including multiple deliverables. Significant inputs in the Companys estimates
of the selling price of separate units of accounting include market and pricing
trends, pricing customization and practices, and profit objectives for the
services.
Vehicle Pooling
Costs
The Company defers in
vehicle pooling costs certain yard operation expenses associated with vehicles
consigned to and received by the Company, but not sold as of the end of the
period. The Company quantifies the deferred costs using a calculation that
includes the number of vehicles at its facilities at the beginning and end of
the period, the number of vehicles sold during the period and an allocation of
certain yard operation costs of the period. The primary expenses allocated and
deferred are certain facility costs, labor, transportation, and vehicle
processing. If the allocation factors change, then yard operation expenses could
increase or decrease correspondingly in the future. These costs are expensed as
vehicles are sold in subsequent periods on an average cost basis. Given the
fixed cost nature of the Companys business, there are no direct correlations
for increases in expenses or units processed on vehicle pooling costs.
The Company applies the
provisions of accounting guidance for subsequent measurement of inventory to our
vehicle pooling costs. The provision requires that items such as idle facility
expenses, double freight and rehandling costs be recognized as current period
charges regardless of whether they meet the criteria of abnormal as provided
in the guidance. In addition, the guidance requires that the allocation of fixed
production overhead to the costs of conversion be based on the normal capacity
of production facilities.
Foreign Currency
Translation
The Company records foreign
currency translation adjustments from the process of translating the functional
currency of the financial statements of its foreign subsidiaries into the U.S.
dollar reporting currency. The Canadian dollar, the British pound, the U.A.E.
dirham, the Brazilian real, and the Euro are the functional currencies of the
Companys foreign subsidiaries as they are the primary currencies within the
economic environment in which each subsidiary operates. The original equity
investment in the respective subsidiaries is translated at historical rates.
Assets and liabilities of the respective subsidiarys operations are translated
into U.S. dollars at period-end exchange rates, and revenues and expenses are
translated into U.S. dollars at average exchange rates in effect during each
reporting period. Adjustments resulting from the translation of each
subsidiarys financial statements are reported in other comprehensive
income.
8
The cumulative effects of
foreign currency exchange rate fluctuations were as follows (in
thousands):
Cumulative
loss on foreign currency translation as of July 31, 2013 |
$ |
(45,420 |
) |
Gain on
foreign currency translation |
|
26,428 |
|
Cumulative
loss on foreign currency translation as of July 31, 2014 |
$ |
(18,992 |
) |
Loss on
foreign currency translation |
|
(46,996 |
) |
Cumulative
loss on foreign currency translation as of April 30, 2015 |
$ |
(65,988 |
) |
Income Taxes and
Deferred Tax Assets
Income taxes are accounted
for under the asset and liability method. Deferred tax assets and liabilities
are recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities, their respective tax basis, and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
In accordance with the
provisions of ASC 740, Income
Taxes, a two-step approach is
applied to the recognition and measurement of uncertain tax positions taken or
expected to be taken in a tax return. The first step is to determine if the
weight of available evidence indicates that it is more likely than not that the
tax position will be sustained in an audit, including resolution of any related
appeals or litigation processes. The second step is to measure the tax benefit
as the largest amount that is more than 50% likely to be realized upon ultimate
settlement. The Company recognizes interest and penalties related to uncertain
tax positions in the provision for income taxes on its consolidated statements
of income.
Fair Value of
Financial Instruments
The Company records its
financial assets and liabilities at fair value in accordance with the framework
for measuring fair value in U.S. GAAP. In accordance with ASC 820,
Fair Value Measurements and
Disclosures, as amended by
Accounting Standards Update 2011-04, the Company considers fair value as an exit
price, representing the amount that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants
under current market conditions. This framework establishes a fair value
hierarchy that prioritizes the inputs used to measure fair value:
|
Level
I |
|
Observable
inputs that reflect unadjusted quoted prices for identical assets or
liabilities traded in active markets. |
|
|
|
|
|
Level
II |
|
Inputs other
than quoted prices included within Level I that are observable for the
asset or liability, either directly or indirectly. Interest rate hedges
are valued at exit prices obtained from the counter-party. |
|
|
|
Level
III |
|
Inputs that
are generally unobservable. These inputs may be used with internally
developed methodologies that result in managements best
estimate. |
The amounts recorded for
financial instruments in the Company's consolidated financial statements, which
included cash, accounts receivable, accounts payable and accrued liabilities
approximated their fair values as of April 30, 2015 and July 31, 2014, due to
the short-term nature of those instruments, and are classified within Level II
of the fair value hierarchy. Cash equivalents are classified within Level II of
the fair value hierarchy because they are valued using quoted market prices of
the underlying investments. See Note 3 - Long-Term Debt
for additional fair value disclosures.
Derivatives and
Hedging
The Company has entered
into two interest rate swaps to eliminate interest rate risk on the Companys
variable interest rate debt, and the swaps are designated as effective cash flow
hedges under ASC 815, Derivatives
and Hedging. See Note 4 - Derivatives and Hedging. Each quarter, the Company measures hedge
effectiveness using the hypothetical derivative method and records in earnings
any hedge ineffectiveness with the effective portion of the change in fair value
recorded in other comprehensive income or loss.
9
Capitalized Software
Costs
The Company capitalizes
system and website development costs related to enterprise computing services
during the application development stage. Costs related to preliminary project
activities and post implementation activities are expensed as incurred.
Internal-use software is amortized on a straight-line basis over its estimated
useful life, generally three years. The Company evaluates the useful lives of
these assets on an annual basis and tests for impairment whenever events or
changes in circumstances occur that impact the recoverability of these
assets.
Total gross capitalized
software as of April 30, 2015 and July 31, 2014 was $63.3 million and $61.7
million, respectively. Accumulated amortization expense related to software as
of April 30, 2015 and July 31, 2014 totaled $41.2 million and $38.6 million,
respectively.
The Company reassessed its
strategy of utilizing a third-party enterprise operating system to address its
international expansion needs based on the projected cost to complete,
deployment risk and certain other factors. The Company decided to cease
deployment of this software and address its international technology needs
through an internally-developed solution. During the three months ended April
30, 2014, the Company recognized a charge of $29.1 million resulting primarily
from the impairment of costs previously capitalized in connection with the
development of the software.
Accounting for
Acquisitions
The Company recognizes and
measures identifiable assets acquired and liabilities assumed in acquired
entities in accordance with ASC 805, Business Combinations. The
accounting for acquisitions involves significant judgments and estimates,
including the fair value of certain forms of consideration, the fair value of
acquired intangible assets, which involve projections of future revenues, cash
flows and terminal value, which are then either discounted at an estimated
discount rate or measured at an estimated royalty rate, and the fair value of
other acquired assets and assumed liabilities, including potential contingencies
and the useful lives of the assets. The projections are developed using internal
forecasts, available industry and market data and estimates of long-term growth
rates of the Company. Historical experience is additionally utilized, in which
historical or current costs have approximated fair value for certain assets
acquired.
Segments and Other
Geographic Reporting
The Companys North
American and U.K. regions are considered two separate operating segments, which
have been aggregated into one reportable segment because they share similar
economic characteristics.
NOTE 2 Cash and Cash
Equivalents
The Company considers all
highly liquid investments purchased with original maturities of three months or
less at the time of purchase to be cash equivalents. Cash and cash equivalents
include cash held in checking and money market accounts. The Company
periodically invests its excess cash in money market funds and U.S. Treasury
Bills. The Companys cash and cash equivalents are placed with high credit
quality financial institutions.
NOTE 3 Long-Term Debt
Credit Facility
On December 14, 2010, the
Company entered into an Amended and Restated Credit Facility Agreement (Credit
Facility), with Bank of America, N.A. The Credit Facility is an unsecured credit
agreement providing for (i) a $100.0 million revolving credit facility,
including a $100.0 million alternative currency borrowing sublimit and a $50.0
million letter of credit sublimit and (ii) a term loan facility of $400.0
million. On September, 29, 2011, the Company amended the Credit Facility
increasing the amount of the term loan facility from $400.0 million to $500.0
million.
Credit Agreement
On December 3, 2014, the
Company entered into a Credit Agreement with Wells Fargo Bank, National
Association, as administrative agent, and Bank of America, N.A., as syndication
agent, which superseded the Credit Facility. The Credit Agreement provides for
(a) a secured revolving loan facility in an aggregate principal amount of up to
$300.0 million, none of which was drawn at closing, or at April 30,
2015 (Revolving Loan Facility), and (b) a secured term loan facility in an
aggregate principal amount of $300.0 million (Term Loan), which was fully drawn
at closing. Proceeds from the Credit Facility Agreement were used to repay all
outstanding amounts under the Credit Facility totaling $275.0 million at
December 3, 2014. The remaining proceeds will be used for general corporate
purposes. The Revolving Loan Facility and the Term Loan facility mature on
December 3, 2019.
10
The Term Loan, which as of
April 30, 2015, had $263.6 million outstanding, amortizes $18.8 million each
quarter beginning December 31, 2014 through December 31, 2015, then amortizes
$7.5 million each quarter, with all outstanding borrowings due on December 3,
2019. All amounts borrowed under the Term Loan may be prepaid without premium or
penalty.
The revolving and term
loans under the Credit Agreement bear interest, at the election of the Company,
at either (a) the Base Rate, which is defined as a fluctuating rate per annum
equal to the greatest of (i) the Prime Rate in effect on such day; (ii) the
Federal Funds Rate in effect on such date plus 0.50%; or (iii) an adjusted LIBOR
rate determined on the basis of a one-month interest period plus 1.0%, in each
case plus an applicable margin ranging from 0.25% to 1.0% based on the Companys
consolidated total net leverage ratio during the preceding fiscal quarter; or
(b) an adjusted LIBOR Rate plus an applicable margin ranging from 1.25% to 2.0%
depending on the Companys consolidated total net leverage ratio during the
preceding fiscal quarter. Interest is due and payable quarterly, in arrears, for
loans bearing interest at the Base Rate, and at the end of an interest period
(or at each three month interval in the case of loans with interest periods
greater than three months) in the case of loans bearing interest at the adjusted
LIBOR rate. The interest rate as of April 30, 2015 on the Companys variable
interest rate debt was the one month LIBOR rate of 0.18% plus an applicable
margin of 1.25%. The carrying amount of the Credit Agreement is comprised
of borrowings under which interest accrues under a fluctuating interest rate structure. Accordingly, the carrying value approximates
fair value at April 30, 2015, and was classified within Level II of the fair value hierarchy.
Amounts borrowed under the
Revolving Loan Facility may be repaid and reborrowed until the maturity date of
December 3, 2019. The Company is obligated to pay a commitment fee on the unused
portion of the Revolving Loan Facility. The commitment fee rate ranges from
0.20% to 0.35%, depending on the Companys consolidated total net leverage ratio
during the preceding fiscal quarter, on the average daily unused portion of the
revolving credit commitment under the Credit Agreement. The Company had no
outstanding borrowings under the Revolving Loan Facility as of April 30, 2015.
The Companys obligations
under the Credit Agreement are guaranteed by certain of the Companys domestic
subsidiaries meeting materiality thresholds set forth in the Credit Agreement.
Such obligations, including the guaranties, are secured by substantially all of
the assets of the Company and the assets of the subsidiary guarantors pursuant
to a Security Agreement, dated December 3, 2014, among the Company, the
subsidiary guarantors from time to time party thereto, and Wells Fargo Bank,
National Association, as collateral agent (the Security Agreement).
The Credit Agreement
contains customary affirmative and negative covenants, including covenants that
limit or restrict the Company and its subsidiaries ability to, among other
things, incur indebtedness, grant liens, merge or consolidate, dispose of
assets, make investments, make acquisitions, enter into transactions with
affiliates, pay dividends, or make distributions on and repurchase stock, in
each case subject to certain exceptions. The Company is also required to
maintain compliance, measured at the end of each fiscal quarter, with a
consolidated total net leverage ratio and a consolidated interest coverage
ratio. The Company was in compliance with all covenants related to the Credit
Agreement as of April 30, 2015.
Note Purchase
Agreement
On December 3, 2014, the
Company entered into a Note Purchase Agreement and sold to certain purchasers
(collectively, the Purchasers) $400.0 million in aggregate principal amount of
senior secured notes (Senior Notes) consisting of (i) $100.0 million aggregate
principal amount of 4.07% Senior Notes, Series A, due December 3, 2024; (ii)
$100.0 million aggregate principal amount of 4.19% Senior Notes, Series B, due
December 3, 2026; (iii) $100.0 million aggregate principal amount of 4.25%
Senior Notes, Series C, due December 3, 2027; and (iv) $100.0 million aggregate
principal amount of 4.35% Senior Notes, Series D, due December 3, 2029. Interest
is due and payable quarterly, in arrears, on each of the Senior Notes. Proceeds
from the Note Purchase Agreement will be used for general corporate purposes.
The Company may prepay the
Senior Notes, in whole or in part, at any time, subject to certain conditions,
including minimum amounts and payment of a make-whole amount equal to the
discounted value of the remaining scheduled interest payments under the Senior
Notes.
The Companys obligations
under the Note Purchase Agreement are guaranteed by certain of the Companys
domestic subsidiaries meeting materiality thresholds set forth in the Note
Purchase Agreement. Such obligations, including the guaranties, are secured by
substantially all of the assets of the Company and the subsidiary guarantors.
The obligations of the Company and its subsidiary guarantors under the Note
Purchase Agreement will be treated on a pari passu basis with the
obligations of those entities under the Credit Agreement as well as any
additional debt the Company may obtain.
11
The Note Purchase Agreement
contains customary affirmative and negative covenants, including covenants that
limit or restrict the Company and its subsidiaries ability to, among other
things, incur indebtedness, grant liens, merge or consolidate, dispose of
assets, make investments, make acquisitions, enter into transactions with
affiliates, pay dividends, or make distributions and repurchase stock, in each
case subject to certain exceptions. The Company is also required to maintain
compliance, measured at the end of each fiscal quarter, with a consolidated
total net leverage ratio and a consolidated interest coverage ratio. The Company
was in compliance with all covenants related to the Note Purchase Agreement as
of April 30, 2015.
Related to the execution of
the Credit Agreement and the Note Purchase Agreement, the Company incurred $2.1
million in costs, of which $1.0 million was capitalized as debt issuance fees
and $1.1 million was recorded as a reduction of the long-term debt proceeds as a
debt discount. Both the debt issuance fees and debt discount are amortized to
interest expense over the term of the respective debt instruments.
NOTE 4 Derivatives and
Hedging
The Company has entered
into two interest rate swaps to exchange its variable interest rate payments
commitment for fixed interest rate payments through December 2015. The swaps are
a designated effective cash flow hedge under ASC 815, Derivatives and Hedging. Each quarter, the Company measures hedge
effectiveness using the hypothetical derivative method and records in earnings
any hedge ineffectiveness with the effective portion of the change in fair value
recorded in other comprehensive income or loss. The Company has reclassified
$0.4 million and $0.5 million for the three months ended April 30, 2015 and
2014, respectively, and $1.3 million and $1.7 million for the nine months ended
April 30, 2015 and 2014, out of other comprehensive income into interest
expense.
The hedge provided by the
swaps could prove to be ineffective for a number of reasons, including early
retirement of the variable interest rate debt, as is allowed under the variable
interest rate debt, or in the event the counterparty to the interest rate swaps
is determined in the future to not be creditworthy.
The interest rate swaps are
classified within Level II of the fair value hierarchy as the derivatives are
valued using observable inputs. The Company determines fair value of the
derivative utilizing observable market data of swap rates and basis rates. These
inputs are placed into a pricing model using a discounted cash flow methodology
in order to calculate the mark-to-market value of the interest rate swaps. As of
April 30, 2015 and July 31, 2014, the Companys fair value of the interest rate
swaps were $0.9 million and $1.7 million, respectively, and were classified as
other liabilities in the consolidated balance sheets.
NOTE 5 Goodwill and
Intangible Assets
The following table sets
forth amortizable intangible assets by major asset class:
(In thousands) |
|
|
April 30, 2015 |
|
|
July 31,
2014 |
Amortized
intangibles: |
|
|
|
|
|
|
|
|
Covenants
not to compete |
|
$ |
1,719 |
|
|
$ |
2,939 |
|
Supply
contracts & customer relationships |
|
|
27,803 |
|
|
|
27,986 |
|
Trade
name |
|
|
5,174 |
|
|
|
5,791 |
|
Licenses and
databases |
|
|
2,514 |
|
|
|
1,810 |
|
Accumulated
amortization |
|
|
(17,495 |
) |
|
|
(13,284 |
) |
Net
intangibles |
|
$ |
19,715 |
|
|
$ |
25,242 |
|
Aggregate amortization
expense on amortizable intangible assets was $1.5 million for the three months
ended April 30, 2015 and 2014 and $5.1 million and $3.8 million for the nine
months ended April 30, 2015 and 2014, respectively.
The change in the carrying
amount of goodwill was as follows (in thousands):
12
Balance as of July 31, 2014 |
$ |
|
283,780 |
|
Adjustments to preliminary purchase price
allocation |
|
|
(790 |
) |
Effect of foreign currency exchange
rates |
|
|
(11,506 |
) |
Balance as of April 30, 2015 |
$ |
|
271,484 |
|
NOTE 6 Net Income Per
Share
The table below reconciles
basic weighted shares outstanding to diluted weighted average shares
outstanding:
|
|
Three Months Ended
April 30, |
|
Nine Months Ended
April 30, |
(In thousands) |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
Weighted average common shares
outstanding |
|
126,415 |
|
125,794 |
|
126,309 |
|
125,604 |
Effect of dilutive securities - stock
options |
|
5,709 |
|
5,692 |
|
5,528 |
|
5,491 |
Weighted average common and
dilutive potential
common shares outstanding |
|
132,124 |
|
131,486 |
|
131,837 |
|
131,095 |
There were no material
adjustments to net income required in calculating diluted net income per share.
Excluded from the dilutive earnings per share calculation were 5,775,664 and
4,973,398 shares for the three months ended April 30, 2015 and 2014,
respectively, and 5,306,759 and 3,240,098 shares for the nine months ended April
30, 2015 and 2014, respectively, because their inclusion would have been
anti-dilutive.
NOTE 7 Stock-based
Payment Compensation
The Company recognizes
compensation expense for stock option awards on a straight-line basis over the
requisite service period of the award. The following is a summary of option
activity for the Companys stock options for the nine months ended April 30,
2015:
(In thousands, except per share
and term data) |
|
Shares |
|
|
Weighted
Average Exercise Price |
|
Weighted
Average Remaining
Contractual Term (In
years) |
|
|
Aggregate Intrinsic Value |
Outstanding as of July 31, 2014 |
|
19,082 |
|
|
$ |
21.64 |
|
6.01 |
|
$ |
235,734 |
Grants of options |
|
1,226 |
|
|
|
36.45 |
|
|
|
|
|
Exercises |
|
(543 |
) |
|
|
18.97 |
|
|
|
|
|
Forfeitures or expirations |
|
(217 |
) |
|
|
32.40 |
|
|
|
|
|
Outstanding as of April 30, 2015 |
|
19,548 |
|
|
$ |
22.52 |
|
5.62 |
|
$ |
257,457 |
Exercisable as of April 30, 2015 |
|
14,272 |
|
|
$ |
18.00 |
|
4.49 |
|
$ |
250,878 |
The aggregate intrinsic value
is calculated as the difference between the exercise price of the underlying
awards and the quoted price of the Companys common stock. The number of options
that were in-the-money was 13,644,626 at April 30, 2015.
The table below sets forth the
stock-based payment compensation recognized by the Company:
|
|
|
Three Months Ended April
30, |
|
|
Nine Months Ended April
30, |
(In
thousands) |
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
General and administrative |
|
$ |
3,794 |
|
$ |
5,948 |
|
$ |
11,569 |
|
$ |
15,406 |
Yard Operations |
|
|
626 |
|
|
675 |
|
|
1,721 |
|
|
1,856 |
Total
stock-based compensation |
|
$ |
4,420 |
|
$ |
6,623 |
|
$ |
13,290 |
|
$ |
17,262 |
13
In accordance with ASC
718, Compensation Stock
Compensation, the Company made an
estimate of expected forfeitures and is recognizing compensation cost only for
those equity awards expected to vest.
In October 2013, following
stockholder approval of proposed grants at a meeting of stockholders, the
Compensation Committee of the Companys Board of Directors approved the grant of
nonqualified stock options to purchase 2,000,000 and 1,500,000 shares of the
Companys common stock to A. Jayson Adair, the Companys Chief Executive
Officer, and Vincent W. Mitz, the Companys President, respectively, at an
exercise price of $35.62 per share, which equaled the closing price of the
Companys common stock on December 16, 2013, the effective date of grant. Such
grants were made in lieu of any cash salary or bonus compensation in excess of
$1.00 per year or the grant of any additional equity incentives for a five-year
period. Each option will become exercisable over five years, subject to
continued service by Mr. Adair and Mr. Mitz, with twenty percent (20%) vesting
on April 15, 2015 and December 16, 2014, respectively, and the balance vesting
monthly over the subsequent four years. Each option will become fully vested,
assuming continued service on April 15, 2019 and December 16, 2018,
respectively. If, prior to a change in control, either executives employment is
terminated without cause, then one hundred percent (100%) of the shares subject
to that executives stock option will immediately vest. If, upon or following a
change in control, either the Company or a successor entity terminates the
executives service without cause, or the executive resigns for good reason (as
defined in the option agreement), then one hundred percent (100%) of the shares
subject to his stock option will immediately vest. The fair value of each option
at the date of grant was $11.43. The total estimated compensation expense to be
recognized by the Company over the five year estimated service period for these
options is $40.0 million. The Company recognized $5.6 million and $2.8 million
in compensation expenses for these grants in the nine months ended April 30,
2015 and 2014, respectively.
NOTE 8 Common Stock
Repurchases
On September 22, 2011, the
Company's board of directors approved a 40 million share increase in the
Company's stock repurchase program, bringing the total current authorization to
98 million shares. The repurchases may be effected through solicited or
unsolicited transactions in the open market or in privately negotiated
transactions. No time limit has been placed on the duration of the stock
repurchase program. Subject to applicable securities laws, such repurchases will
be made at such times and in such amounts as the Company deems appropriate and
may be discontinued at any time. The Company did not repurchase any common stock
under the program during the nine months ended April 30, 2015 or 2014. As of April 30, 2015, the
total number of shares repurchased under the program was 50,286,782, and
47,713,218 shares were available for repurchase under the program. The impact on
dilutive earnings per share of all repurchased shares on the weighted average
number of common shares outstanding for the nine months ended April 30, 2015,
was less than $0.01.
In the first quarter of
fiscal 2014 and 2015, and the third quarter of fiscal 2015 certain employees and
executive officers exercised stock options through cashless exercises. A portion
of the options exercised were net settled in satisfaction of the exercise price
and federal and state minimum statutory tax withholding requirements. The
Company remitted $1.7 million and $0.1 million for the nine months ended April
30, 2015 and 2014, respectively, to the proper taxing authorities in
satisfaction of the employees' minimum statutory withholding
requirements.
The stock options exercised
by certain employees and executive officers through cashless exercises are
summarized in the following table:
Period |
|
Options Exercised |
|
|
Exercise Price |
|
Shares Net Settled for Exercise |
|
Shares Withheld for Taxes(1) |
|
Net Shares to Employee |
|
|
Share Price
for Withholding |
|
|
Tax Withholding (in 000s) |
FY
2014 - Q1 |
|
14,000 |
|
$ |
16.43 |
|
7,241 |
|
2,519 |
|
4,240 |
|
$ |
31.77 |
|
$ |
80 |
FY
2015 - Q1 |
|
201,333 |
|
$ |
19.59 |
|
124,621 |
|
35,416 |
|
41,296 |
|
$ |
31.65 |
|
$ |
1,121 |
FY
2015 - Q3 |
|
89,690 |
|
$ |
17.03 |
|
40,682 |
|
16,495 |
|
32,513 |
|
$ |
37.37 |
|
$ |
616 |
(1) |
Shares withheld for
taxes are treated as a repurchase of shares for accounting purposes but do
not count against the Companys stock repurchase
program. |
No stock options were
exercised by certain employees and executive officers through cashless exercises
during the three months ended January 31, 2014, April 30, 2014 and January 31,
2015.
14
NOTE 9 Income Taxes
The Company applies the
provisions of the accounting standard for uncertain tax positions to its income
taxes. For benefits to be realized, a tax position must be more likely than not
to be sustained upon examination. The amount recognized is measured as the
largest amount of benefit that is greater than 50% likely of being realized upon
ultimate settlement.
As of April 30, 2015, the
gross amounts of the Companys liabilities for unrecognized tax benefits of
$27.0 million, including interest and penalties, were classified as long-term
income taxes payable in the accompanying consolidated balance sheets. Over the
next twelve months, the Companys existing positions will continue to generate
an increase in liabilities for unrecognized tax benefits, as well as a likely
decrease in liabilities as a result of the lapse of the applicable statute of
limitations and the conclusion of income tax audits. The expected decrease in
liabilities relating to unrecognized tax benefits will have a positive effect on
the Companys consolidated results of operations and financial position when
realized. The Company recognizes interest and penalties related to uncertain tax
positions in income tax expense. The amount of interest and penalties recognized
during the nine months ended April 30, 2015 and 2014 was $1.2 million and $1.3
million, respectively.
The Company files income tax
returns in the U.S. federal jurisdiction, various states and foreign
jurisdictions. The Company is currently under examination by the U.S. Internal
Revenue Service for fiscal year 2012, and the states of New York, Minnesota,
Massachusetts and Maryland for fiscal years 2011 to 2013. At this time, the
Company does not believe that the outcome of any examination will have a
material impact on the Companys consolidated results of operations and
financial position.
The Company has not provided
for U.S. federal income and foreign withholding taxes on its foreign
subsidiaries undistributed earnings as of April 30, 2015, because the Company
intends to reinvest such earnings indefinitely in the operations and potential
acquisitions related to its foreign operations. It is not practical to determine
the taxes that might be incurred if these earnings were to be distributed in the
form of dividends or otherwise. If distributed, however, foreign tax credits may
become available under current law to reduce or eliminate the resultant U.S.
income tax liability.
NOTE 10 Recent Accounting
Pronouncements
In April 2015, the FASB issued
ASU 2015-03, Interest - Imputation
of Interest (Subtopic 835-30),
which requires that debt issuance costs related to a recognized debt liability
be presented in the balance sheet as a direct deduction from the carrying amount
of that debt liability, consistent with debt discounts. The recognition and
measurement guidance for debt issuance costs are not affected by the amendments
in this ASU. The amendments are effective for financial statements issued for
annual and interim periods beginning after December 15, 2015. The amendments are
to be applied on a retrospective basis, wherein the balance sheet of each
individual period presented is adjusted to reflect the period-specific effects
of applying the new guidance. The Companys adoption of ASU 2015-03 will not
have a material impact on the Companys consolidated results of operations and
financial position.
In February 2015, the FASB
issued ASU 2015-02, Consolidation (Topic 810),
which is intended to improve targeted areas of consolidation guidance for legal
entities such as limited partnerships, limited liability corporations, and
securitization structures (collateralized debt obligations, collateralized loan
obligations, and mortgage-backed security transactions). The ASU focuses on the
consolidation evaluation for reporting organizations that are required to
evaluate whether they should consolidate certain legal entities. In addition to
reducing the number of consolidation models from four to two, the new standard
simplifies the FASB Accounting Standards Codification and improves current U.S.
GAAP by placing more emphasis on risk of loss when determining a controlling
financial interest, reducing the frequency of the application of related-party
guidance when determining a controlling financial interest in a variable
interest entity (VIE), and changing consolidation conclusions for companies in
several industries that typically make use of limited partnerships or VIEs. The
ASU will be effective for annual and interim periods beginning after December
15, 2015. The Companys adoption of ASU 2015-02 will not have a material impact
on the Companys consolidated results of operations and financial position.
In May 2014, the FASB issued
ASU 2014-09, Revenue from
Contracts with Customers (Topic
606), which supersedes the revenue recognition requirements in ASC 605,
Revenue
Recognition. ASU 2014-09 is based
on the principle that revenue is recognized to depict the transfer of goods or
services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services. ASU
2014-09 also requires additional disclosure about the nature, amount, timing and
uncertainty of revenue and cash flows arising from customer contracts, including
significant judgments and changes in judgments and assets recognized from costs
incurred to obtain or fulfill a contract. ASU 2014-09 is effective for annual
and interim periods beginning after December 15, 2016, using one of two
retrospective application methods. On April 29, 2015, the FASB issued a proposed
ASU to defer the effective date for one year. The Company has not determined the
potential effects of implementing ASU 2014-09 on the consolidated financial
statements.
15
NOTE 11 Legal Proceedings
The Company is subject to
threats of litigation and is involved in actual litigation and damage claims
arising in the ordinary course of business, such as actions related to injuries,
property damage, and handling or disposal of vehicles. The material pending
legal proceedings to which the Company is a party to, or of which any of the
Companys property is subject to include the following matters.
On November 1, 2013, the
Company filed suit against Sparta Consulting, Inc. (now known as KPIT) in the
44th Judicial District Court of Dallas County, Texas, alleging fraud, fraudulent
inducement and/or promissory fraud, negligent misrepresentation, unfair business
practices pursuant to California Business and Professions Code § 17200, breach
of contract, declaratory judgment, and attorneys fees. The Company seeks
compensatory and exemplary damages, disgorgement of amounts paid, attorneys
fees, pre- and post-judgment interest, costs of suit, and a judicial declaration
of the parties rights, duties, and obligations under the Implementation
Services Agreement dated October 6, 2011. The suit arises out of the Companys
September 17, 2013 decision to terminate the Implementation Services Agreement,
under which KPIT was to design, implement, and deliver a customized replacement
enterprise resource planning system for the Company. On January 2, 2014, KPIT
removed this suit to the United States District Court for the Northern District
of Texas. On August 11, 2014, the Northern District of Texas transferred the
suit to the United States District Court for the Eastern District of California
for convenience. On January 8, 2014, KPIT filed suit against the Company in the
United States District Court for the Eastern District of California, alleging
breach of contract, promissory estoppel, breach of the implied covenant of good
faith and fair dealing, account stated, quantum meruit, unjust enrichment, and
declaratory relief. KPIT seeks compensatory and exemplary damages, pre-judgment
interest, costs of suit, and a judicial declaration of the parties rights,
duties, and obligations under the Implementation Services Agreement. The Company
is zealously pursuing its claim for damages, and vigorously defending against
KPITs claim for damages.
The Company provides for costs
relating to these matters when a loss is probable and the amount can be
reasonably estimated. The effect of the outcome of these matters on the
Companys future consolidated results of operations and cash flows cannot be
predicted because any such effect depends on future results of operations and
the amount and timing of the resolution of such matters. The Company believes
that any ultimate liability will not have a material effect on its consolidated
results of operations, financial position or cash flows. However, the amount of
the liabilities associated with these claims, if any, cannot be determined with
certainty. The Company maintains insurance which may or may not provide coverage
for claims made against the Company. There is no assurance that there will be
insurance coverage available when and if needed. Additionally, the insurance
that the Company carries requires that the Company pay for costs and/or claims
exposure up to the amount of the insurance deductibles negotiated when the
insurance is purchased.
Governmental
Proceedings
The Georgia Department of
Revenue, or DOR, conducted a sales and use tax audit of the Companys operations
in Georgia for the period from January 1, 2007 through June 30, 2011. As a
result of the audit, the DOR issued a notice of proposed assessment for
uncollected sales taxes in which it asserted that the Company failed to remit
sales taxes totaling $73.8 million, including penalties and interest. In issuing
the notice of proposed assessment, the DOR stated its policy position that sales
for resale to non-U.S. registered resellers are subject to Georgia sales and use
tax.
The Company has engaged a
Georgia law firm and outside tax advisors to review the conduct of its business
operations in Georgia, the notice of assessment, and the DORs policy position.
In particular, the Companys outside legal counsel has provided the Company an
opinion that its sales for resale to non-U.S. registered resellers should not be
subject to Georgia sales and use tax. In rendering its opinion, the Companys
counsel noted that non-U.S. registered resellers are unable to comply strictly
with technical requirements for a Georgia certificate of exemption but concluded
that its sales for resale to non-U.S. registered resellers should not be subject
to Georgia sales and use tax notwithstanding this technical inability to
comply.
Based on the opinion from the
Companys outside law firm, advice from outside tax advisors, and the Companys
best estimate of a probable outcome, the Company has adequately provided for the
payment of a possible assessment in its consolidated financial statements. The
Company believes it has strong defenses to the DORs notice of proposed
assessment and intends to defend this matter. The Company has filed a request
for protest or administrative appeal with the State of Georgia. There can be no
assurance that this matter will be resolved in the Companys favor or that the
Company will not ultimately be required to make a substantial payment to the
Georgia DOR. The Company understands that Georgia law and DOR regulations are
ambiguous on many of the points at issue in the audit and litigating and
defending the matter in Georgia could be expensive and time-consuming and result
in substantial management distraction. If the matter were to be resolved in a
manner adverse to the Company, it could have a material adverse effect on the
Companys consolidated results of operations and financial position.
16
NOTE 12 Acquisitions
During the year ended July 31,
2014, the Company acquired one facility in Montreal, Canada; a salvage vehicle
auction business in Brazil, which did not include any facilities; as well as the
assets of an online marketing company, which included the rights to hundreds of
web domains including www.cashforcars.com and www.cash4cars.com.
During the nine months ended
April 30, 2015, the purchase price allocations for the assets of the online
marketing company and the salvage vehicle auction businesses in Montreal, Canada
and Brazil were finalized. As a result, from the preliminary purchase price
allocation as of July 31, 2014, goodwill decreased $0.8 million, primarily
related to a $0.9 million increase in intangible assets, and changes to deferred
taxes on acquired intangible assets. In accordance with ASC 805, any adjustments
to the fair value of acquired assets and liabilities that occur subsequent to
the measurement period will be reflected in the Companys results of operations.
There were no acquisitions during the nine months ended April 30,
2015.
These acquisitions were
undertaken because of their strategic fit and have been accounted for using the
purchase method in accordance with ASC 805, Business Combinations, which
resulted in the recognition of goodwill in the Company's consolidated financial
statements. Goodwill arose because the purchase price of each acquisition
reflected a number of factors, including their future earnings and cash flow
potential; the multiple to earnings, cash flow and other factors at which
similar businesses have been purchased by other acquirers; the competitive
nature of the process by which the Company acquired these businesses; and the
complementary strategic fit and resulting synergies brought to existing
operations. Goodwill that arose from these acquisitions was within Level III of
the fair value hierarchy as it was valued using unobservable inputs.
Unobservable inputs reflect the Companys best estimate of what hypothetical
market participants would use to determine the value of acquired assets at the
reporting date based on the best information available in the circumstances.
When a determination is made to classify items within Level III of the fair
value hierarchy, the evaluation is based upon the significance of the
unobservable inputs to the overall fair value measurement. Due to the limitation
of goodwill asset market value or pricing information, the determination of fair
value of the goodwill asset is inherently more difficult. Goodwill is not
amortized for financial reporting purposes but could be amortizable for tax
purposes. The intangible assets that arose from these acquisitions were also
within Level III of the fair value hierarchy as it was valued using unobservable
inputs, primarily from utilizing the Multi-Period Excess Earnings Method (MPEEM)
model, which is an income-based approach that allocates to goodwill any
acquisition costs not specifically assigned to intangibles, fixed assets or
working capital. Intangible assets acquired include covenants not to compete,
supply contracts, customer relationships, trade names, licenses and databases
and software with a useful life ranging from three to eight years.
These acquisitions did not
result in a significant change in the Companys consolidated results of
operations individually or in the aggregate; therefore, pro forma financial
information has not been presented. The operating results have been included in
the Companys consolidated results of operations and financial position since
the acquisition dates.
17
ITEM 2. MANAGEMENTS
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). 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 industrys 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 I, 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 in the United States (U.S.),
Canada, the United Kingdom (U.K.), and Brazil. We also provide vehicle
remarketing services in the United Arab Emirates (U.A.E.), Germany, and Spain.
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 and financial institutions,
charities, car dealerships, fleet operators and vehicle rental companies. We
sell the vehicles principally to licensed vehicle dismantlers, rebuilders,
repair licensees, used vehicle dealers and 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 or 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 expedite each stage of the
vehicle sales process, minimize administrative and processing costs, and
maximize the ultimate sales price.
In the U.S. and Canada
(North America), Brazil, and the U.A.E., we sell vehicles primarily as an agent
and derive revenue primarily from fees paid by vehicle sellers and vehicle
buyers, as well as related fees for services such as towing and storage. In the
U.K., we operate both on a principal basis, purchasing the salvage vehicles
outright from the insurance companies and reselling the vehicles for our own
account, and as an agent. In Germany and Spain, we derive revenue from sales
listing fees for listing vehicles on behalf of many insurance companies.
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 revenue consists of
sales transaction fees charged to vehicle sellers and vehicle buyers,
transportation revenue, purchased vehicle revenue, and other remarketing
services. Revenues from sellers are generally generated either on a fixed fee
contract basis, where our fees are fixed based on the sale of each vehicle
regardless of the selling price of the vehicle or under our Percentage Incentive
Program (PIP), where our fees are generally based on a predetermined percentage
of the vehicle sales price. Under the consignment or fixed fee program, we
generally charge an additional fee for title processing and special preparation.
We may also charge additional fees for the cost of transporting the vehicle to
our facility, storage of the vehicle, and other incidental costs included in the
consignment fee. Under the consignment program, only the fees associated with
vehicle processing are recorded in revenue, not the actual sales price (gross
proceeds). Sales transaction fees also include fees charged to vehicle buyers
for purchasing vehicles, storage, loading, and annual registration.
Transportation revenue includes charges to sellers for towing vehicles under
certain contracts and towing charges assessed to buyers for delivering vehicles.
Purchased vehicle revenue includes the gross sales price of the vehicle, which
we have purchased or are otherwise considered to own and is primarily generated
in the U.K. We have certain contracts with insurance companies 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.
18
Our revenue is impacted by
several factors, including salvage frequency and the average vehicle auction
selling price, as over 50% of our service revenue is associated in some manner
to the ultimate selling price of the vehicle. Vehicle auction selling prices are
driven primarily by: (i) changes in commodity prices, particularly the per ton
price for crushed car bodies, as this has an impact on the ultimate selling
price of vehicles sold for scrap and vehicles sold for dismantling; (ii) used
car pricing, which we believe has an impact on salvage frequency; and (iii) the
mix of cars sold, as insurance company cars on average command a lower average
selling price than non-insurance cars. We cannot determine the impact of the
movement of these influences as we cannot determine which vehicles are sold to
the end user or for scrap, dismantling, retailing or export. We also cannot
predict the future movements of these influences. Accordingly, we cannot
quantify the specific impact that commodity pricing, used car pricing, and
product sales mix has on the selling price of vehicles and ultimately on service
revenue. Salvage frequency is the percentage of cars involved in accidents which
insurance companies salvage rather than repair and is driven by the relationship
between repairs 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 salvage frequency. The increase in
salvage frequency may have been driven by the decline in used car values
relative to repair costs. Conversely, increases in used car prices, such as
occurred during the most recent recession, may decrease salvage frequency and
adversely affect our growth rate. Used car values are determined by many
factors, including the used car supply, which is tied directly to new car sales,
and the average age of cars on the road. New car sales grew on a year over year
basis increasing the supply of used cars. Additionally, the average age of cars
on the road continued to increase, growing from 9.6 years in 2002 to 11.4 years
in 2014. These factors, among others, have led to a general decline in used car
values while repair costs are generally trending upward. The factors that
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 salvage frequency.
Operating Costs and
Expenses: Yard operations
expenses consist primarily of operating personnel (which includes yard
management, clerical and yard employees), rent, contract vehicle towing,
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, research and development,
and marketing expenses.
Other Income and
Expense: Other income primarily
includes income from the rental of certain real property, 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
Consolidated Financial Statements, Note 3 Long-Term Debt.
Liquidity and Cash
Flows: Our primary source of
working capital is cash operating results. The primary source of our liquidity
is our cash and cash equivalents. The primary factors affecting cash operating
results are: (i) seasonality; (ii) market wins and losses; (iii) supplier mix;
(iv) accident frequency; (v) salvage frequency; (vi) increased volume from our
existing suppliers; (vii) commodity pricing; (viii) used car pricing; (ix)
foreign currency exchange rates; (x) product mix; and (xi) contract mix to the
extent appropriate. 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 are the sale of assets or the issuance of equity
through option exercises and shares issued under our Employee Stock Purchase
Plan. A potential external source of additional working capital is the issuance
of debt and equity; however, we cannot predict if these sources will be
available in the future and, if available, if they can be issued under terms
commercially acceptable to us.
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 strengthen our coverage, as we have facilities located in North
America, the U.K., the U.A.E., Germany, Spain and Brazil, and are able to
provide national coverage for our sellers. All of these acquisitions have been
accounted for using the purchase method of accounting.
19
The following table sets
forth facilities that we have acquired or opened from August 1, 2013 through
April 30, 2015:
Locations |
|
Acquisition
or Greenfield |
|
Date |
|
Geographic Service
Area |
Seaford, Delaware |
|
Greenfield |
|
July
2014 |
|
United States |
Montreal, Canada |
|
Acquisition |
|
November 2013 |
|
Canada |
Itaquaquecetuba, Brazil |
|
Greenfield |
|
January 2014 |
|
Brazil |
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. In particular, we have certain contracts
inherited through our U.K. acquisitions that require us to act as a principal,
purchasing vehicles from the insurance companies and reselling them for our own
account. It is our intention, where possible, to migrate these contracts to the
agency model in future periods. Changes in the amount of revenue derived in a
period from principal transactions relative to total revenue will impact revenue
growth and margin percentages.
In addition to growth
through business acquisitions, we seek to increase revenues and profitability
by, among other things, (i) acquiring and developing additional vehicle storage
facilities in key markets; (ii) pursuing national and regional vehicle seller
agreements; (iii) increasing our service offerings to sellers and members; and
(iv) expanding the application of VB3 into new markets. In addition, we
implement our pricing structures and auction procedures, and attempt to
introduce cost efficiencies at each of our acquired facilities by implementing
our operational procedures, integrating our management information systems, and
redeploying personnel, when necessary.
20
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, 2015 and 2014:
|
|
Three Months Ended
April 30, |
|
Nine Months Ended
April 30, |
(In percentages) |
|
2015 |
|
2014 |
|
2015 |
|
2014 |
Service revenues and vehicle sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Service
revenues |
|
86 |
% |
|
82 |
% |
|
86 |
% |
|
82 |
% |
Vehicle
sales |
|
14 |
% |
|
18 |
% |
|
14 |
% |
|
18 |
% |
Total
service revenues and vehicle sales |
|
100 |
% |
|
100 |
% |
|
100 |
% |
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Yard
operations |
|
46 |
% |
|
43 |
% |
|
46 |
% |
|
44 |
% |
Cost of vehicle
sales |
|
12 |
% |
|
15 |
% |
|
12 |
% |
|
16 |
% |
General and
administrative |
|
11 |
% |
|
13 |
% |
|
12 |
% |
|
14 |
% |
Impairment of
long-lived assets |
|
- |
|
9 |
% |
|
- |
|
3 |
% |
Total
operating expenses |
|
69 |
% |
|
80 |
% |
|
70 |
% |
|
77 |
% |
Operating income |
|
31 |
% |
|
20 |
% |
|
30 |
% |
|
23 |
% |
Other (expense) income: |
|
-2 |
% |
|
0 |
% |
|
-1 |
% |
|
0 |
% |
Income
before income taxes |
|
29 |
% |
|
20 |
% |
|
29 |
% |
|
23 |
% |
Income taxes |
|
10 |
% |
|
7 |
% |
|
10 |
% |
|
8 |
% |
Net
income |
|
19 |
% |
|
13 |
% |
|
19 |
% |
|
15 |
% |
Comparison of the Three and Nine Months Ended April
30, 2015 and 2014
The following table
presents a comparison of service revenues and vehicle sales for the three and
nine months ended April 30, 2015 and 2014:
|
|
|
Three Months Ended
April 30, |
|
|
Nine Months Ended
April 30, |
(In
thousands) |
|
|
2015 |
|
|
2014 |
|
|
Change |
|
%
Change |
|
|
2015 |
|
|
2014 |
|
|
Change |
|
%
Change |
Service revenues |
|
$ |
256,564 |
|
$ |
255,045 |
|
$ |
1,519 |
|
|
0.6 |
% |
|
$ |
741,692 |
|
$ |
717,140 |
|
$ |
24,552 |
|
|
3.4 |
% |
Vehicle sales |
|
|
40,578 |
|
|
54,677 |
|
|
(14,099 |
) |
|
-25.8 |
% |
|
|
122,094 |
|
|
158,899 |
|
|
(36,805 |
) |
|
-23.2 |
% |
Total service
revenues and vehicle
sales |
|
$ |
297,142 |
|
$ |
309,722 |
|
$ |
(12,580 |
) |
|
-4.1 |
% |
|
$ |
863,786 |
|
$ |
876,039 |
|
$ |
(12,253 |
) |
|
-1.4 |
% |
Service Revenues. The increase in service revenues during the three
months ended April 30, 2015 of $1.5 million, or 0.6% as compared to the same
period last year came from (i) growth in North America of $2.5 million;
partially offset by (ii) a decline in the U.K. of $0.9 million; and (iii) a
decline in our other international markets of $0.1 million. The growth in North
America was driven primarily by increased volume, partially offset by a decrease
in revenue per car due to lower average auction selling prices, which we believe
is due to lower commodity prices. The increase in volume in North America came
from existing suppliers as we believe there may have been an increase in the
overall growth in the salvage market driven by increased salvage frequency.
Excluding a detrimental impact of $2.9 million due to the change in the British
pound to U.S. dollar exchange rate, the growth in the U.K. of $2.0 million was
driven primarily by increased volume as we increased our market share and a
marginal increase in revenue per car.
The increase in service
revenues during the nine months ended April 30, 2015 of $24.6 million, or 3.4%
as compared to the same period last year came from (i) growth in North America
of $15.6 million; (ii) growth in the U.K. of $6.1 million; and (iii) growth in
our other international markets of $2.9 million. The growth in North America was
driven primarily by increased volume, partially offset by a decrease in revenue
per car due to lower average auction selling prices, which we believe is due to
lower commodity prices. The increase in volume in North America came from
existing suppliers as we believe there may have been an increase in the overall
growth in the salvage market driven by increased salvage frequency. Excluding a
detrimental impact of $3.3 million due to the change in the British pound to
U.S. dollar exchange rate, the growth in the U.K. of $9.4 million was driven by
increased volume as we increased our market share and a marginal increase in
revenue per car.
21
Vehicle Sales.
The decrease in vehicle sales for
the three months ended April 30, 2015 of $14.1 million, or 25.8% as compared to
the same period last year came from (i) a decline in the U.K. of $12.1 million;
(ii) a decline in our other international markets of $1.4 million; and (iii) a
decline in North America of $0.6 million. The decline in the U.K. was primarily
the result of lower average auction selling prices driven by decreased insurance
volume and increased open market purchase activity from the general public and included a $2.7 million detrimental impact due to the change
in the British pound to U.S. dollar exchange rate. The decline in North America
was primarily the result of lower average auction selling prices, which we
believe is due to lower commodity prices. The decline in our other international
markets was driven primarily by reduced volume.
The decrease in vehicle
sales for the nine months ended April 30, 2015 of $36.8 million, or 23.2% as
compared to the same period last year came from (i) a decline in the U.K. of
$24.5 million; (ii) a decline in North America of $7.8 million; and (iii) a
decline in our other international markets of $4.5 million. The decline in the
U.K. was primarily the result of decreased volume from insurance sellers and
lower average auction selling prices, driven by decreased insurance volume and
increased open market purchase activity from the general public and included a $2.9 million detrimental impact due to the change in the
British pound to U.S. dollar exchange rate. The decline in North America was
primarily the result of decreased open market purchase activity from the general
public and lower average auction selling prices, which we believe is due to
lower commodity prices. The decline in our other international markets was
driven primarily by reduced volume.
The following table
summarizes operating expenses, total other expenses and income taxes for the
three and nine months ended April 30, 2015 and 2014:
|
|
|
Three Months Ended
April 30, |
|
|
Nine Months Ended
April 30, |
(In
thousands) |
|
|
2015 |
|
|
2014 |
|
|
Change |
|
%
Change |
|
|
2015 |
|
|
2014 |
|
|
Change |
|
%
Change |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yard
operations |
|
$ |
125,974 |
|
|
$ |
123,097 |
|
|
$ |
2,877 |
|
|
2.3 |
% |
|
$ |
368,845 |
|
|
$ |
360,744 |
|
|
$ |
8,101 |
|
|
2.2 |
% |
Yard depreciation
and amortization |
|
|
9,248 |
|
|
|
8,110 |
|
|
|
1,138 |
|
|
14.0 |
% |
|
|
26,655 |
|
|
|
27,665 |
|
|
|
(1,010 |
) |
|
-3.7 |
% |
Total yard
operations expense |
|
|
135,222 |
|
|
|
131,207 |
|
|
|
4,015 |
|
|
3.1 |
% |
|
|
395,500 |
|
|
|
388,409 |
|
|
|
7,091 |
|
|
1.8 |
% |
|
Cost of vehicle
sales |
|
|
34,503 |
|
|
|
46,263 |
|
|
|
(11,760 |
) |
|
-25.4 |
% |
|
|
103,694 |
|
|
|
135,996 |
|
|
|
(32,302 |
) |
|
-23.8 |
% |
|
General and
administrative |
|
|
29,734 |
|
|
|
35,856 |
|
|
|
(6,122 |
) |
|
-17.1 |
% |
|
|
98,310 |
|
|
|
110,770 |
|
|
|
(12,460 |
) |
|
-11.2 |
% |
General and
administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
depreciation and
amortization |
|
|
2,916 |
|
|
|
4,659 |
|
|
|
(1,743 |
) |
|
-37.4 |
% |
|
|
8,646 |
|
|
|
12,684 |
|
|
|
(4,038 |
) |
|
-31.8 |
% |
Total general and
administrative |
|
|
32,650 |
|
|
|
40,515 |
|
|
|
(7,865 |
) |
|
-19.4 |
% |
|
|
106,956 |
|
|
|
123,454 |
|
|
|
(16,498 |
) |
|
-13.4 |
% |
|
Impairment of
long-lived assets |
|
|
- |
|
|
|
29,104 |
|
|
|
(29,104 |
) |
|
-100.0 |
% |
|
|
- |
|
|
|
29,104 |
|
|
|
(29,104 |
) |
|
-100.0 |
% |
Total operating expenses |
|
|
202,375 |
|
|
|
247,089 |
|
|
|
(44,714 |
) |
|
-18.1 |
% |
|
|
606,150 |
|
|
|
676,963 |
|
|
|
(70,813 |
) |
|
-10.5 |
% |
Total other expense |
|
$ |
(6,471 |
) |
|
$ |
(1,315 |
) |
|
$ |
(5,156 |
) |
|
392.1 |
% |
|
$ |
(7,013 |
) |
|
$ |
(2,925 |
) |
|
$ |
(4,088 |
) |
|
139.8 |
% |
Income taxes |
|
|
30,733 |
|
|
|
20,441 |
|
|
|
10,292 |
|
|
50.3 |
% |
|
|
88,252 |
|
|
|
68,507 |
|
|
|
19,745 |
|
|
28.8 |
% |
Yard Operations Expense.
The increase in yard operations
expense for the three months ended April 30, 2015 of $2.9 million, or 2.3% as
compared to the same period last year came primarily from (i) an increase in
volume in North America; (ii) partially offset by a marginal decrease in the
cost to process each car in North America.
The increase in yard
depreciation and amortization expenses for the three months ended April 30, 2015
of $1.1 million, or 14.0% as compared to the same period last year came
primarily from the expansion of our international operations outside of the
U.K.
The increase in yard
operations expense for the nine months ended April 30, 2015 of $8.1 million, or
2.2% as compared to the same period last year came primarily from (i) growth in
volume in North America, the U.K., and in our other international markets; (ii)
partially offset by a marginal decrease in the cost to process each car in North
America; and (iii) the detrimental impact of $1.8 million in the U.K. due to the
change in the British pound to U.S. dollar exchange rate. Included in our yard
operations expenses for the nine months ended April 30, 2014 were severance and
lease termination costs of $3.7 million, primarily associated with the
integration of the Salvage Parent, Inc. acquisition.
The decrease in yard
depreciation and amortization expenses for the nine months ended April 30, 2015
of $1.0 million, or 3.7% as compared to the same period last year resulted
primarily from certain assets becoming fully amortized in North
America.
Cost of Vehicle Sales.
The decrease in cost of vehicle
sales for the three months ended April 30, 2015 of $11.8 million, or 25.4% as
compared to the same period last year primarily came from (i) a decline in the
U.K. of $10.7 million, which included the detrimental impact of the change in
the British pound to U.S. dollar exchange rate of $2.1 million; (ii) a decline
in our other international markets of $1.4 million; partially offset by (iii) an
increase in North America of $0.3 million. The decline in the U.K. resulted from
lower average purchase prices driven by decreased insurance volume and increased
open market purchase activity from the general public.
22
The decrease in the cost of
vehicle sales for the nine months ended April 30, 2015 of $32.3 million, or
23.8% as compared to the same period last year primarily came from (i) a decline
in the U.K. of $21.0 million, which included the detrimental impact of the
change in the British pound to U.S. dollar exchange rate of $2.3 million; (ii) a
decline in North America of $7.0 million; and (iii) a decline in our other
international markets of $4.3 million. The decline in the U.K. resulted from
decreased volume from insurance sellers and lower average purchase prices,
driven by decreased insurance volume and increased open market purchase activity
from the general public. The decline in North America was primarily the result
of decreased open market purchase activity from the general public and lower
average purchase prices.
General and
Administrative Expenses. The
decrease in general and administrative expenses for the three months ended April
30, 2015 of $6.1 million, or 17.1% as compared to the same period last year came
primarily from a decrease in North America of $5.6 million as a result of
decreased expenditures on technology development and a decrease in stock-based
payment compensation. The decrease in general and administrative depreciation
and amortization for the three months ended April 30, 2015 of $1.7 million, or
37.4% as compared to the same period last year came primarily from a decrease in
North America as a result of certain assets becoming fully amortized.
The decrease in general and
administrative expenses for the nine months ended April 30, 2015 of $12.5
million, or 11.2% as compared to the same period last year came primarily from a
decrease in North America of $11.8 million as a result of the integration of the
Salvage Parent, Inc. acquisition, the relocation of our technology department
being completed in fiscal 2014 and a decrease in stock-based payment
compensation. The decrease in general and administrative depreciation and
amortization for the nine months ended April 30, 2015 of $4.0 million, or 31.8%
as compared to the same period last year came primarily from a decrease in North
America as a result of certain assets becoming fully amortized.
Impairment. During the
three months ended April 30, 2014, we terminated a contract with KPIT (formerly
known as Sparta Consulting, Inc.), whereby KPIT was engaged to design and
implement an SAP-based replacement for our existing business operating software
that, among other things, would address our international expansion needs.
Following a review of KPITs work performed and an assessment of the cost to
complete, deployment risk, and other factors, we ceased development of KPITs
software and are now pursuing an internally-developed proprietary solution in
its place. As a result, we recognized a charge of $29.1 million resulting
primarily from the impairment of costs previously capitalized in connection with
the development of the software.
Other (Expense) Income.
The increase in total other
expense for the three months ended April 30, 2015 of $5.2 million, or 392.1% as
compared to the same period last year was primarily due to an increase in
interest expense of $3.8 million as a result of the additional long-term debt
issued in December 2014 and increased currency losses in the U.K. of $1.4
million. See Notes to Unaudited Consolidated Financial Statements,
Note 3 - Long-Term
Debt.
The increase in total other
expense for the nine months ended April 30, 2015 of $4.1 million, or 139.8% as
compared to the same period last year was primarily due to an increase in
interest expense of $5.8 million as a result of the additional long-term debt
issued in December 2014, partially offset by increased currency gains in the
U.K. of $2.6 million. See Notes to Unaudited Consolidated Financial Statements,
Note 3 - Long-Term
Debt.
Income Taxes. Our effective income tax rates were 34.8% and
33.3% for the three months ended April 30, 2015 and 2014, respectively, and
35.2% and 34.9% for the nine months ended April 30, 2015 and 2014, respectively.
The change in the overall tax rate was driven by fluctuations in the
geographical allocation of our taxable income.
23
Liquidity and Capital
Resources
The following table
presents a comparison of key components of our capital resources and liquidity
at April 30, 2015 and July 31, 2014 and for the nine months ended April 30, 2015
and 2014, respectively:
(In
thousands) |
|
|
April
30, 2015 |
|
|
July
31, 2014 |
|
|
Change |
|
%
Change |
Cash
and cash equivalents |
|
$ |
678,742 |
|
$ |
158,668 |
|
$ |
520,074 |
|
327.8 |
% |
Working capital |
|
|
725,011 |
|
|
168,007 |
|
|
557,004 |
|
331.5 |
% |
|
|
|
|
Nine Months Ended
April 30, |
(In
thousands) |
|
|
2015 |
|
|
2014 |
|
|
Change |
|
%
Change |
Operating cash flows |
|
$ |
203,369 |
|
$ |
207,634 |
|
$ |
(4,265 |
) |
-2.1 |
% |
Investing cash flows |
|
|
(47,992 |
) |
|
(74,807 |
) |
|
26,815 |
|
-35.8 |
% |
Financing cash flows |
|
|
371,143 |
|
|
(64,607 |
) |
|
435,750 |
|
-674.5 |
% |
|
Capital expenditures |
|
$ |
(49,079 |
) |
$ |
(78,078 |
) |
$ |
28,999 |
|
-37.1 |
% |
Payments on long-term debt |
|
|
(331,250 |
) |
|
(56,250 |
) |
|
(275,000 |
) |
488.9 |
% |
Working capital and cash
and cash equivalents increased at April 30, 2015 as compared to July 31, 2014
primarily due to issuance of long-term debt of $700.0 million and cash generated
from operations, partially offset by capital expenditures and payments on
long-term debt. Cash equivalents consisted of bank deposits and funds invested
in money market accounts, which bear interest at variable rates.
Historically, we have
financed our growth through cash generated from operations, public offerings of
common stock, equity issued in conjunction with certain acquisitions and debt
financing. Our primary source of cash generated by operations is from the
collection of sellers' fees, members' fees and reimbursable advances from the
proceeds of vehicle sales. Our business is seasonal as inclement weather during
the winter months increases the frequency of accidents and consequently, the
number of cars involved in accidents which the insurance companies salvage
rather than repair. During the winter months, most of our facilities process 10%
to 30% more vehicles than at other times of the year. This increased volume
requires the increased use of our cash to pay out advances and handling costs of
the additional business.
We believe that our
currently available cash and cash equivalents and cash generated from operations
will be sufficient to satisfy our operating and working capital requirements for
at least the next 12 months. However, if we experience significant growth in the
future or utilize cash reserves to acquire businesses, we may be required to
raise additional cash through the issuance of new debt or additional equity.
Although the timing and magnitude of growth through expansion and acquisitions
are not predictable, the opening of new greenfield yards is contingent upon our
ability to locate property that (i) is in an area in which we have a need for
more capacity; (ii) has adequate size given the capacity needs; (iii) has the
appropriate shape and topography for our operations; (iv) is reasonably close to
a major road or highway; and (v) most importantly, has the appropriate zoning
for our business. Costs to develop a new yard generally range from $1.0 to $13.0
million, depending on size, location and developmental infrastructure
requirements.
As of April 30, 2015, $78.9
million of the $678.7 million of cash and cash equivalents was held by our
foreign subsidiaries. If these funds are needed for our operations in the U.S.,
we would be required to accrue and pay U.S. taxes to repatriate these funds.
However, our intent is to permanently reinvest these funds outside of the U.S.
and our current plans do not demonstrate a need to repatriate them to fund our
U.S. operations.
Net cash provided by
operating activities decreased for the nine months ended April 30, 2015 as
compared to the same period in 2014 due to improved cash operating results from
an increase in service revenues and a decrease in general and administrative
expenses, partially offset by changes in operating assets and liabilities. The
change in operating assets and liabilities was primarily the result of a
decrease in accounts payable of $13.2 million, an increase in income taxes paid
of $16.2 million and an increase in accounts receivable of $12.6 million,
partially offset by a decrease in other assets of $19.7 million, primarily
related to contracted prepayments in fiscal 2014.
24
Net cash used in investing
activities decreased for the nine months ended April 30, 2015 as compared to the
same period in 2014 due primarily to decreases in capital expenditures and cash
used in acquisitions.
Net cash provided by financing
activities increased for the nine months ended April 30, 2015 as compared to the
same period in 2014 due primarily to the issuance of long-term debt. See Notes
to Consolidated Financial Statements, Note 3 Long-Term Debt.
Credit Facility
On December 14, 2010, we
entered into an Amended and Restated Credit Facility Agreement (Credit
Facility), with Bank of America, N.A. The Credit Facility is an unsecured credit
agreement providing for (i) a $100.0 million revolving credit facility,
including a $100.0 million alternative currency borrowing sublimit and a $50.0
million letter of credit sublimit and (ii) a term loan facility of $400.0
million. On September, 29, 2011, we amended the Credit Facility increasing the
amount of the term loan facility from $400.0 million to $500.0 million.
Credit Agreement
On December 3, 2014, we
entered into a Credit Agreement with Wells Fargo Bank, National Association, as
administrative agent, and Bank of America, N.A., as syndication agent, which
superseded the Credit Facility. The Credit Agreement provides for (a) a secured
revolving loan facility in an aggregate principal amount of up to $300.0
million, none of which was drawn at closing, or at April 30, 2015 (Revolving Loan
Facility), and (b) a secured term loan facility in an aggregate principal amount
of $300.0 million (Term Loan), which was fully drawn at closing. Proceeds from
the Credit Agreement were used to repay all outstanding amounts under the Credit
Facility totaling $275.0 million at December 3, 2014. The remaining proceeds
will be used for general corporate purposes. The Revolving Loan Facility and the
Term Loan facility mature on December 3, 2019.
The Term Loan, which as of
April 30, 2015, had $263.6 million outstanding, amortizes $18.8 million each
quarter beginning December 31, 2014 through December 31, 2015, then amortizes
$7.5 million each quarter, with all outstanding borrowings due on December 3,
2019. All amounts borrowed under the Term Loan may be prepaid without premium or
penalty.
The revolving and term loans
under the Credit Agreement bear interest, at our election, at either (a) the
Base Rate, which is defined as a fluctuating rate per annum equal to the
greatest of (i) the Prime Rate in effect on such day; (ii) the Federal Funds
Rate in effect on such date plus 0.50%; or (iii) an adjusted LIBOR rate
determined on the basis of a one-month interest period plus 1.0%, in each case
plus an applicable margin ranging from 0.25% to 1.0% based on our consolidated
total net leverage ratio during the preceding fiscal quarter; or (b) an adjusted
LIBOR Rate plus an applicable margin ranging from 1.25% to 2.0% depending on our
consolidated total net leverage ratio during the preceding fiscal quarter.
Interest is due and payable quarterly, in arrears, for loans bearing interest at
the Base Rate, and at the end of an interest period (or at each three month
interval in the case of loans with interest periods greater than three months)
in the case of loans bearing interest at the adjusted LIBOR rate. The interest
rate as of April 30, 2015 on our variable interest rate debt was the one month
LIBOR rate of 0.18% plus an applicable margin of 1.25%. The carrying amount of the Credit Agreement is comprised
of borrowings under which interest accrues under a fluctuating interest rate structure. Accordingly, the carrying value approximates
fair value at April 30, 2015, and was classified within Level II of the fair value hierarchy.
Amounts borrowed under
the Revolving Loan Facility may be repaid and reborrowed
until the maturity date of December 3, 2019. We are obligated to pay a
commitment fee on the unused portion of the Revolving Loan Facility. The
commitment fee rate ranges from 0.20% to 0.35%, depending on our consolidated
total net leverage ratio during the preceding fiscal quarter, on the average
daily unused portion of the revolving credit commitment under the Credit
Agreement. We had no outstanding borrowings under the Revolving Loan Facility as
of April 30, 2015.
Our obligations under the
Credit Agreement are guaranteed by certain of our domestic subsidiaries meeting
materiality thresholds set forth in the Credit Agreement. Such obligations,
including the guaranties, are secured by substantially all of our assets and the
subsidiary guarantors pursuant to a Security Agreement, dated December 3, 2014,
among us, the subsidiary guarantors from time to time party thereto, and Wells
Fargo Bank, National Association, as collateral agent (the Security
Agreement).
The Credit Agreement contains
customary affirmative and negative covenants, including covenants that limit or
restrict us and our subsidiaries ability to, among other things, incur
indebtedness, grant liens, merge or consolidate, dispose of assets, make
investments, make acquisitions, enter into transactions with affiliates, pay
dividends, or make distributions on and repurchase stock, in each case subject
to certain exceptions. We are also required to maintain compliance, measured at
the end of each fiscal quarter, with a consolidated total net leverage ratio and
a consolidated interest coverage ratio. We were in compliance with all covenants
related to the Credit Agreement as of April 30, 2015.
25
Note Purchase Agreement
On December 3, 2014, we
entered into a Note Purchase Agreement and sold to certain purchasers
(collectively, the Purchasers) $400.0 million in aggregate principal amount of
senior secured notes (Senior Notes) consisting of (i) $100.0 million aggregate
principal amount of 4.07% Senior Notes, Series A, due December 3, 2024; (ii)
$100.0 million aggregate principal amount of 4.19% Senior Notes, Series B, due
December 3, 2026; (iii) $100.0 million aggregate principal amount of 4.25%
Senior Notes, Series C, due December 3, 2027; and (iv) $100.0 million aggregate
principal amount of 4.35% Senior Notes, Series D, due December 3, 2029. Interest
is due and payable quarterly, in arrears, on each of the Senior Notes. Proceeds
from the Note Purchase Agreement will be used for general corporate purposes.
We may prepay the Senior
Notes, in whole or in part, at any time, subject to certain conditions,
including minimum amounts and payment of a make-whole amount equal to the
discounted value of the remaining scheduled interest payments under the Senior
Notes.
Our obligations under the Note
Purchase Agreement are guaranteed by certain of our domestic subsidiaries
meeting materiality thresholds set forth in the Note Purchase Agreement. Such
obligations, including the guaranties, are secured by substantially all of our
assets and the assets of the subsidiary guarantors. Our obligations and our
subsidiary guarantors under the Note Purchase Agreement will be treated on a
pari passu basis with the obligations of those entities
under the Credit Agreement as well as any additional debt we may obtain.
The Note Purchase Agreement
contains customary affirmative and negative covenants, including covenants that
limit or restrict us and our subsidiaries ability to, among other things, incur
indebtedness, grant liens, merge or consolidate, dispose of assets, make
investments, make acquisitions, enter into transactions with affiliates, pay
dividends, or make distributions and repurchase stock, in each case subject to
certain exceptions. We are also required to maintain compliance, measured at the
end of each fiscal quarter, with a consolidated total net leverage ratio and a
consolidated interest coverage ratio. We are in compliance with all covenants
related to the Note Purchase Agreement as of April 30, 2015.
Related to the execution of
the Credit Agreement and the Note Purchase Agreement, we incurred $2.1 million
in costs, of which $1.0 million was capitalized as debt issuance fees and $1.1
million was recorded as a reduction of the long-term debt proceeds as a debt
discount. Both the debt issuance fees and debt discount are amortized to
interest expense over the term of the respective debt
instruments.
Critical Accounting
Policies and Estimates
The preparation of
consolidated financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses,
and the related disclosure of contingent assets and liabilities. On an ongoing
basis, we evaluate our estimates, including costs related to vehicle pooling,
self-insured reserves, allowance for doubtful accounts, income taxes, revenue
recognition, stock-based payment compensation, purchase price allocations,
long-lived asset impairment calculations and contingencies. We base our
estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Management has discussed the
selection of critical accounting policies and estimates with the Audit Committee
of the Board of Directors and the Audit Committee has reviewed our disclosure
relating to critical accounting policies and estimates in this Quarterly Report
on Form 10-Q. Our significant accounting policies are described in the Notes to
Consolidated Financial Statements, Note 1 - Description of Business and Summary of Significant Accounting
Policies. The following is a
summary of the more significant judgments and estimates included in our critical
accounting policies used in the preparation of our consolidated financial
statements. We discuss, where appropriate, sensitivity to change based on other
outcomes reasonably likely to occur.
The following discussion and
analysis should be read in conjunction with our Unaudited Consolidated Financial
Statements and related Notes in Part I., Item I., Financial Statements.
Revenue Recognition
We provide a portfolio of
services to our sellers and buyers that facilitate the sale and delivery of a
vehicle from seller to buyer. These services include the ability to use our
Internet sales technology and vehicle delivery, loading, title processing,
preparation and storage. We evaluate multiple-element arrangements relative to
our member and seller agreements.
26
The services we provide to the
seller of a vehicle involve disposing of a vehicle on the seller's behalf and,
under most of our current North American contracts, collecting the proceeds from
the member. Pre-sale services, including towing, title processing, preparation
and storage, as well as sale fees and other enhancement service fees meet the
criteria for separate units of accounting. Revenue associated with each service
is recognized upon completion of the respective service, net of applicable
rebates or allowances. For certain sellers who are charged a proportionate fee
based on high bid of the vehicle, the revenue associated with the pre-sale
services is recognized upon completion of the sale when the total arrangement is
fixed and determinable. The selling price of each service is determined based on
management's best estimate and is allotted based on the relative selling price
method.
Vehicle sales, where vehicles
are purchased and remarketed on our own behalf, are recognized on the sale date,
which is typically the point of high bid acceptance. Upon high bid acceptance, a
legal binding contract is formed with the member, and we record the gross sales
price as revenue.
We also provide a number of
services to the buyer of the vehicle, charging a separate fee for each service.
Each of these services has been assessed to determine whether we have met the
requirements to separate them into units of accounting within a multiple-element
arrangement. We have concluded that the sale and the post-sale services are
separate units of accounting.
The fees for sale services are
recognized upon completion of the sale. The fees for the post-sale services are
recognized upon successful completion of those services using the relative
selling price method.
We also charge members an
annual registration fee for the right to participate in our vehicle sales
program, which is recognized ratably over the term of the arrangement, and
relist and late-payment fees, which are recognized upon receipt of payment by
the member. No provision for returns has been established, as all sales are
final with no right of return, although we provide for bad debt expense in the
case of non-performance by our members or sellers.
We allocate arrangement
consideration based on the relative estimated selling prices of the separate
units of accounting contained within arrangements including multiple
deliverables. Estimated selling prices are determined using managements best
estimate. Significant inputs in our estimates of the selling price of separate
units of accounting include market and pricing trends, pricing customization and
practices, and profit objectives for the services.
Fair Value of Financial
Instruments
We record our financial assets
and liabilities at fair value in accordance with the framework for measuring
fair value in U.S. GAAP. In accordance with ASC 820, Fair Value Measurements and
Disclosures, as amended by
Accounting Standards Update 2011-04, we consider fair value as an exit price,
representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants under
current market conditions. This framework establishes a fair value hierarchy
that prioritizes the inputs used to measure fair value:
|
Level
I |
|
Observable
inputs that reflect unadjusted quoted prices for identical assets or
liabilities traded in active markets. |
|
|
|
Level
II |
|
Inputs other
than quoted prices included within Level I that are observable for the
asset or liability, either directly or indirectly. Interest rate hedges
are valued at exit prices obtained from the counter-party. |
|
|
|
|
|
Level
III |
|
Inputs that
are generally unobservable. These inputs may be used with internally
developed methodologies that result in managements best
estimate. |
The amounts recorded for
financial instruments in our consolidated financial statements, which included
cash, accounts receivable, accounts payable and accrued liabilities approximate
their fair values as of April 30, 2015 and July 31, 2014, due to the short-term
nature of those instruments, and are classified within Level II of the fair
value hierarchy. Cash equivalents are classified within Level II of the fair
value hierarchy because they are valued using quoted market prices of the
underlying investments. See Notes to Unaudited Consolidated Financial
Statements, Note 3 - Long-Term
Debt for additional fair value
disclosures.
Vehicle Pooling Costs
We defer in vehicle pooling
costs certain yard operation expenses associated with vehicles consigned to and
received by us, but not sold as of the balance sheet date. We quantify the
deferred costs using a calculation that includes the number of vehicles at our
facilities at the beginning and end of the period, the number of vehicles sold
during the period and an allocation of certain yard operation expenses of the
period. The primary expenses allocated and deferred are certain facility costs,
labor, and vehicle processing. If our allocation factors change, then yard
operation expenses could increase or decrease correspondingly in the future.
These costs are expensed as vehicles are sold in subsequent periods on an
average cost basis. Given the fixed cost nature of our business, there are no
direct correlations for increases in expenses or units processed on vehicle
pooling costs.
27
We apply the provisions of
accounting guidance for subsequent measurement of inventory to our vehicle
pooling costs. The provision requires that items such as idle facility expense,
double freight and rehandling costs be recognized as current period charges,
regardless of whether they meet the criteria of abnormal as provided in the
guidance. In addition, the guidance requires that the allocation of fixed
production overhead to the costs of conversion be based on the normal capacity
of production facilities.
Long-lived Asset Valuation,
Including Intangible Assets
We evaluate long-lived assets,
including property and equipment, and certain identifiable intangibles, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets is
measured by comparing the carrying amount of an asset to the estimated
undiscounted future cash flows expected to be generated by the use of the asset.
If the estimated undiscounted cash flows change in the future, we may be
required to reduce the carrying amount of an asset.
Capitalized Software Costs
We capitalize system and
website development costs related to our enterprise computing services during
the application development stage. Costs related to preliminary project
activities and post implementation activities are expensed as incurred.
Internal-use software is amortized on a straight-line basis over its estimated
useful life, generally three years. Management evaluates the useful lives of
these assets on an annual basis and tests for impairment whenever events or
changes in circumstances occur that could impact the recoverability of these
assets.
Total gross capitalized
software as of April 30, 2015 and July 31, 2014 was $63.3 million and $61.7
million, respectively. Accumulated amortization expense related to software as
of April 30, 2015 and July 31, 2014 totaled $41.2 million and $38.6 million,
respectively.
During the three months ended
April 30, 2014, we terminated a contract with KPIT (formerly known as Sparta
Consulting, Inc.), whereby KPIT was engaged to design and implement an SAP-based
replacement for our existing business operating software that, among other
things, would address our international expansion needs. Following a review of
KPITs work performed to date, and an assessment of the cost to complete,
deployment risk, and other factors, we ceased development of KPITs software and
are now pursuing an internally-developed proprietary solution in its place. As a
result, we recognized a charge of $29.1 million resulting primarily from the
impairment of costs previously capitalized in connection with the development of
the software.
Allowance for Doubtful
Accounts
We maintain an allowance for
doubtful accounts in order to provide for estimated losses resulting from
disputed amounts billed to sellers or members and the inability of our sellers
or members to make required payments. If billing disputes exceed expectations
and/or if the financial condition of our sellers or members were to deteriorate,
additional allowances may be required. The allowance is calculated by taking
both seller and buyer accounts receivables written off during the previous 12
month period as a percentage of the total accounts receivable balance. A one
percentage point adverse change to the write-off percentage would have resulted
in an increase to the allowance for doubtful accounts balance of $1.9 million at
April 30, 2015.
Income Taxes and Deferred
Tax Assets
We account for income tax
exposures as required under ASC 740, Income Taxes. We are
subject to income taxes in the U.S., Canada, the U.K., Brazil, Spain, and
Germany. In arriving at a provision of income taxes, we first calculate taxes
payable in accordance with the prevailing tax laws in the jurisdictions in which
we operate. Then, we analyze the timing differences between the financial
reporting and tax basis of our assets and liabilities, such as various accruals,
depreciation and amortization. The tax effects of the timing difference are
presented as deferred tax assets and liabilities in the consolidated balance
sheets. We assess the probability that the deferred tax assets will be realized
based on our ability to generate future taxable income. In the event it is more
likely than not that the full benefit would not be realized from deferred tax
assets, we record a valuation allowance to reduce the carrying value of the
deferred tax assets to the amount expected to be realized. As of April 30, 2015,
we have $2.2 million of valuation allowance arising from both our U.S. and
foreign operations. To the extent we establish a valuation allowance or change
the amount of valuation allowance in a period, we reflect the change with a
corresponding increase or decrease in our income tax provision in the
consolidated statements of income.
28
Historically, our income tax
provision has been sufficient to cover our actual income tax liabilities among
the jurisdictions in which we operate. Nonetheless, our future effective tax
rate could still be adversely affected by several factors, including (i) the
geographical allocation of our future earnings; (ii) the change in tax laws or
our interpretation of tax laws; (iii) the changes in governing regulations and
accounting principles; (iv) the changes in the valuation of our deferred tax
assets and liabilities; and (v) the outcome of the income tax examinations. We
routinely assess the possibilities of material changes resulting from the
aforementioned factors to determine the adequacy of our income tax provision.
Based on our results for the
nine months ended April 30, 2015, a one percentage adverse change in our
provision for income taxes as a percentage of income before taxes would have
resulted in an increase in the income tax expense of $2.5 million.
We apply the
provision of ASC 740, Income
Taxes, which contains a two-step
approach to recognizing and measuring uncertain tax positions. The first step is
to evaluate the tax position for recognition by determining if the weight of
available evidence indicates that it is more likely than not that the position
will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the tax benefit as
the largest amount that is more than 50% likely of being realized upon
settlement.
Although we believe we have
adequately reserved for our uncertain tax positions, no assurance can be given
that the final tax outcome of these matters will not be different. We adjust
these reserves in light of changing facts and circumstances, such as the closing
of a tax audit or the refinement of an estimate. To the extent that the final
tax outcome of these matters is different than the amounts recorded, such
differences will impact the provision for income taxes in the period in which
such determination is made. The provision for income taxes, including the impact
of reserve provisions and changes to the reserves that are considered
appropriate, as well as the related net interest settlement of any particular
position, could require the use of cash. In addition, we are subject to the
continuous examination of our income tax returns by various taxing authorities,
including the Internal Revenue Service and U.S. states. We regularly assess the
likelihood of adverse outcomes resulting from these examinations to determine
the adequacy of our provision for income taxes.
Stock-based Payment
Compensation
We account for our stock-based
awards to employees and non-employees using the fair value method. Compensation
cost related to stock-based payment transactions are recognized based on the
fair value of the equity or liability instruments issued. Determining the fair
value of options using the Black-Scholes Merton option pricing model, or other
currently accepted option valuation models, requires highly subjective
assumptions, including future stock price volatility and expected time until
exercise, which greatly affect the calculated fair value on the measurement
date. If actual results are not consistent with our assumptions and judgments
used in estimating the key assumptions, we may be required to record additional
compensation or income tax expense, which could have a material impact on our
consolidated results of operations and financial position.
Retained Insurance
Liabilities
We are partially self-insured
for certain losses related to medical, general liability, workers' compensation
and auto liability. Our insurance policies are subject to a $250,000 deductible
per claim, with the exception of our medical policy which has a $225,000 stop
loss per claim and a stop loss limiting total exposure to 120% of expected
claims. In addition, each of our policies contains an aggregate stop loss to
limit our ultimate exposure. Our liability represents an estimate of the
ultimate cost of claims incurred as of the balance sheet date. The estimated
liability is not discounted and is established based upon analysis of historical
data and actuarial estimates. The primary estimates used in the actuarial
analysis include total payroll and revenue. Historically, our estimates have not
materially fluctuated from actual results. While we believe these estimates are
reasonable based on the information currently available, if actual trends,
including the severity of claims and medical cost inflation, differ from our
estimates, our consolidated results of operations, financial position or cash
flows could be impacted. The process of determining our insurance reserves
requires estimates with various assumptions, each of which can positively or
negatively impact those balances. The total amount reserved for all policies was
$6.1 million as of April 30, 2015. If the total number of participants in the
medical plan changed by 10%, we estimate that our annual medical expense would
change by $1.5 million and our accrual for medical expenses would change by $0.4
million. If our total payroll changed by 10%, we estimate that our annual
workers' compensation expense and our accrual for workers' compensation expenses
would change by less than $0.2 million. A 10% change in revenue would change our
insurance premium for the general liability and umbrella policy by an
insignificant amount.
29
Accounting for Acquisitions
We recognize and measure
identifiable assets acquired and liabilities assumed in acquired entities in
accordance with ASC 805, Business
Combinations. The accounting for
acquisitions involves significant judgments and estimates, including the fair
value of acquired intangible assets, which involve projections of future
revenues, cash flows and terminal value, which are then either discounted at an
estimated discount rate or measured at an estimated royalty rate, and the fair
value of other acquired assets and assumed liabilities, including potential
contingencies and the useful lives of the assets. The projections are developed
using internal forecasts, available industry and market data and estimates of
long-term growth rates of our business. Historical experience is additionally
utilized, in which historical or current costs have approximated fair value for
certain assets acquired.
Segment Reporting
Our North American and U.K.
regions are considered two separate operating segments, which have been
aggregated into one reportable segment because they share similar economic
characteristics.
Recently Issued Accounting
Standards
For a description of the new
accounting standards that affect us, refer to the Notes to Unaudited
Consolidated Financial Statements Note 10 - Recent Accounting Pronouncements.
Off-Balance Sheet
Arrangements
As of April 30, 2015, there
are no off-balance sheet arrangements pursuant to Item 303(a)(4) of Regulation
S-K promulgated under the Securities Exchange Act of 1934, as amended.
ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal exposures to
financial market risk are interest rate risk, foreign currency risk and
translation risk. We do not hold or issue financial instruments for trading
purposes.
Interest Income Risk
The primary objective of our
investment activities is to preserve principal while secondarily maximizing
yields without significantly increasing risk. To achieve this objective in the
current uncertain global financial markets, all cash and cash equivalents were
held in bank deposits and money market funds as of April 30, 2015. As the
interest rates on a material portion of our cash and cash equivalents are
variable, a change in interest rates earned on our investment portfolio would
impact interest income along with cash flows but would not materially impact the
fair market value of the related underlying instruments. As of April 30, 2015,
we held no direct investments in auction rate securities, collateralized debt
obligations, structured investment vehicles or mortgaged-backed securities.
Based on the average cash balance held during the nine months ended April 30,
2015, a hypothetical 10% adverse change in our interest yield would not have
materially affected our operating results.
Interest Expense Risk
Our total borrowings under the
Credit Agreement were $263.6 million as of April 30, 2015. Amounts borrowed
under the Credit Agreement bear interest, at our election, at either (a) the
Base Rate, which is defined as a fluctuating rate per annum equal to the
greatest of (i) the Prime Rate in effect on such day; (ii) the Federal Funds
Rate in effect on such date plus 0.50%; or (iii) an adjusted LIBOR rate
determined on the basis of a one-month interest period plus 1.0%, in each case
plus an applicable margin ranging from 0.25% to 1.0% based on our consolidated
total net leverage ratio during the preceding fiscal quarter; or (b) an adjusted
LIBOR Rate plus an applicable margin ranging from 1.25% to 2.0% depending on our
consolidated total net leverage ratio during the preceding fiscal quarter. A
default interest rate applies on all obligations during an event of default
under the Credit Agreement rate swaps to exchange our variable interest rate
payments commitment for fixed interest rate payments on our variable interest
rate debt to mitigate the interest expense risk. If interest rates were to
increase by 10% our interest expense would increase but by an insignificant
amount due to the fixed interest rate swaps.
30
Foreign Currency and
Translation Exposure
Fluctuations in the foreign
currencies create volatility in our reported results of operations because we
are required to consolidate the results of operations of our foreign currency
denominated subsidiaries. International operating income is typically denominated
in the local currency of each country and result from transactions by our
operations in Canada, the U.K., the U.A.E., Brazil, Spain, and Germany. These
operations also incur a majority of their expenses in the local currency, the
Canadian dollar, the British pound, the U.A.E. dirham, the Brazilian real, and
the Euro. Our international operations are subject to risks associated with
foreign exchange rate volatility, which could have a material and adverse impact
on our future results. A hypothetical 10% adverse change in the value of the
U.S. dollar relative to the Canadian dollar, British pound, U.A.E. dirham,
Brazilian real and Euro would have resulted in an increase to operating income of $4.2
million for the nine months ended April 30, 2015.
Fluctuations in foreign
currencies also create volatility in our consolidated financial position,
because we are required to remeasure substantially all assets and liabilities
held by our foreign subsidiaries at the current exchange rate at the close of
the accounting period. At April 30, 2015, the cumulative effect of foreign
exchange rate fluctuations on our consolidated financial position was a net
translation loss of $47.0 million. This loss was recognized as an adjustment to
stockholders equity through accumulated other comprehensive income. A
hypothetical 10% adverse change in the value of the U.S. dollar relative to the
Canadian dollar, British pound, U.A.E. dirham, Brazilian real and Euro would not
have materially affected our consolidated financial position.
We do not hedge our exposure
to translation risks arising from fluctuations in foreign currency exchange
rates.
ITEM 4. CONTROLS AND
PROCEDURES
(a) Evaluation of Disclosure
Controls and Procedures
We conducted an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act),
or Disclosure Controls, as of the end of the period covered by this Quarterly
Report on Form 10-Q. This evaluation, or Controls Evaluation, was performed
under the supervision and with the participation of management, including our
Chief Executive Officer (CEO) and our Chief Financial Officer (CFO). Disclosure
Controls are controls and procedures designed to provide reasonable assurance
that information required to be disclosed in our reports filed under the
Exchange Act, such as this Quarterly Report, is recorded, processed, summarized
and reported within the time periods specified in the SECs rules and forms.
Disclosure Controls include, without limitation, controls and procedures
designed to provide reasonable assurance that information required to be
disclosed in our reports filed under the Exchange Act is accumulated and
communicated to our management, including our CEO and CFO, or persons performing
similar functions, as appropriate, to allow timely decisions regarding required
disclosure. Our Disclosure Controls include some, but not all, components of our
internal control over financial reporting.
Based upon the Controls
Evaluation, our CEO and CFO have concluded that, as of the end of the period
covered by this Quarterly Report on Form 10-Q, our Disclosure Controls were
effective to provide reasonable assurance that information required to be
disclosed in our Exchange Act reports is accumulated and communicated to
management, including the CEO and CFO, to allow timely decisions regarding
required disclosure, and that such information is recorded, processed,
summarized and reported within the time periods specified by the Securities and
Exchange Commission.
(b) Changes in Internal
Controls
There have not been any
changes in our internal control over financial reporting during the most recent
fiscal quarter that have materially affected or are reasonably likely to
materially affect our internal control over financial reporting.
PART II OTHER
INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to threats of
litigation and are involved in actual litigation and damage claims arising in
the ordinary course of business, such as actions related to injuries, property
damage, and handling or disposal of vehicles. The material pending legal
proceedings to which we are party to, or of which our property is subject to
include the following matters.
On November 1, 2013, we filed
suit against Sparta Consulting, Inc. (now known as KPIT) in the 44th Judicial
District Court of Dallas County, Texas, alleging fraud, fraudulent inducement
and/or promissory fraud, negligent misrepresentation, unfair business practices
pursuant to California Business and Professions Code § 17200, breach of
contract, declaratory judgment, and attorneys fees. We seek compensatory and
exemplary damages, disgorgement of amounts paid, attorneys fees, pre- and
post-judgment interest, costs of suit, and a judicial declaration of the
parties rights, duties, and obligations under the Implementation Services
Agreement dated October 6, 2011. The suit arises out of our September 17, 2013
decision to terminate the Implementation Services Agreement, under which KPIT
was to design, implement, and deliver a customized replacement enterprise
resource planning system for us. On January 2, 2014, KPIT removed this suit to
the United States District Court for the Northern District of Texas. On August
11, 2014, the Northern District of Texas transferred the suit to the United
States District Court for the Eastern District of California for convenience. On
January 8, 2014, KPIT filed suit against us in the United States District Court
for the Eastern District of California, alleging breach of contract, promissory
estoppel, breach of the implied covenant of good faith and fair dealing, account
stated, quantum meruit, unjust enrichment, and declaratory relief. KPIT seeks
compensatory and exemplary damages, pre-judgment interest, costs of suit, and a
judicial declaration of the parties rights, duties, and obligations under the
Implementation Services Agreement. We are zealously pursuing our claim for
damages, and vigorously defending against KPITs claim for damages.
31
Governmental
Proceedings
The Georgia Department of
Revenue, or DOR, conducted a sales and use tax audit of our operations in
Georgia for the period from January 1, 2007 through June 30, 2011. As a result
of the audit, the DOR issued a notice of proposed assessment for uncollected
sales taxes in which it asserted that we failed to remit sales taxes totaling
$73.8 million, including penalties and interest. In issuing the notice of
proposed assessment, the DOR stated its policy position that sales for resale to
non-U.S. registered resellers are subject to Georgia sales and use
tax.
We have engaged a Georgia law
firm and outside tax advisors to review the conduct of our business operations
in Georgia, the notice of assessment, and the DORs policy position. In
particular, our outside legal counsel has provided us an opinion that the sales
for resale to non-U.S. registered resellers should not be subject to Georgia
sales and use tax. In rendering its opinion, our counsel noted that non-U.S.
registered resellers are unable to comply strictly with technical requirements
for a Georgia certificate of exemption but concluded that our sales for resale
to non-U.S. registered resellers should not be subject to Georgia sales and use
tax notwithstanding this technical inability to comply.
Based on the opinion from our
outside law firm, advice from outside tax advisors, and our best estimate of a
probable outcome, we have adequately provided for the payment of a possible
assessment in our consolidated financial statements. We believe we have strong
defenses to the DORs notice of proposed assessment and intend to defend this
matter. We have filed a request for protest or administrative appeal with the
State of Georgia. There can be no assurance that this matter will be resolved in
our favor or that we will not ultimately be required to make a substantial
payment to the Georgia DOR. We understand that Georgia law and DOR regulations
are ambiguous on many of the points at issue in the audit and litigating and
defending the matter in Georgia could be expensive and time-consuming and result
in substantial management distraction.
ITEM 1A. RISK FACTORS
Set forth below and elsewhere
in this Quarterly Report on Form 10-Q and in other documents we file with the
SEC are descriptions of the risks and uncertainties that could cause our actual
results to differ materially from the results contemplated by the
forward-looking statements contained in this report. The descriptions below
include any material changes to and supersede the description of the risk
factors affecting our business previously disclosed in Part I, Item 1A, Risk
Factors of our Annual Report on Form 10-K for the fiscal year ended July 31,
2014.
We depend on a limited
number of major vehicle sellers for a substantial portion of our revenues. The
loss of one or more of these major sellers could adversely affect our
consolidated results of operations and financial position, and an inability to
increase our sources of vehicle supply could adversely affect our growth
rates.
No single customer accounted
for more than 10% of our revenue during the nine months ended April 30, 2015.
Historically, a limited number of vehicle sellers have collectively accounted
for a substantial portion of our revenues. Seller arrangements are either
written or oral agreements typically subject to cancellation by either party
upon 30 to 90 days notice. Vehicle sellers have terminated agreements with us
in the past in particular markets, which has affected the pricing for sales
services in those markets. There can be no assurance that our existing
agreements will not be cancelled. Furthermore, there can be no assurance that we
will be able to enter into future agreements with vehicle sellers or that we
will be able to retain our existing supply of salvage vehicles. A reduction in
vehicles from a significant vehicle seller or any material changes in the terms
of an arrangement with a significant vehicle seller could have a material
adverse effect on our consolidated results of operations and financial position.
In addition, a failure to increase our sources of vehicle supply could adversely
affect our earnings and revenue growth rates.
32
Our expansion into markets
outside North America, including recent expansions in Europe, Brazil and the
Middle East expose us to risks arising from operating in international markets.
Any failure to successfully integrate businesses acquired outside of North
America into our operations could have an adverse effect on our consolidated
results of operations, financial position or cash flows.
We first expanded our
operations outside North America in 2007 with a significant acquisition in the
United Kingdom (the U.K.), and we continue to evaluate acquisitions and other
opportunities outside North America. In August 2012, we announced our
acquisition of a company in the United Arab Emirates (the U.A.E.), in November
2012, we announced our acquisitions of companies in Brazil and Germany, and in
June 2013, we announced our acquisition of a company in Spain. Acquisitions or
other strategies to expand our operations outside North America pose substantial
risks and uncertainties that could have an adverse effect on our future
operating results. In particular, we may not be successful in realizing
anticipated synergies from these acquisitions, or we may experience
unanticipated costs or expenses integrating the acquired operations into our
existing business. We have and may continue to incur substantial expenses
establishing new yards or operations in international markets. Among other
things, we will ultimately deploy our proprietary auction technologies at all of
our foreign operations and we cannot predict whether this deployment will be
successful or will result in increases in the revenues or operating efficiencies
of any acquired companies relative to their historic operating performance.
Integration of our respective operations, including information technology and
financial and administrative functions, may not proceed as anticipated and could
result in unanticipated costs or expenses such as capital expenditures that
could have an adverse effect on our future operating results. We cannot provide
any assurance that we will achieve our business and financial objectives in
connection with these acquisitions or our strategic decision to expand our
operations internationally.
As we continue to expand our
business internationally, we will need to develop policies and procedures to
manage our business on a global scale. Operationally, acquired businesses
typically depend on key seller relationships, and our failure to maintain those
relationships would have an adverse effect on our consolidated results of
operations and could have an adverse effect on our future operating
results.
In addition, we anticipate our
international operations will subject us to a variety of risks associated with
operating on an international basis, including:
● |
the difficulty of managing and staffing foreign offices
and the increased travel, infrastructure and legal compliance costs
associated with multiple international locations; |
|
|
● |
the need to localize our product offerings, particularly
the need to implement our online auction platform in foreign
countries; |
|
|
● |
tariffs and trade barriers and other regulatory or
contractual limitations on our ability to operate in certain foreign
markets; |
|
|
● |
exposure to foreign currency exchange rate risk, which
may have an adverse impact on our revenues and revenue growth rates; |
|
|
● |
adapting to different business cultures and market
structures, particularly where we seek to implement our auction model in
markets where insurers have historically not played a substantial role in
the disposition of salvage vehicles; and |
|
|
● |
repatriation of funds
currently held in foreign jurisdictions to the U.S. may result in higher
effective tax rates. |
As we continue to expand our business globally, our
success will depend, in large part, on our ability to anticipate and
effectively manage these and other risks associated with our international
operations. Our failure to manage any of these risks successfully could
harm our international operations and have an adverse effect on our
operating results.
In addition, certain
acquisitions in the U.K. may be reviewed by the Competition and Markets
Authority (U.K. Regulator). If an inquiry is made by the U.K. Regulator, we may
be required to demonstrate that our acquisitions will not result, or be expected
to result, in a substantial lessening of competition in the U.K. market.
Although we believe that there will not be a substantial lessening of
competition in the U.K. market, based on our analysis of the relevant U.K.
markets, there can be no assurance that the U.K. Regulator will agree with us if
it decides to make an inquiry. If the U.K. Regulator determines that by our
acquisitions of certain assets, there is or likely will be a substantial
lessening of competition in the U.K. market, we could be required to divest some
portion of our U.K. assets. In the event of a divestiture order by the U.K.
Regulator, the assets disposed may be sold for substantially less than their
carrying value. Accordingly, any divestiture could have a material adverse
effect on our operating results in the period of the divestiture.
33
Our operations and
acquisitions in certain foreign areas expose us to political, regulatory,
economic, and reputational risks.
Although we have implemented
policies, procedures and training designed to ensure compliance with
anti-bribery laws, trade controls and economic sanctions, and similar
regulations, our employees or agents may take actions in violation of our
policies. We may incur costs or other penalties in the event that any such
violations occur, which could have an adverse effect on our business and
reputation.
In addition, some of our
recent acquisitions have required us to integrate non-U.S. companies which had
not, until our acquisition, been subject to U.S. law. In many countries outside
of the United States, particularly in those with developing economies, it may be
common for persons to engage in business practices prohibited by laws and
regulations applicable to us, such as the U.S. Foreign Corrupt Practices Act
(FCPA), U.K. Bribery Act, Brazil Clean Companies Act or similar local
anti-bribery laws. These laws generally prohibit companies and their employees
or agents from making improper payments to government officials for the purpose
of obtaining or retaining business. Failure by us and our subsidiaries to comply
with these laws could subject us to civil and criminal penalties that could have
a material adverse effect on our consolidated operating results and financial
position.
We face risks associated
with the implementation of our salvage auction model in markets that may not
operate on the same terms as the North American market. For example, certain
markets operate on a principal rather than agent basis, which may have an
adverse impact on our gross margin percentages and expose us to inventory risks
that we do not experience in North America.
Some of our target markets
outside North America operate in a manner substantially different than our
historic market in North America. For example, new markets may operate either
wholly or partially on the principal model, in which the vehicle is purchased
then resold for our own account, rather than the agency model employed in North
America, in which we act as a sales agent for the legal owner of vehicles.
Further, operating on a principal basis exposes us to inventory risks, including
losses from theft, damage, and obsolescence. In addition, our business in North
America and the U.K. has been established and grown based largely on our ability
to build relationships with insurance carriers. In other markets, insurers have
traditionally been less involved in the disposition of salvage vehicles. As we
expand into markets outside North America and the U.K., we cannot predict
whether markets will readily adapt to our strategy of online auctions of
automobiles sourced principally through vehicle insurers. Any failure of new
markets to adopt our business model could adversely affect our consolidated
results of operations and financial position.
In general, acquisitions
increase our sales and profitability although, given the typical size of our
acquisitions, most acquisitions will not individually have a material impact on
our consolidated results of operations and financial position. We may not always
be able to introduce our processes and selling platform to acquired companies
due to different operating models in international jurisdictions or other facts.
As a result, the associated benefits of acquisitions may be delayed for years in
some international situations. During this period, the acquisitions may operate
at a loss and certain acquisitions, while profitable, may operate at a margin
percentage that is below our overall operating margin percentage and,
accordingly, have an adverse impact on our consolidated results of operations
and financial position. Hence, the conversion periods vary from weeks to years
and cannot be predicted.
We are transitioning
various functionality of our third-party enterprise operating system to an
internally developed proprietary system, and we may experience difficulties
operating our business as we work to develop and design this
system.
During fiscal 2014, we
terminated a contract with KPIT (formerly known as Sparta Consulting, Inc.),
whereby KPIT was engaged to design and implement an SAP-based replacement for
our existing business operating software that, among other things, would address
our international expansion needs. Following a review of KPITs work performed
to date, and an assessment of the cost to complete, deployment risk, and other
factors, we ceased development of KPITs software and are now pursuing an
internally developed proprietary solution in its place. The transition of our
enterprise operating system carries certain risks, including the risk of
significant design or deployment errors causing disruptions, delays or
deficiencies, which may make our website and services unavailable. This type of
interruption could prevent us from processing vehicles for our sellers and may
prevent us from selling vehicles through our Internet bidding platform, VB3,
which would adversely affect our consolidated results of operations and
financial position.
We may also implement
additional or enhanced information systems in the future to accommodate our
growth and to provide additional capabilities and functionality. The
implementation of new systems and enhancements is frequently disruptive to the
underlying business of an enterprise and can be time-consuming and expensive,
increase management responsibilities and divert management attention. Any
disruptions relating to our system enhancements or any problems with the
implementation, particularly any disruptions impacting our operations or our
ability to accurately report our financial performance on a timely basis during
the implementation period, could materially and adversely affect our business.
Even if we do not encounter these material and adverse effects, the
implementation of these enhancements may be much more costly than we
anticipated. If we are unable to successfully implement the information systems
enhancements as planned, our financial position, results of operations and cash
flows could be negatively impacted.
34
Our success depends on
maintaining the integrity of our systems and infrastructure. As our operations
continue to grow in both size and scope, domestically and internationally, we
must continue to provide reliable, real-time access to our systems by our
customers through improving and upgrading our systems and infrastructure for
enhanced products, services, features and functionality. The transition to our
new internal proprietary system will require us to commit substantial financial,
operational and technical resources before the volume of business increases,
without assurance that the volume of business will increase. Consumers will not
tolerate a service hampered by slow delivery times, unreliable service levels or
insufficient capacity, any of which could have a material adverse effect on our
business, consolidated financial position and results of operations.
The impairment of
capitalized development costs could adversely affect our consolidated results of
operations and financial condition.
We capitalize certain costs
associated with the development of new software products, new software for
internal use and major software enhancements to existing software. These costs
are amortized over the estimated useful life of the software beginning with its
introduction or roll-out. If, at any time, it is determined that capitalized
software provides a reduced economic benefit, the unamortized portion of the
capitalized development costs will be expensed, in part or in full, as an
impairment, which may have a material impact on our consolidated results of
operations and financial position. During fiscal 2014, we recognized a $29.1
million impairment charge primarily related to capitalized software development
costs, as we ceased development of a third-party enterprise operating system and
decided to address our international technology needs through an internally
developed proprietary solution.
Any failure to maintain security and prevent unauthorized access to electronic and other confidential information could disrupt our business and materially and adversely affect our reputation, consolidated results of operations and financial condition.
Information security risks for online commerce companies have significantly increased in recent years because of, in addition to other factors, the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, and other external parties. These threats may derive from fraud or malice on the part of third parties or current or former employees. In addition, human error or accidental technological failure could make us vulnerable to cyber-attacks, including the introduction of malicious computer viruses or code into our system, phishing attacks, or other information technology data security incidents.
Our operations rely on the secure processing, transmission and storage of confidential, proprietary and other information in our computer systems and networks. Our customers and other parties in the payments value chain rely on our digital technologies, computer and email systems, software and networks to conduct their operations. In addition, to access our products and services, our customers and cardholders increasingly use personal smartphones, tablet PCs and other mobile devices that may be beyond our control.
Cyber-attacks or other cyber security incidents could materially and adversely affect our reputation, operating results, or financial condition by, among other things, making our auction platform inoperable for a period of time, damaging our reputation with buyers, sellers, and insurance companies as a result of the unauthorized disclosure of confidential information (including account data information), or resulting in governmental investigations, litigation, liability, fines, or penalties against us. If such attacks are not detected immediately, their effect could be compounded. While we maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects of these cyber risks, our insurance coverage may be insufficient to cover all losses and would not remedy damage to our reputation.
We have in the past identified attempts by unauthorized third parties to access our systems and disrupt our online auctions. These attempts have caused minor service interruptions, which were promptly addressed and resolved, and our online service was restored to normal business. In April 2015, we identified that unauthorized third parties had gained access to data provided to us by our members that is considered to be personal information in certain jurisdictions. We immediately investigated, including the engagement of an external expert security firm, and are making required notifications to members whose information may have been accessed and to regulatory agencies.
We are constantly evaluating and implementing new technologies and processes to manage risks relating to cyber-attacks and system and network disruptions, including but not limited to usage errors by our employees, power outages and catastrophic events such as fires, tornadoes, floods, hurricanes and earthquakes. We have further enhanced our security protocols based on the investigation we conducted in response to the recently discovered data breach. Nevertheless, we cannot provide assurances that our efforts to address prior data security incidents and mitigate against the risk of future data security incidents or system failures will be successful. The techniques used by criminals to obtain unauthorized access to sensitive data change frequently and are often not recognized immediately. We may be unable to anticipate these techniques or implement adequate preventative measures and believe that cyber-attacks and threats against us have occurred in the past and are likely to continue in the future. If our systems are compromised again in the future, become inoperable for extended periods of time, or cease to function properly, we may have to make a significant investment to fix or replace them, and our ability to provide many of our electronic and online solutions to our customers may be impaired. In addition, as cyber-threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. Any of the risks described above could materially and adversely affect our consolidated financial position and results of operations.
35
Our business is exposed to
risks associated with online commerce security and credit card fraud.
Consumer concerns over the
security of transactions conducted on the Internet or the privacy of users may
inhibit the growth of the Internet and online commerce. To securely transmit
confidential information such as customer credit card numbers, we rely on
encryption and authentication technology. Unanticipated events or developments
could result in a compromise or breach of the systems we use to protect customer
transaction data. Furthermore, our servers may also be vulnerable to viruses
transmitted via the Internet. While we proactively check for intrusions into our
infrastructure, a new or undetected virus could cause a service disruption.
We maintain an information
security program and our processing systems incorporate multiple levels of
protection in order to address or otherwise mitigate these risks. Despite these
mitigation efforts, there can be no assurance that we will be immune to these
risks and not suffer losses in the future. Under current credit card practices
and the rules of the online auto auction industry, we may be held liable for
fraudulent credit card transactions and other payment disputes with customers.
As such, we have implemented certain anti-fraud measures, including credit card
verification procedures; however, a failure to adequately prevent fraudulent
credit card transactions could adversely affect our consolidated financial
position and results of operations.
Our security measures may also
be breached due to employee error, malfeasance, insufficiency, or defective
design. Additionally, outside parties may attempt to fraudulently induce
employees, users, or customers to disclose sensitive information in order to
gain access to our data or our users' or customers' data. Any such breach or
unauthorized access could result in significant legal and financial exposure,
damage to our reputation, and a loss of confidence in the security of our
products and services that could have an adverse effect on our consolidated
financial position and results of operations.
Implementation of our
online auction model in new markets may not result in the same synergies and
benefits that we achieved when we implemented the model in North America and the
U.K.
We believe that the
implementation of our proprietary auction technologies across our operations
over the last decade had a favorable impact on our results of operations by
increasing the size and geographic scope of our buyer base, increasing the
average selling price for vehicles sold through our sales, and lowering expenses
associated with vehicle sales.
We implemented our online
system across all of our North American and U.K. salvage yards beginning in
fiscal 2004 and 2008, respectively, and experienced increases in revenues and
average selling prices, as well as improved operating efficiencies in both
markets. In considering new markets, we consider the potential synergies from
the implementation of our model based in large part on our experience in North
America and the U.K. We cannot predict whether these synergies will also be
realized in new markets.
Failure to have sufficient
capacity to accept additional cars at one or more of our storage facilities
could adversely affect our relationships with insurance companies or other
sellers of vehicles.
Capacity at our storage
facilities varies from period to period and from region to region. For example,
following adverse weather conditions in a particular area, our yards in that
area may fill and limit our ability to accept additional salvage vehicles while
we process existing inventories. For example, Hurricanes Katrina, Rita and Sandy
had, in certain quarters, an adverse effect on our operating results, in part
because of yard capacity constraints in the impacted areas of the United States.
We regularly evaluate our capacity in all our markets and where appropriate,
seek to increase capacity through the acquisition of additional land and yards.
We may not be able to reach agreements to purchase independent storage
facilities in markets where we have limited excess capacity, and zoning
restrictions or difficulties obtaining use permits may limit our ability to
expand our capacity through acquisitions of new land. Failure to have sufficient
capacity at one or more of our yards could adversely affect our relationships
with insurance companies or other sellers of vehicles, which could have an
adverse effect on our consolidated results of operations and financial
position.
36
Because the growth of our
business has been due in large part to acquisitions and development of new
facilities, the rate of growth of our business and revenues may decline if we
are not able to successfully complete acquisitions and develop new facilities.
We seek to increase our
sales and profitability through the acquisition of additional facilities and the
development of new facilities. For example, in fiscal 2013, we acquired new
facilities in Sao Paulo, Brazil; the U.A.E.; Ettlingen, Germany; Cordoba, Spain;
and in North America. Furthermore, promising acquisitions are difficult to
identify and complete for a number of reasons, including competition among
prospective buyers, the availability of affordable financing in the capital
markets and the need to satisfy applicable closing conditions and obtain
antitrust and other regulatory approvals on acceptable terms. There can be no
assurance that we will be able to:
● |
continue to acquire
additional facilities on favorable terms; |
● |
expand existing
facilities in no-growth regulatory environments;
|
● |
increase revenues and
profitability at acquired and new facilities; |
● |
maintain the
historical revenue and earnings growth rates we have been able to obtain
through facility openings and strategic acquisitions;
|
● |
create new vehicle
storage facilities that meet our current revenue and profitability
requirements; or |
● |
obtain necessary
regulatory approvals under applicable antitrust and competition
laws. |
In addition, certain of the
acquisition agreements by which we have acquired companies require the former
owners to indemnify us against certain liabilities related to the operation of
the company before we acquired it. In most of these agreements, however, the
liability of the former owners is limited and certain former owners may be
unable to meet their indemnification responsibilities. We cannot assure that
these indemnification provisions will protect us fully or at all, and as a
result we may face unexpected liabilities that adversely affect our financial
statements. Any failure to continue to successfully identify and complete
acquisitions and develop new facilities could have a material adverse effect on
our consolidated results of operations and financial position.
As we continue to expand
our operations, our failure to manage growth could harm our business and
adversely affect our consolidated results of operations and financial
position.
Our ability to manage
growth depends not only on our ability to successfully integrate new facilities,
but also on our ability to:
● |
hire, train and
manage additional qualified personnel; |
● |
establish new
relationships or expand existing relationships with vehicle sellers;
|
● |
identify and acquire
or lease suitable premises on competitive terms;
|
● |
secure adequate
capital; and |
● |
maintain the supply
of vehicles from vehicle sellers. |
Our inability to control or
manage these growth factors effectively could have a material adverse effect on
our consolidated results of operations and financial position.
Our annual and quarterly
performance may fluctuate, causing the price of our stock to
decline.
Our revenues and operating
results have fluctuated in the past and can be expected to continue to fluctuate
in the future on a quarterly and annual basis as a result of a number of
factors, many of which are beyond our control. Factors that may affect our
operating results include, but are not limited to, the following:
● |
fluctuations in the
market value of salvage and used vehicles; |
● |
fluctuations in commodity prices, particularly the per ton price of crushed car bodies; |
● |
the impact of foreign
exchange gain and loss as a result of international operations;
|
● |
our ability to
successfully integrate our newly acquired operations in international
markets and any additional markets we may enter;
|
● |
the availability of
salvage vehicles; |
● |
variations in vehicle
accident rates; |
● |
member participation
in the Internet bidding process; |
37
● |
delays or changes in
state title processing; |
● |
changes in
international, state or federal laws or regulations affecting salvage
vehicles; |
● |
changes in local laws
affecting who may purchase salvage vehicles; |
● |
our ability to
integrate and manage our acquisitions successfully;
|
● |
the timing and size
of our new facility openings; |
● |
the announcement of
new vehicle supply agreements by us or our competitors;
|
● |
the severity of
weather and seasonality of weather patterns; |
● |
the amount and timing
of operating costs and capital expenditures relating to the maintenance
and expansion of our business, operations and infrastructure;
|
● |
the availability and
cost of general business insurance; |
● |
labor costs and
collective bargaining; |
● |
changes in the
current levels of out of state and foreign demand for salvage vehicles;
|
● |
the introduction of a
similar Internet product by a competitor; and |
● |
the ability to obtain
necessary permits to operate. |
Due to the foregoing
factors, our operating results in one or more future periods can be expected to
fluctuate. As a result, we believe that period-to-period comparisons of our
results of operations are not necessarily meaningful and should not be relied
upon as any indication of future performance. In the event such fluctuations
result in our financial performance being below the expectations of public
market analysts and investors, the price of our common stock could decline
substantially.
Our Internet-based sales
model has increased the relative importance of intellectual property assets to
our business, and any inability to protect those rights could have a material
adverse effect on our business, financial position, or results of
operations.
Our intellectual property
rights include patents relating to our auction technologies, as well as
trademarks, trade secrets, copyrights and other intellectual property rights. In
addition, we may enter into agreements with third parties regarding the license
or other use of our intellectual property in foreign jurisdictions. Effective
intellectual property protection may not be available in every country in which
our products and services are distributed, deployed, or made available. We seek
to maintain certain intellectual property rights as trade secrets. The secrecy
could be compromised by third parties, or intentionally or accidentally by our
employees, which would cause us to lose the competitive advantage resulting from
those trade secrets. Any significant impairment of our intellectual property
rights, or any inability to protect our intellectual property rights, could have
a material adverse effect on our consolidated results of operations and
financial position.
We have in the past been
and may in the future be subject to intellectual property rights claims, which
are costly to defend, could require us to pay damages, and could limit our
ability to use certain technologies in the future.
Litigation based on
allegations of infringement or other violations of intellectual property rights
are common among companies who rely heavily on intellectual property rights. Our
reliance on intellectual property rights has increased significantly in recent
years as we have implemented our auction-style sales technologies across our
business and ceased conducting live auctions. Recent U.S. Supreme Court
precedent potentially restricts patentability of software inventions by
affirming that patent claims merely requiring application of an abstract idea on
standard computers utilizing generic computer functions are patent ineligible,
which may impact our ability to enforce our issued patent and obtain new
patents. As we face increasing competition, the possibility of intellectual
property rights claims against us increases. Litigation and any other
intellectual property claims, whether with or without merit, can be
time-consuming, expensive to litigate and settle, and can divert management
resources and attention from our core business. An adverse determination in
current or future litigation could prevent us from offering our products and
services in the manner currently conducted. We may also have to pay damages or
seek a license for the technology, which may not be available on reasonable
terms and which may significantly increase our operating expenses, if it is
available for us to license at all. We could also be required to develop
alternative non-infringing technology, which could require significant effort
and expense.
38
If we experience
problems with our subhaulers and trucking fleet operations, our business could
be harmed.
We rely solely upon
independent subhaulers to pick up and deliver vehicles to and from our North
American and Brazilian storage facilities. We also utilize, to a lesser extent,
independent subhaulers in the U.K. Our failure to pick up and deliver vehicles
in a timely and accurate manner could harm our reputation and brand, which could
have a material adverse effect on our business. Further, an increase in fuel
cost may lead to increased prices charged by our independent subhaulers, which
may significantly increase our cost. We may not be able to pass these costs on
to our sellers or buyers.
In addition to using
independent subhaulers, in the U.K. we utilize a fleet of company trucks to pick
up and deliver vehicles from our U.K. storage facilities. In connection
therewith, we are subject to the risks associated with providing trucking
services, including inclement weather, disruptions in transportation
infrastructure, availability and price of fuel, any of which could result in an
increase in our operating expenses and reduction in our net income.
We are partially
self-insured for certain losses and if our estimates of the cost of future
claims differ from actual trends, our results of operations could be
harmed.
We are partially
self-insured for certain losses related to medical insurance, general liability,
workers compensation and auto liability. Our liability represents an estimate
of the ultimate cost of claims incurred as of the balance sheet date. The
estimated liability is not discounted and is established based upon analysis of
historical data and actuarial estimates. Further, we utilize independent
actuaries to assist us in establishing the proper amount of reserves for
anticipated payouts associated with these self-insured exposures. While we
believe these estimates are reasonable based on the information currently
available, if actual trends, including the severity of claims and medical cost
inflation, differ from our estimates, our results of operations could be
impacted.
Our executive officers,
directors and their affiliates hold a large percentage of our stock and their
interests may differ from other stockholders.
Our executive officers,
directors and their affiliates beneficially own, in the aggregate, 20.4% of our
common stock as of April 30, 2015. If they were to act together, these
stockholders would have significant influence over most matters requiring
approval by stockholders, including the election of directors, any amendments to
our certificate of incorporation and certain significant corporate transactions,
including potential merger or acquisition transactions. In addition, without the
consent of these stockholders, we could be delayed or prevented from entering
into transactions that could be beneficial to us or our other investors. These
stockholders may take these actions even if they are opposed by our other
investors.
We have certain
provisions in our certificate of incorporation and bylaws, which may have an
anti-takeover effect or that may delay, defer or prevent acquisition bids for us
that a stockholder might consider favorable and limit attempts by our
stockholders to replace or remove our current management.
Our board of directors is
authorized to create and issue from time to time, without stockholder approval,
up to an aggregate of 5,000,000 shares of undesignated preferred stock, the
terms of which may be established and shares of which may be issued without
stockholder approval, and which may include rights superior to the rights of the
holders of common stock. In addition, our bylaws establish advance notice
requirements for nominations for elections to our board of directors or for
proposing matters that can be acted upon by stockholders at stockholder
meetings. These anti-takeover provisions and other provisions under Delaware law
could discourage, delay or prevent a transaction involving a change in control
of our company, even if doing so would benefit our stockholders. These
provisions could also discourage proxy contests and make it more difficult for
stockholders to elect directors of their choosing and cause us to take other
corporate actions the stockholders desire.
If we lose key
management or are unable to attract and retain the talent required for our
business, we may not be able to successfully manage our business or achieve our
objectives.
Our future success depends
in large part upon the leadership and performance of our executive management
team, all of whom are employed on an at-will basis and none of whom are subject
to any agreements not to compete. If we lose the service of one or more of our
executive officers or key employees, in particular Willis J. Johnson, our
Chairman; A. Jayson Adair, our Chief Executive Officer; Vincent W. Mitz, our
President; and William E. Franklin, our Executive Vice President and Chief
Financial Officer, or if one or more of these executives decide to join a
competitor or otherwise compete directly or indirectly with us, we may not be
able to successfully manage our business or achieve our business
objectives.
39
Cash investments are
subject to risks.
We may invest our excess cash in securities or money market
funds backed by securities, which may include U.S. treasuries, other federal,
state and municipal debt, bonds, preferred stock, commercial paper, insurance
contracts and other securities both privately and publicly traded. All
securities are subject to risk, including fluctuations in interest rates, credit
risk, market risk and systemic economic risk. Changes or movements in any of
these risk factors may result in a loss or impairment to our invested cash and
may have a material effect on our consolidated results of operations and
financial position.
Rapid technological
changes may render our technology obsolete or decrease the competitiveness of
our services.
To remain competitive, we
must continue to enhance and improve the functionality and features of our
websites and software. The Internet and the online commerce industry are rapidly
changing. In particular, the online commerce industry is characterized by
increasingly complex systems and infrastructures. If competitors introduce new
services embodying new technologies or if new industry standards and practices
emerge, our existing websites and proprietary technology and systems may become
obsolete. Our future success will depend on our ability to:
● |
enhance our existing
services;
|
● |
develop and license
new services and technologies that address the increasingly sophisticated
and varied needs of our prospective customers; and
|
● |
respond to
technological advances and emerging industry standards and practices in a
cost-effective and timely basis. |
Developing our websites and
other proprietary technology entails significant technical and business risks.
We may use new technologies ineffectively or we may fail to adapt our websites,
transaction-processing systems and network infrastructure to customer
requirements or emerging industry standards. If we face material delays in
introducing new services, products and enhancements, our customers and suppliers
may forego the use of our services and use those of our competitors.
New member programs
could impact our operating results.
We have or will initiate
programs to open our auctions to the general public. These programs include the
Registered Broker program through which the public can purchase vehicles through
a registered member and the Market Maker program through which registered
members can open Copart storefronts with Internet kiosks enabling the general
public to search our inventory and purchase vehicles. Initiating programs that
allow access to our online auctions to the general public may involve material
expenditures and we cannot predict what future benefit, if any, will be
derived.
Factors such as mild
weather conditions can have an adverse effect on our revenues and operating
results, as well as our revenue and earnings growth rates, by reducing the
available supply of salvage vehicles. Conversely, extreme weather conditions can
result in an oversupply of salvage vehicles that requires us to incur abnormal
expenses to respond to market demands.
Mild weather conditions
tend to result in a decrease in the available supply of salvage vehicles because
traffic accidents decrease and fewer automobiles are damaged. Accordingly, mild
weather can have an adverse effect on our salvage vehicle inventories, which
would be expected to have an adverse effect on our revenue and operating results
and related growth rates. Conversely, our inventories will tend to increase in
poor weather such as a harsh winter or as a result of adverse weather-related
conditions such as flooding. During periods of mild weather conditions, our
ability to increase our revenues and improve our operating results and related
growth will be increasingly dependent on our ability to obtain additional
vehicle sellers and to compete more effectively in the market, each of which is
subject to the other risks and uncertainties described in these sections. In
addition, extreme weather conditions, although they increase the available
supply of salvage cars, can have an adverse effect on our operating results. For
example, during fiscal 2006 and fiscal 2013, we recognized substantial
additional costs associated with Hurricanes Katrina, Rita and Sandy. Weather
events have had, in certain quarters, an adverse effect on our operating
results, in part because of yard capacity constraints in the impacted areas of
the U.S. These additional costs were characterized as abnormal under ASC 330,
Inventory, and included the additional subhauling, payroll,
equipment and facilities expenses directly related to the operating conditions
created by the hurricanes. In the event that we were to again experience
extremely adverse weather or other anomalous conditions that result in an
abnormally high number of salvage vehicles in one or more of our markets, those
conditions could have an adverse effect on our future operating
results.
40
Macroeconomic factors
such as high fuel prices, declines in commodity prices, declines in used car
prices, and vehicle-related technological advances may have an adverse effect on
our revenues and operating results, as well as our earnings growth
rates.
Macroeconomic factors that affect oil prices and the automobile
and commodity markets can have adverse effects on our revenues, revenue growth
rates (if any), and operating results. Significant increases in the cost of fuel
could lead to a reduction in miles driven per car and a reduction in accident
rates. A material reduction in accident rates, whether due to, among other
things, vehicle-related technological advances such as accident avoidance
systems and, to the extent widely adopted, the advent of driverless cars, could
have a material impact on revenue growth. In addition, under our percentage
incentive program contracts, or PIP, the cost of towing the vehicle to one of
our facilities is included in the PIP fee. We may incur increased fees, which we
may not be able to pass on to our vehicle sellers. A material increase in tow
rates could have a material impact on our operating results. Volatility in fuel,
commodity, and used car prices could have a material adverse effect on our
revenues and revenue growth rates in future periods.
The salvage vehicle
sales industry is highly competitive and we may not be able to compete
successfully.
We face significant
competition for the supply of salvage vehicles and for the buyers of those
vehicles. We believe our principal competitors include other auction and vehicle
remarketing service companies with whom we compete directly in obtaining
vehicles from insurance companies and other sellers, and large vehicle
dismantlers, who may buy salvage vehicles directly from insurance companies,
bypassing the salvage sales process. Many of the insurance companies have
established relationships with competitive remarketing companies and large
dismantlers. Certain of our competitors may have greater financial resources
than us. Due to the limited number of vehicle sellers, particularly in the U.K.,
the absence of long-term contractual commitments between us and our sellers and
the increasingly competitive market environment, there can be no assurance that
our competitors will not gain market share at our expense.
We may also encounter
significant competition for local, regional and national supply agreements with
vehicle sellers. There can be no assurance that the existence of other local,
regional or national contracts entered into by our competitors will not have a
material adverse effect on our business or our expansion plans. Furthermore, we
are likely to face competition from major competitors in the acquisition of
vehicle storage facilities, which could significantly increase the cost of such
acquisitions and thereby materially impede our expansion objectives or have a
material adverse effect on our consolidated results of operations. These
potential new competitors may include consolidators of automobile dismantling
businesses, organized salvage vehicle buying groups, automobile manufacturers,
automobile auctioneers and software companies. While most vehicle sellers have
abandoned or reduced efforts to sell salvage vehicles directly without the use
of service providers such as us, there can be no assurance that this trend will
continue, which could adversely affect our market share, consolidated results of
operations and financial position. Additionally, existing or new competitors may
be significantly larger and have greater financial and marketing resources than
us; therefore, there can be no assurance that we will be able to compete
successfully in the future.
Government regulation of
the salvage vehicle sales industry may impair our operations, increase our costs
of doing business and create potential liability.
Participants in the salvage
vehicle sales industry are subject to, and may be required to expend funds to
ensure compliance with a variety of governmental, regulatory and administrative
rules, regulations, land use ordinances, licensure requirements and procedures,
including those governing vehicle registration, the environment, zoning and land
use. Failure to comply with present or future regulations or changes in
interpretations of existing regulations may result in impairment of our
operations and the imposition of penalties and other liabilities. At various
times, we may be involved in disputes with local governmental officials
regarding the development and/or operation of our business facilities. We
believe that we are in compliance in all material respects with applicable
regulatory requirements. We may be subject to similar types of regulations by
federal, national, international, provincial, state, and local governmental
agencies in new markets. In addition, new regulatory requirements or changes in
existing requirements may delay or increase the cost of opening new facilities,
may limit our base of salvage vehicle buyers and may decrease demand for our
vehicles.
Changes in laws
affecting the importation of salvage vehicles may have an adverse effect on our
business and financial condition.
Our Internet-based
auction-style model has allowed us to offer our products and services to
international markets and has increased our international buyer base. As a
result, foreign importers of salvage vehicles now represent a significant part
of our total buyer base. Changes in laws and regulations that restrict the
importation of salvage vehicles into foreign countries may reduce the demand for
salvage vehicles and impact our ability to maintain or increase our
international buyer base. For example, in March 2008, a decree issued by the
president of Mexico became effective that placed restrictions on the types of
vehicles that can be imported into Mexico from the U.S. The adoption of similar
laws or regulations in other jurisdictions that have the effect of reducing or
curtailing our activities abroad could have a material adverse effect on our
consolidated results of operations and financial position by reducing the demand
for our products and services.
41
The operation of our
storage facilities poses certain environmental risks, which could adversely
affect our consolidated financial position, results of operations or cash
flows.
Our operations are subject
to federal, state, national, provincial and local laws and regulations regarding
the protection of the environment in the countries which we have storage
facilities. In the salvage vehicle remarketing industry, large numbers of
wrecked vehicles are stored at storage facilities and during that time, spills
of fuel, motor oil and other fluids may occur, resulting in soil, surface water
or groundwater contamination. In addition, certain of our facilities generate
and/or store petroleum products and other hazardous materials, including waste
solvents and used oil. In the U.K., we provide vehicle de-pollution and crushing
services for End-of-Life program vehicles. We could incur substantial
expenditures for preventative, investigative or remedial action and could be
exposed to liability arising from our operations, contamination by previous
users of certain of our acquired facilities, or the disposal of our waste at
off-site locations. Environmental laws and regulations could become more
stringent over time and there can be no assurance that we or our operations will
not be subject to significant costs in the future. Although we have obtained
indemnification for pre-existing environmental liabilities from many of the
persons and entities from whom we have acquired facilities, there can be no
assurance that such indemnifications will be adequate. Any such expenditures or
liabilities could have a material adverse effect on our consolidated results of
operations and financial position.
Adverse U.S. and
international economic conditions may negatively affect our business, operating
results, or financial condition.
The capital and credit
markets have historically experienced extreme volatility and disruption, which
has in the past and may in the future lead to economic downturns in the U.S. and
abroad. As a result of any economic downturn, the number of miles driven may
decrease, which may lead to fewer accident claims, a reduction of vehicle
repairs, and fewer salvage vehicles. Increases in unemployment, as a result of
any economic downturn, may lead to an increase in the number of uninsured
motorists. Uninsured motorists are responsible for disposition of their vehicle
if involved in an accident. Disposition generally is either the repair or
disposal of the vehicle. In the situation where the owner of the wrecked
vehicle, and not an insurance company, is responsible for its disposition, we
believe it is more likely that vehicle will be repaired or, if disposed,
disposed through channels other than us. Adverse credit markets may also affect
the ability of members to secure financing to purchase salvaged vehicles which
may adversely affect demand. In addition, if the banking system or the financial
markets deteriorate or are volatile, our credit facility or our ability to
obtain additional debt or equity financing may be affected. These adverse
economic conditions and events may have a negative effect on our business,
consolidated results of operations and financial position.
If we determine that our
goodwill has become impaired, we could incur significant charges that would have
a material adverse effect on our consolidated results of
operations.
Goodwill represents the
excess of cost over the fair market value of assets acquired in business
combinations. In recent periods, the amount of goodwill on our consolidated
balance sheets has increased substantially, principally as a result of a series
of acquisitions we have made in North America, the U.K., Brazil, Germany, the
U.A.E., and Spain in fiscal 2013 and 2014. As of April 30, 2015, the amount of
goodwill on our consolidated balance sheet subject to future impairment testing
was $271.5 million.
Pursuant to ASC 350,
IntangiblesGoodwill and
Other, we are required to
annually test goodwill and intangible assets with indefinite lives to determine
if impairment has occurred. Additionally, interim reviews must be performed
whenever events or changes in circumstances indicate that impairment may have
occurred. If the testing performed indicates that impairment has occurred, we
are required to record a non-cash impairment charge for the difference between
the carrying value of the goodwill or other intangible assets and the implied
fair value of the goodwill or other intangible assets in the period the
determination is made. The testing of goodwill and other intangible assets for
impairment requires us to make significant estimates about our future
performance and cash flows, as well as other assumptions. These estimates can be
affected by numerous factors, including changes in the definition of a business
segment in which we operate; changes in economic, industry or market conditions;
changes in business operations; changes in competition; or potential changes in
the share price of our common stock and market capitalization. Changes in these
factors, or changes in actual performance compared with estimates of our future
performance, could affect the fair value of goodwill or other intangible assets,
which may result in an impairment charge. For example, continued deterioration
in worldwide economic conditions could affect these assumptions and lead us to
determine that goodwill impairment is required with respect to our acquisitions
in North America, the U.K., Brazil, Germany, the U.A.E. or Spain. We cannot
accurately predict the amount or timing of any impairment of assets. Should the
value of our goodwill or other intangible assets become impaired, it could have
a material adverse effect on our consolidated results of operations and could
result in our incurring net losses in future periods.
42
An adverse outcome of a
pending Georgia sales tax audit could have a material adverse effect on our
consolidated results of operations and financial condition.
The Georgia Department of Revenue, or DOR, conducted a sales
and use tax audit of our operations in Georgia for the period from January 1,
2007 through June 30, 2011. As a result of the audit, the DOR issued a notice of
proposed assessment for uncollected sales taxes in which it asserted that we
failed to remit sales taxes totaling $73.8 million, including penalties and
interest. In issuing the notice of proposed assessment, the DOR stated its
policy position that sales for resale to non-U.S. registered resellers are
subject to Georgia sales and use tax.
We have engaged a Georgia
law firm and outside tax advisors to review the conduct of our business
operations in Georgia, the notice of assessment, and the DORs policy position.
In particular, our outside legal counsel has provided us with an opinion that
our sales for resale to non-U.S. registered resellers should not be subject to
Georgia sales and use tax. In rendering its opinion, our counsel noted that
non-U.S. registered resellers are unable to comply strictly with technical
requirements for a Georgia certificate of exemption but concluded that our sales
for resale to non-U.S. registered resellers should not be subject to Georgia
sales and use tax notwithstanding this technical inability to comply.
Based on the opinion from
our outside law firm, advice from outside tax advisors, and our best estimate of
a probable outcome, we believe that we have adequately provided for the payment
of this assessment in our consolidated financial statements. We believe we have
strong defenses to the DORs notice of proposed assessment and intend to defend
this matter. We have filed a request for protest or administrative appeal with
the State of Georgia. There can be no assurance that this matter will be
resolved in our favor or that we will not ultimately be required to make a
substantial payment to the Georgia DOR. We understand that Georgia law and DOR
regulations are ambiguous on many of the points at issue in the audit and
litigating and defending the matter in Georgia could be expensive and
time-consuming and result in substantial management distraction. If the matter
were to be resolved in a manner adverse to us, it could have a material adverse
effect on our consolidated results of operations and financial
position.
New accounting
pronouncements or new interpretations of existing standards could require us to
make adjustments to accounting policies that could adversely affect the
consolidated financial statements.
The Financial Accounting
Standards Board, the Public Company Accounting Oversight Board, and the SEC,
from time to time issue new pronouncements or new interpretations of existing
accounting standards that require changes to our accounting policies and
procedures. To date, we do not believe any new pronouncements or interpretations
have had a material adverse effect on our consolidated results of operations and
financial position, but future pronouncements or interpretations could require a
change or changes in our policies or procedures.
Fluctuations in foreign
currency exchange rates could result in declines in our reported revenues and
earnings.
Our reported revenues and
earnings are subject to fluctuations in currency exchange rates. We do not
engage in foreign currency hedging arrangements; consequently, foreign currency
fluctuations may adversely affect our revenues and earnings. Should we choose to
engage in hedging activities in the future we cannot be assured our hedges will
be effective or that the costs of the hedges will exceed their benefits.
Fluctuations in the rate of exchange between the U.S. dollar and foreign
currencies, primarily the British pound, Canadian dollar, U.A.E. dirham,
Brazilian real, and the Euro could adversely affect our consolidated results of
operations and financial position.
If the interest rate
swaps entered into in connection with our credit facility prove ineffective, it
could result in volatility in our operating results, including potential losses,
which could have a material adverse effect on our results of operations and cash
flows.
We entered into two
interest rate swaps to exchange our variable interest rate payment commitments
for fixed interest rate payments on our variable interest rate debt through
December 2015. We recorded the swaps at fair value, and are currently designated
as an effective cash flow hedge under ASC 815, Derivatives and Hedging. Each quarter, we measure hedge effectiveness
using the hypothetical derivative method and record in earnings any gains or
losses resulting from hedge ineffectiveness. The hedge provided by our swaps
could prove to be ineffective for a number of reasons, including early
retirement of the variable interest rate debt, as is allowed under the variable
interest rate debt, or in the event the counterparty to the interest rate swaps
are determined in the future to not be creditworthy. Any determination that the
hedge created by the swaps is ineffective could have a material adverse effect
on our results of operations and cash flows and result in volatility in our
operating results. In addition, any changes in relevant accounting standards
relating to the swaps, especially ASC 815, Derivatives and Hedging, could materially increase earnings volatility.
43
ITEM 6.
EXHIBITS
a) Exhibits
31. |
1 |
|
Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|
|
|
|
31. |
2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|
|
|
|
32. |
1(1) |
|
Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
|
|
|
|
32. |
2(1) |
|
Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
|
|
|
|
101. |
INS |
|
XBRL
Instance Document |
|
|
|
|
101. |
SCH |
|
XBRL
Taxonomy Extension Schema Document |
|
|
|
|
101. |
CAL |
|
XBRL
Taxonomy Extension Calculation Linkbase Document |
|
|
|
|
101. |
DEF |
|
XBRL
Extension Definition |
|
|
|
|
101. |
LAB |
|
XBRL
Taxonomy Extension Label Linkbase Document |
|
|
|
|
101. |
PRE |
|
XBRL
Taxonomy Extension Presentation Linkbase Document |
|
|
|
|
|
(1) |
|
In accordance with
Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 33-8238 and
34-47986, Final Rule: Managements Reports on Internal Control Over
Financial Reporting and Certification of Disclosure in Exchange Act
Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2
hereto are deemed to accompany this Form 10-Q and will not be deemed
filed for purposes of Section 18 of the Exchange Act. Such
certifications will not be deemed to be incorporated by reference into any
filings under the Securities Act or the Exchange Act, except to the extent
that the registrant specifically incorporates it by
reference. |
44
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COPART,
INC. |
|
|
/s/ William E.
Franklin |
|
William E. Franklin, Executive Vice President and Chief
Financial Officer (Principal Financial and Accounting Officer and duly
Authorized Officer) |
Date: May 28, 2015
45
EXHIBIT 31.1
CERTIFICATION OF CHIEF
EXECUTIVE OFFICER PURSUANT TO
EXCHANGE ACT RULE 13a-14(a)/15d-14(a)
AS
ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, A. Jayson Adair, certify
that:
1. |
I have reviewed this
Quarterly Report on Form 10-Q of Copart, Inc.; |
2. |
Based on my
knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
report; |
3. |
Based on my
knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report; |
4. |
The registrants
other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have: |
a) |
Designed such
disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being
prepared; |
b) |
Designed such
internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles; |
c) |
Evaluated the
effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and |
d) |
Disclosed in this
report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially
affect, the registrants internal control over financial reporting;
and |
5. |
The registrants
other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the
registrants auditors and the audit committee of the registrants board of
directors (or persons performing the equivalent
functions): |
a) |
All significant
deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrants ability to record, process, summarize
and report financial information; and |
b) |
Any fraud, whether or
not material, that involves management or other employees who have a
significant role in the registrants internal control over financial
reporting. |
|
Date: May
28, 2015 |
|
/s/ A. Jayson Adair |
A. Jayson
Adair |
|
Chief
Executive Officer |
46
EXHIBIT 31.2
CERTIFICATION OF CHIEF
FINANCIAL OFFICER PURSUANT TO
EXCHANGE ACT RULE
13a-14(a)/15d-14(a)
AS ADOPTED PURSUANT TO
SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, William E. Franklin,
certify that:
1. |
I have reviewed this
Quarterly Report on Form 10-Q of Copart, Inc.; |
2. |
Based on my
knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
report; |
3. |
Based on my
knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report; |
4. |
The registrants
other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have: |
a) |
Designed such
disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being
prepared; |
b) |
Designed such
internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles; |
c) |
Evaluated the
effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and |
d) |
Disclosed in this
report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially
affect, the registrants internal control over financial reporting;
and |
5. |
The registrants
other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the
registrants auditors and the audit committee of the registrants board of
directors (or persons performing the equivalent
functions): |
a) |
All significant
deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrants ability to record, process, summarize
and report financial information; and |
b) |
Any fraud, whether or
not material, that involves management or other employees who have a
significant role in the registrants internal control over financial
reporting. |
|
Date: May
28, 2015 |
|
/s/ William E. Franklin |
William E.
Franklin |
|
Executive
Vice President |
and Chief
Financial Officer |
47
EXHIBIT 32.1
CERTIFICATION OF CHIEF
EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT
TO
SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
I, A. Jayson Adair, hereby
certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to the best of my knowledge, the Quarterly
Report of Copart, Inc. on Form 10-Q for the quarter ended April 30, 2015 (the
Report) fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that the information contained in this
Report fairly presents, in all material respects, the financial condition and
results of operations of Copart, Inc.
/s/ A. Jayson Adair |
A. Jayson
Adair |
Chief
Executive Officer |
Date: May 28, 2015
A signed original of this
written statement required by Section 906 has been provided to Copart, Inc. and
will be retained by Copart, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
The foregoing certification
is being furnished to the Securities and Exchange Commission pursuant to 18
U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, and is not to be incorporated by
reference into any filing of the Company, whether made before or after the date
hereof, regardless of any general incorporation language in such filing except
to the extent that the Company specifically incorporates it by reference.
48
EXHIBIT
32.2
CERTIFICATION OF CHIEF
FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT
TO
SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
I, William E. Franklin,
hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge, the
Quarterly Report of Copart, Inc. on Form 10-Q for the quarter ended April 30,
2015 (the Report) fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 and that the information contained
in this Report fairly presents, in all material respects, the financial
condition and results of operations of Copart, Inc.
/s/ William E. Franklin |
William E.
Franklin |
Executive Vice
President
and Chief Financial Officer
Date: May 28, 2015
A signed original of this
written statement required by Section 906 has been provided to Copart, Inc. and
will be retained by Copart, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
The foregoing certification
is being furnished to the Securities and Exchange Commission pursuant to 18
U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, and is not to be incorporated by
reference into any filing of the Company, whether made before or after the date
hereof, regardless of any general incorporation language in such filing except
to the extent that the Company specifically incorporates it by reference.
49
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