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 January
31, 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
(Registrant’s 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 |
Smaller reporting company o |
(Do not check if a smaller reporting company)
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 March 3, 2015, 126,439,552 shares of the registrant’s
common stock were outstanding.
Copart, Inc.
Index to the Quarterly Report
January 31, 2015
Copart, Inc.
Consolidated Balance Sheets
(Unaudited)
| |
January 31, | | |
July 31, | |
(In thousands, except share amounts) | |
2015 | | |
2014 | |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 590,366 | | |
$ | 158,668 | |
Accounts receivable, net | |
| 235,477 | | |
| 196,985 | |
Vehicle pooling costs | |
| 26,091 | | |
| 24,438 | |
Inventories | |
| 8,015 | | |
| 7,259 | |
Income taxes receivable | |
| 7,803 | | |
| 2,288 | |
Deferred income taxes | |
| 2,769 | | |
| 1,803 | |
Prepaid expenses and other assets | |
| 17,904 | | |
| 20,850 | |
Total current assets | |
| 888,425 | | |
| 412,291 | |
Property and equipment, net | |
| 688,244 | | |
| 692,383 | |
Intangibles, net | |
| 21,425 | | |
| 25,242 | |
Goodwill | |
| 270,492 | | |
| 283,780 | |
Deferred income taxes | |
| 37,524 | | |
| 36,721 | |
Other assets | |
| 45,961 | | |
| 56,387 | |
Total assets | |
$ | 1,952,071 | | |
$ | 1,506,804 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable and accrued liabilities | |
$ | 148,180 | | |
$ | 152,156 | |
Deferred revenue | |
| 4,515 | | |
| 4,170 | |
Income taxes payable | |
| 5,858 | | |
| 8,284 | |
Current portion of long-term debt and capital lease obligations | |
| 76,171 | | |
| 79,674 | |
Total current liabilities | |
| 234,724 | | |
| 244,284 | |
Deferred income taxes | |
| 6,324 | | |
| 7,372 | |
Income taxes payable | |
| 25,499 | | |
| 23,771 | |
Long-term debt and capital lease obligations, net of discount | |
| 608,236 | | |
| 223,227 | |
Other liabilities | |
| 4,051 | | |
| 4,651 | |
Total liabilities | |
| 878,834 | | |
| 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;
126,426,736 and 126,143,366 shares issued and outstanding, respectively. | |
| 13 | | |
| 13 | |
Additional paid-in capital | |
| 416,958 | | |
| 404,542 | |
Accumulated other comprehensive loss | |
| (66,525 | ) | |
| (20,060 | ) |
Retained earnings | |
| 722,791 | | |
| 619,004 | |
Total stockholders’ equity | |
| 1,073,237 | | |
| 1,003,499 | |
Total liabilities and stockholders’ equity | |
$ | 1,952,071 | | |
$ | 1,506,804 | |
The accompanying notes are an integral
part of these consolidated financial statements.
Copart, Inc.
Consolidated Statements of Income
(Unaudited)
| |
Three Months Ended January 31, | | |
Six Months Ended January 31, | |
(In thousands, except per share amounts) | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
| | |
| | |
| |
Service revenues and vehicle sales: | |
| | | |
| | | |
| | | |
| | |
Service revenues | |
$ | 238,508 | | |
$ | 235,732 | | |
$ | 485,128 | | |
$ | 462,095 | |
Vehicle sales | |
| 37,750 | | |
| 50,702 | | |
| 81,516 | | |
| 104,222 | |
Total service revenues and vehicle sales | |
| 276,258 | | |
| 286,434 | | |
| 566,644 | | |
| 566,317 | |
| |
| | | |
| | | |
| | | |
| | |
Operating expenses: | |
| | | |
| | | |
| | | |
| | |
Yard operations | |
| 129,273 | | |
| 131,246 | | |
| 260,278 | | |
| 257,202 | |
Cost of vehicle sales | |
| 32,118 | | |
| 43,642 | | |
| 69,191 | | |
| 89,733 | |
General and administrative | |
| 34,399 | | |
| 40,062 | | |
| 74,306 | | |
| 82,939 | |
Total operating expenses | |
| 195,790 | | |
| 214,950 | | |
| 403,775 | | |
| 429,874 | |
Operating income | |
| 80,468 | | |
| 71,484 | | |
| 162,869 | | |
| 136,443 | |
| |
| | | |
| | | |
| | | |
| | |
Other (expense) income: | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| (4,688 | ) | |
| (2,209 | ) | |
| (6,598 | ) | |
| (4,495 | ) |
Interest income | |
| 183 | | |
| 143 | | |
| 322 | | |
| 292 | |
Other income, net | |
| 4,141 | | |
| 1,170 | | |
| 5,734 | | |
| 2,593 | |
Total other expense | |
| (364 | ) | |
| (896 | ) | |
| (542 | ) | |
| (1,610 | ) |
Income before income taxes | |
| 80,104 | | |
| 70,588 | | |
| 162,327 | | |
| 134,833 | |
Income taxes | |
| 27,911 | | |
| 25,243 | | |
| 57,519 | | |
| 48,066 | |
Net income | |
$ | 52,193 | | |
$ | 45,345 | | |
$ | 104,808 | | |
$ | 86,767 | |
| |
| | | |
| | | |
| | | |
| | |
Basic net income per common share | |
$ | 0.41 | | |
$ | 0.36 | | |
$ | 0.83 | | |
$ | 0.69 | |
Weighted average common shares outstanding | |
| 126,300 | | |
| 125,564 | | |
| 126,258 | | |
| 125,512 | |
| |
| | | |
| | | |
| | | |
| | |
Diluted net income per common share | |
$ | 0.40 | | |
$ | 0.35 | | |
$ | 0.80 | | |
$ | 0.66 | |
Diluted weighted average common shares outstanding | |
| 131,872 | | |
| 131,101 | | |
| 131,694 | | |
| 130,904 | |
The accompanying notes are an integral
part of these consolidated financial statements.
Copart, Inc.
Consolidated Statements of Comprehensive
Income
(Unaudited)
| |
Three Months Ended January 31, | | |
Six Months Ended January 31, | |
(In thousands) | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Comprehensive income, net of tax: | |
| | | |
| | | |
| | | |
| | |
Net income | |
$ | 52,193 | | |
$ | 45,345 | | |
$ | 104,808 | | |
$ | 86,767 | |
Other comprehensive income: | |
| | | |
| | | |
| | | |
| | |
Unrealized gain on interest rate swaps, net (a) | |
| 545 | | |
| 591 | | |
| 949 | | |
| 892 | |
Reclassification adjustment of interest rate swaps, net (b) | |
| (294 | ) | |
| (366 | ) | |
| (606 | ) | |
| (744 | ) |
Foreign currency translation adjustments | |
| (22,840 | ) | |
| 737 | | |
| (46,808 | ) | |
| 15,295 | |
Total comprehensive income | |
$ | 29,604 | | |
$ | 46,307 | | |
$ | 58,343 | | |
$ | 102,210 | |
(a) | Net of tax effect of $(298) and $(331) for the three months
ended January 31, 2015 and 2014, respectively. Net of tax effect of $(526) and $(495) for the six months ended January 31, 2015
and 2014, respectively. |
(b) | Net of tax effect of $157 and $204 for the three months
ended January 31, 2015 and 2014, respectively. Net of tax effect of $332 and $412 for the six months ended January 31, 2015 and
2014, respectively. |
The accompanying notes are an integral part of these
consolidated financial statements.
Copart, Inc.
Consolidated Statements of
Cash Flows
(Unaudited)
| |
Six Months Ended January 31, | |
(In thousands) | |
2015 | | |
2014 | |
Cash flows from operating activities: | |
| | | |
| | |
Net Income | |
$ | 104,808 | | |
$ | 86,767 | |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 25,367 | | |
| 27,580 | |
Allowance for doubtful accounts | |
| (242 | ) | |
| 884 | |
Stock-based payment compensation | |
| 8,870 | | |
| 10,639 | |
Excess tax benefit from stock-based payment compensation | |
| (534 | ) | |
| (1,171 | ) |
Gain on sale of property and equipment | |
| (457 | ) | |
| (1,743 | ) |
Deferred income taxes | |
| (2,317 | ) | |
| (5,982 | ) |
Changes in operating assets and liabilities, net of effects from acquisitions: | |
| | | |
| | |
Accounts receivable | |
| (40,908 | ) | |
| (38,928 | ) |
Vehicle pooling costs | |
| (2,125 | ) | |
| (3,034 | ) |
Inventories | |
| (1,226 | ) | |
| 1,316 | |
Prepaid expenses and other current assets | |
| 1,747 | | |
| (4,266 | ) |
Other assets | |
| 5,368 | | |
| (12,602 | ) |
Accounts payable and accrued liabilities | |
| (4,173 | ) | |
| 7,724 | |
Deferred revenue | |
| 351 | | |
| 347 | |
Income taxes receivable | |
| (4,938 | ) | |
| 4,799 | |
Income taxes payable | |
| 103 | | |
| 1,494 | |
Other liabilities | |
| (811 | ) | |
| 1,967 | |
Net cash provided by operating activities | |
| 88,883 | | |
| 75,791 | |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Purchases of property and equipment | |
| (39,459 | ) | |
| (51,768 | ) |
Proceeds from sale of property and equipment | |
| 525 | | |
| 2,082 | |
Proceeds from sale of assets held for sale | |
| 217 | | |
| 494 | |
Purchases of assets and liabilities in connection with acquisition, net of cash acquired | |
| — | | |
| (14,228 | ) |
Net cash used in investing activities | |
| (38,717 | ) | |
| (63,420 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from the exercise of stock options | |
| 2,303 | | |
| 4,550 | |
Excess tax benefit from stock-based payment compensation | |
| 534 | | |
| 1,171 | |
Proceeds from the issuance of Employee Stock Purchase Plan shares | |
| 1,495 | | |
| 1,115 | |
Repurchases of common stock | |
| (1,121 | ) | |
| (80 | ) |
Change in bank overdraft | |
| — | | |
| 743 | |
Proceeds from the issuance of long-term debt, net of discount | |
| 698,939 | | |
| — | |
Debt offering costs | |
| (955 | ) | |
| — | |
Principal payments on long-term debt | |
| (312,500 | ) | |
| (37,500 | ) |
Net cash provided by (used in) financing activities | |
| 388,695 | | |
| (30,001 | ) |
| |
| | | |
| | |
Effect of foreign currency translation | |
| (7,163 | ) | |
| 198 | |
Net increase in cash and cash equivalents | |
| 431,698 | | |
| (17,432 | ) |
Cash and cash equivalents at beginning of period | |
| 158,668 | | |
| 63,631 | |
Cash and cash equivalents at end of period | |
$ | 590,366 | | |
$ | 46,199 | |
| |
| | | |
| | |
Supplemental disclosure of cash flow information: | |
| | | |
| | |
Interest paid | |
$ | 3,788 | | |
$ | 4,495 | |
Income taxes paid, net of refunds | |
$ | 64,432 | | |
$ | 47,891 | |
The accompanying notes are an integral part of these consolidated
financial statements.
Copart, Inc.
Notes to Consolidated Financial Statements
January 31, 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 Company’s 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 January 31, 2015 and July 31, 2014, its consolidated
statements of income and comprehensive income for the three and six months ended January 31, 2015 and 2014, and its cash flows
for the six months ended January 31, 2015 and 2014. Interim results for the six months ended January 31, 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 Company’s 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 Company’s 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.
The services provided
to the seller of a vehicle involve disposing of a vehicle on the seller’s behalf and, under most of the Company’s
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 management’s best estimate
and allotted based on the relative selling price method.
Vehicle sales, where
vehicles are purchased and remarketed on the Company’s 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 rights 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 management’s best estimate of the selling price of the separate units of accounting
contained within arrangements including multiple deliverables. Significant inputs in the Company’s 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 Company’s 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 Company’s 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 subsidiary’s 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 subsidiary’s financial
statements are reported in other comprehensive income.
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 | |
| (46,808 | ) |
Cumulative loss on foreign currency translation as of January 31, 2015 | |
$ | (65,800 | ) |
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 management’s 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 January 31, 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 Company’s 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.
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 January 31, 2015 and July 31, 2014 was $60.4 million and $61.7 million, respectively. Accumulated amortization
expense related to software as of January 31, 2015 and July 31, 2014 totaled $39.9 million and $38.6 million, respectively.
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 Company’s 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 Company’s 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 January 31, 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 January 31, 2015, had $281.3 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 Company’s 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 Company’s 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 January 31, 2015 on the Company’s variable interest rate debt was the one month LIBOR rate
of 0.17% plus an applicable margin of 1.5%.
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 Company’s 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 January 31, 2015.
The Company’s
obligations under the Credit Agreement are guaranteed by certain of the Company’s 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 January 31, 2015.
Note Purchase
Agreement
On
December 3, 2014, the Company entered into a Note Purchase Agreement to sell 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
Company’s obligations under the Note Purchase Agreement are guaranteed by certain of the Company’s 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.
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 January 31, 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 $0.6 million for the three months ended January 31, 2015 and 2014, respectively,
and $0.9 million and $1.2 million for the six months ended January 31, 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 January 31, 2015 and July 31, 2014, the Company’s fair value of the interest rate swaps were $1.1 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) | |
January 31, 2015 | | |
July 31, 2014 | |
Amortized intangibles: | |
| | | |
| | |
Covenants not to compete | |
$ | 1,750 | | |
$ | 2,939 | |
Supply contracts & customer relationships | |
| 27,829 | | |
| 27,986 | |
Trade name | |
| 5,193 | | |
| 5,791 | |
Licenses and databases | |
| 2,526 | | |
| 1,810 | |
Accumulated amortization | |
| (15,873 | ) | |
| (13,284 | ) |
Net intangibles | |
$ | 21,425 | | |
$ | 25,242 | |
Aggregate amortization
expense on amortizable intangible assets was $1.7 million and $1.2 million for the three months ended January 31, 2015 and 2014,
respectively, and $3.6 million and $2.3 million for the six months ended January 31, 2015 and 2014, respectively.
The change in the carrying amount of
goodwill was as follows (in thousands):
Balance as of July 31, 2014 | |
$ | 283,780 | |
Adjustments to preliminary purchase price allocation | |
| (790 | ) |
Effect of foreign currency exchange rates | |
| (12,498 | ) |
Balance as of January 31, 2015 | |
$ | 270,492 | |
NOTE 6 – Net Income Per Share
The
table below reconciles basic weighted shares outstanding to diluted weighted average shares outstanding:
| |
Three Months Ended January 31, | | |
Six Months Ended January 31, | |
(In thousands) | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Weighted average common shares oustanding | |
| 126,300 | | |
| 125,564 | | |
| 126,258 | | |
| 125,512 | |
Effect of dilutive securities - stock options | |
| 5,572 | | |
| 5,537 | | |
| 5,436 | | |
| 5,392 | |
Weighted average common and
dilutive potential common shares outstanding | |
| 131,872 | | |
| 131,101 | | |
| 131,694 | | |
| 130,904 | |
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 5,104,400 and 4,429,831 shares for the three months ended January 31, 2015 and 2014, respectively, and 5,148,374
and 2,373,448 shares for the six months ended January 31, 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 Company’s stock options for the six months ended January
31, 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 | |
| 349 | | |
| 34.52 | | |
| | | |
| | |
Exercises | |
| (391 | ) | |
| 19.70 | | |
| | | |
| | |
Forfeitures or expirations | |
| (162 | ) | |
| 31.65 | | |
| | | |
| | |
Outstanding as of January 31, 2015 | |
| 18,878 | | |
$ | 21.83 | | |
| 5.64 | | |
$ | 278,799 | |
Exercisable as of January 31, 2015 | |
| 13,763 | | |
$ | 17.28 | | |
| 4.52 | | |
$ | 265,913 | |
The aggregate intrinsic
value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s
common stock. The number of options that were in-the-money was 18,751,997 at January 31, 2015.
The
table below sets forth the stock-based payment compensation recognized by the Company:
| |
Three Months Ended January 31, | | |
Six Months Ended January 31, | |
(In thousands) | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
General and administrative | |
$ | 3,955 | | |
$ | 5,226 | | |
$ | 7,775 | | |
$ | 9,458 | |
Yard Operations | |
| 549 | | |
| 546 | | |
| 1,095 | | |
| 1,181 | |
Total stock-based compensation | |
$ | 4,504 | | |
$ | 5,772 | | |
$ | 8,870 | | |
$ | 10,639 | |
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 Company’s
Board of Directors approved the grant of nonqualified stock options to purchase 2,000,000 and 1,500,000 shares of the Company’s
common stock to A. Jayson Adair, the Company’s Chief Executive Officer, and Vincent W. Mitz, the Company’s President,
respectively, at an exercise price of $35.62 per share, which equaled the closing price of the Company’s 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 executive’s employment is terminated without cause, then one hundred percent (100%) of the shares subject to that
executive’s stock option will immediately vest. If, upon or following a change in control, either the Company or a
successor entity terminates the executive’s 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 $3.8 million and $0.6 million
in compensation expenses for these grants in the six months ended January 31, 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 its common stock during the six months ended
January 31, 2015 or 2014. As of January 31, 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 six months ended January 31, 2015, was less than $0.01.
In the first quarter
of fiscal 2014 and 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 $1.1 million and $0.1 million for the six months ended January 31, 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 | |
| (1) | Shares withheld for taxes are treated as a repurchase of
shares for accounting purposes but do not count against the Company’s stock repurchase program. |
No stock options
were exercised by certain employees and executive officers through cashless exercises during the three months ended January 31, 2015 and 2014.
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 January 31,
2015, the gross amounts of the Company’s liabilities for unrecognized tax benefits of $25.5 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 Company’s 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 Company’s 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 six months ended January 31, 2015 and 2014 was $0.8 million.
The Company files
income tax returns in the U.S. federal jurisdiction, various states, and foreign jurisdictions. The Company is currently under
audit by the state of New York for fiscal years 2011 to 2013. The Company is currently under audit by the state of South Carolina
for fiscal years 2010 to 2012. The Company is no longer subject to U.S. federal and state income tax examination for fiscal years
prior to 2011, excepting the jurisdiction currently under audit. At this time, the Company does not believe that the outcome of
any examination will have a material impact on the Company’s 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 January 31, 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 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. The Company has not determined the potential effects
of implementing ASU 2014-09 on the consolidated financial statements.
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 Company’s 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 attorney’s
fees. The Company seeks compensatory and exemplary damages, disgorgement of amounts paid, attorney’s 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 Company’s 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, prejudgment 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 KPIT’s 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 Company’s 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 Company’s 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 DOR’s policy position. In particular, the Company’s 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 Company’s 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 Company’s outside law firm, advice from outside tax advisors, and the Company’s 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 DOR’s 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 Company’s 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 Company’s consolidated results of
operations and financial position.
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 six months
ended January 31, 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 Company’s results of operations.
There were no acquisitions during the six months ended January 31, 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 Company’s 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 Company’s 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 Company’s
consolidated results of operations and financial position since the acquisition dates.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly
Report on Form 10-Q, including the information incorporated by reference herein, contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange
Act of 1934, as amended (the Exchange Act). All statements other than statements of historical facts are statements that could
be deemed forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,”
“will,” “should,” “expect,” “plan,” “intend,” “forecast,”
“anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue”
or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Form 10-Q involve
known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity,
performance or achievements to be materially different from any future results, levels of activity, performance or achievements
expressed or implied by these statements. These forward-looking statements are made in reliance upon the safe harbor provision
of the Private Securities Litigation Reform Act of 1995. These factors include those listed in Part 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.
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.
The following table sets forth facilities
that we have acquired or opened from August 1, 2013 through January 31, 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.
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 six months ended January 31, 2015 and 2014:
| |
Three Months Ended January 31, | | |
Six Months Ended January 31, | |
(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 | |
| 47 | % | |
| 46 | % | |
| 46 | % | |
| 45 | % |
Cost of vehicle sales | |
| 12 | % | |
| 15 | % | |
| 12 | % | |
| 16 | % |
General and administrative | |
| 12 | % | |
| 14 | % | |
| 13 | % | |
| 15 | % |
Total operating expenses | |
| 71 | % | |
| 75 | % | |
| 71 | % | |
| 76 | % |
Operating income | |
| 29 | % | |
| 25 | % | |
| 29 | % | |
| 24 | % |
Other (expense) income: | |
| 0 | % | |
| 0 | % | |
| 0 | % | |
| 0 | % |
Income before income taxes | |
| 29 | % | |
| 25 | % | |
| 29 | % | |
| 24 | % |
Income taxes | |
| 10 | % | |
| 9 | % | |
| 10 | % | |
| 8 | % |
Net income | |
| 19 | % | |
| 16 | % | |
| 19 | % | |
| 16 | % |
Comparison of the Three and Six Months
Ended January 31, 2015 and 2014
The
following table presents a comparison of service revenues and vehicle sales for the three and six months ended January 31, 2015
and 2014:
| |
Three Months Ended January 31, | | |
Six Months Ended January 31, | |
(In thousands) | |
2015 | | |
2014 | | |
Change | | |
% Change | | |
2015 | | |
2014 | | |
Change | | |
% Change | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Service revenues | |
$ | 238,508 | | |
$ | 235,732 | | |
$ | 2,776 | | |
| 1.2 | % | |
$ | 485,128 | | |
$ | 462,095 | | |
$ | 23,033 | | |
| 5.0 | % |
Vehicle sales | |
| 37,750 | | |
| 50,702 | | |
| (12,952 | ) | |
| -25.5 | % | |
| 81,516 | | |
| 104,222 | | |
| (22,706 | ) | |
| -21.8 | % |
Total service revenues and vehicle sales | |
$ | 276,258 | | |
$ | 286,434 | | |
$ | (10,176 | ) | |
| -3.6 | % | |
$ | 566,644 | | |
$ | 566,317 | | |
$ | 327 | | |
| 0.1 | % |
Service
Revenues. The increase in service revenues during the three months ended January 31, 2015 of $2.8 million, or 1.2% as
compared to the same period last year came from (i) growth in North America of $0.8 million; (ii) growth in the U.K. of
$0.8 million, which included the detrimental
impact of $1.3 million due to the change in the British pound to U.S. dollar exchange rate; and (iii) growth in our other international markets of $1.2 million. The growth in North America was
driven primarily by increased volume. The increase in volume 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.
The increase in
service revenues during the six months ended January 31, 2015 of $23.0 million, or 5.0% as compared to the same period last year
came from (i) growth in North America of $13.1 million; (ii) growth in the U.K. of $7.0 million, driven by increased volume as
we increased our market share and revenue per car increases; and (iii) growth in our other international markets of $2.9 million.
The growth in North America was driven primarily by increased volume and revenue per car increases. The increase in volume 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.
Vehicle Sales. The
decrease in vehicle sales for the three months ended January 31, 2015 of $13.0 million, or 25.5% as compared to the same
period last year came from (i) a decline in the U.K. of $8.6 million, driven primarily by decreased insurance volume and open market purchase
activity from the general public; (ii) a decline in North America of $2.5 million, driven primarily by
reduced volume; and (iii) a decline in our other
international
markets of $1.9 million driven primarily by reduced volume. The decline in the U.K. included a $1.2 million detrimental impact due to the change
in the British pound to U.S. dollar exchange rate.
The decrease in
vehicle sales for the six months ended January 31, 2015 of $22.7 million, or 21.8% as compared to the same period last year came
from (i) a decline in the U.K. of $12.4 million, driven primarily by decreased insurance volume and open market purchase activity from the general
public; (ii) a decline in North America of $7.2 million, driven primarily by reduced volume; and (iii) a
decline in our other international markets of $3.1 million driven primarily by reduced volume.
The following table
summarizes operating expenses, total other expenses and income taxes for the three and six months ended January 31, 2015 and 2014:
| |
Three Months Ended January 31, | | |
Six Months Ended January 31, | |
(In thousands) | |
2015 | | |
2014 | | |
Change | | |
% Change | | |
2015 | | |
2014 | | |
Change | | |
% Change | |
Operating expenses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Yard operations | |
$ | 129,273 | | |
$ | 131,246 | | |
$ | (1,973 | ) | |
| -1.5 | % | |
$ | 260,278 | | |
$ | 257,202 | | |
$ | 3,076 | | |
| 1.2 | % |
Cost of vehicle sales | |
| 32,118 | | |
| 43,642 | | |
| (11,524 | ) | |
| -26.4 | % | |
| 69,191 | | |
| 89,733 | | |
| (20,542 | ) | |
| -22.9 | % |
General and administrative | |
| 34,399 | | |
| 40,062 | | |
| (5,663 | ) | |
| -14.1 | % | |
| 74,306 | | |
| 82,939 | | |
| (8,633 | ) | |
| -10.4 | % |
Total operating expenses | |
$ | 195,790 | | |
$ | 214,950 | | |
$ | (19,160 | ) | |
| -8.9 | % | |
$ | 403,775 | | |
$ | 429,874 | | |
$ | (26,099 | ) | |
| -6.1 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total other expense | |
$ | (364 | ) | |
$ | (896 | ) | |
$ | 532 | | |
| -59.4 | % | |
$ | (542 | ) | |
$ | (1,610 | ) | |
$ | 1,068 | | |
| -66.3 | % |
Income taxes | |
| 27,911 | | |
| 25,243 | | |
| 2,668 | | |
| 10.6 | % | |
| 57,519 | | |
| 48,066 | | |
| 9,453 | | |
| 19.7 | % |
Yard Operations
Expense. The decrease in yard operations expense for the three months ended January 31, 2015 of $2.0 million, or 1.5% as compared
to the same period last year came primarily from a slight decrease in the cost to process each car in North America and a decrease
in depreciation and amortization expenses, partially offset by an increase in volume in North America.
The increase in
yard operations expense for the six months ended January 31, 2015 of $3.1 million, or 1.2% as compared to the same period last
year came primarily from growth in volume in North America, the U.K., and in our international activity outside of the U.K., partially
offset by a decrease in severance and lease termination costs of $2.3 million primarily associated with the integration of the
Salvage Parent, Inc. acquisition, which occurred in fiscal 2014 and the beneficial impact of $0.8 million in the U.K. due to the change in
the British pound to U.S. dollar exchange rate.
Included in yard
operations expense were depreciation and amortization expenses of $8.5 million and $9.5 million for the three months ended January
31, 2015 and 2014, respectively, and $17.4 million and $19.6 million for the six months ended January 31, 2015 and 2014, respectively.
Depreciation and amortization expenses decreased as a result of certain assets becoming fully amortized.
Cost of Vehicle
Sales. The decrease in cost of vehicle sales for the three months ended January 31, 2015 of $11.5 million, or 26.4% as compared
to the same period last year primarily came from (i) a decline in North America of $2.2 million; (ii) a decline in the U.K. of $7.6 million, driven
primarily by decreased insurance volume and open market purchase activity from the general public, partially offset by the beneficial impact of the
change in the British pound to U.S. dollar exchange rate of $1.0 million; and (iii) a decline in our other international markets of $1.7 million.
The decrease in
the cost of vehicle sales for the six months ended January 31, 2015 of $20.5 million, or 22.9% as compared to the same period
last year primarily came from (i) a decline in North America of $7.3 million; (ii) a decline in the U.K. of $10.3 million, driven primarily by
decreased insurance volume and open market purchase activity from the general public; and (iii) a decline in our other international
markets of $2.9 million.
General and Administrative
Expenses. The decrease in general and administrative expenses for the three months ended January 31, 2015 of $5.7 million,
or 14.1% as compared to the same period last year came primarily from a decrease in North America of $5.4 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 depreciation and amortization expenses, partially offset by increased expenditures on technology development.
The decrease in
general and administrative expenses for the six months ended January 31, 2015 of $8.6 million, or 10.4% as compared to
the same period last year came primarily from a decrease in North America of $8.3 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 depreciation and amortization expenses, partially offset by increased expenditures on technology development.
Included in general
and administrative expenses were depreciation and amortization expenses of $2.9 million and $3.6 million for the three months
ended January 31, 2015 and 2014, respectively, and $5.7 million and $8.0 million for the six months
ended January 31, 2015
and 2014, respectively. Depreciation and amortization expenses decreased as a result of certain assets becoming fully amortized.
Other (Expense)
Income. The decrease in total other expense for the three months ended January 31, 2015 of $0.5 million, or 59.4% as
compared to the same period last year was primarily due to currency gains in the U.K. of $3.5 million, partially offset by
an increase in interest expense of $2.5 million as a result of the additional long-term debt issued in December 2014. See Notes to
Unaudited Consolidated Financial Statements, Note 3 - Long-Term Debt.
The decrease
in total other expense for the six months ended January 31, 2015 of $1.1 million, or 66.3% as compared to the same period
last year was primarily due to currency gains in the U.K. of $4.5 million, partially offset by an increase in interest expense of $2.1 million as a
result of the additional long-term debt issued in December 2014. See Notes to Unaudited Consolidated Financial Statements, Note
3 - Long-Term Debt.
Income Taxes.
Our effective income tax rates were 34.8% and 35.8% for the three months ended January 31, 2015 and 2014, respectively, and
35.4% and 35.6% for the six months ended January 31, 2015 and 2014, respectively. The change in the overall tax rate was driven
by fluctuations in the geographical allocation of our taxable income.
Liquidity and Capital Resources
The
following table presents a comparison of key components of our capital resources and liquidity at January 31, 2015 and July 31,
2014 and for the six months ended January 31, 2015 and 2014, respectively:
| |
January 31, | | |
July 31, | | |
| |
(In thousands) | |
2015 | | |
2014 | | |
Change | | |
% Change | |
Cash and cash equivalents | |
$ | 590,366 | | |
$ | 158,668 | | |
$ | 431,698 | | |
| 272.1 | % |
Working capital | |
| 653,701 | | |
| 168,007 | | |
| 485,694 | | |
| 289.1 | % |
| |
Six Months Ended January 31, | |
(In thousands) | |
2015 | | |
2014 | | |
Change | | |
% Change | |
Operating cash flows | |
$ | 88,883 | | |
$ | 75,791 | | |
$ | 13,092 | | |
| 17.3 | % |
Investing cash flows | |
| (38,717 | ) | |
| (63,420 | ) | |
| 24,703 | | |
| -39.0 | % |
Financing cash flows | |
| 388,695 | | |
| (30,001 | ) | |
| 418,696 | | |
| -1,395.6 | % |
| |
| | | |
| | | |
| | | |
| | |
Capital expenditures | |
$ | (39,459 | ) | |
$ | (65,996 | ) | |
$ | 26,537 | | |
| -40.2 | % |
Payments on long-term debt | |
| (312,500 | ) | |
| (37,500 | ) | |
| (275,000 | ) | |
| 733.3 | % |
Working capital
and cash and cash equivalents increased at January 31, 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 January 31,
2015, $64.4 million of the $590.4 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 increased for the six months ended January 31, 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 the result of a decrease in
accounts payable of $11.9 million, an increase in income taxes paid of $16.5 million and an increase in accounts receivable of
$2.0 million, partially offset by a decrease in other assets of $18.0 million, primarily related to contracted prepayments in
fiscal 2014.
Net cash used in
investing activities decreased for the six months ended January 31, 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 six months ended January 31, 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 January 31, 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 January 31, 2015, had $281.3 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 January 31, 2015 on our variable interest rate debt was the one month LIBOR rate of 0.17% plus an applicable
margin of 1.5%.
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 January 31, 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 January 31, 2015.
Note Purchase
Agreement
On
December 3, 2014, we entered into a Note Purchase Agreement to sell 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 January 31, 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.
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 management’s 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 management’s 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 January 31, 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.
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 January 31, 2015 and July 31, 2014 was $60.4 million and $61.7 million, respectively. Accumulated amortization
expense related to software as of January 31, 2015 and July 31, 2014 totaled $39.9 million and $38.6 million, respectively.
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 $2.0 million at January 31, 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 January 31, 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.
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 six months ended January 31, 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 $1.6 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 $6.0 million as of January 31, 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.
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 January 31, 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 January 31, 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 January 31, 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 six months ended January 31, 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 $281.3 million as of January 31, 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.
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 net revenues are 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 revenue of $12.3 million for the six months ended January 31, 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
January 31, 2015, the cumulative effect of foreign exchange rate fluctuations on our consolidated financial position was a net
translation loss of $65.8 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 SEC’s 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 attorney’s
fees. We seek compensatory and exemplary damages, disgorgement of amounts paid, attorney’s 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, prejudgment 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 KPIT’s claim for damages.
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
DOR’s 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 DOR’s
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 six months ended January 31, 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.
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.
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, design and stabilize 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 KPIT’s work performed to date, and an assessment of the cost to complete, deployment
risk, and other factors, we ceased development of KPIT’s 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.
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.
A failure or breach of our security
systems or infrastructure as a result of cyber-attacks could disrupt our business, result in the disclosure or misuse of confidential
or proprietary information, damage our reputation, increase our costs and cause losses.
Information security
risks for online commerce companies have significantly increased in recent years in part because of 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 our employees or third parties, or may result from human error or accidental technological failure. These threats
include cyber-attacks such as computer viruses, malicious code, phishing attacks or information security breaches.
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. We routinely
are subject to cyber-threats and our technologies, systems and networks have been subject to cyber-attacks and we believe we are
likely to continue to be a target of such threats and attacks.
Although we have not
been the victim of cyber-attacks or other cyber incidents that have had a material impact on our consolidated operating results
or financial position, we have experienced incidents relating to cyber-attacks in which unauthorized parties attempted to access
and disrupt our online commerce. These cyber-attacks have caused minor service interruptions, which were promptly addressed and
resolved, and our online service was restored to normal business. However, if one or more of these events continue to occur, it
could lead to security breaches of the networks, systems or devices that our customers use to access our products and services,
which could result in the unauthorized disclosure, release, gathering, monitoring, misuse, loss or destruction of confidential,
proprietary and other information (including account data information) or data security compromises. This could cause service
interruptions, malfunctions or other failures in the physical infrastructure or operations systems that support our businesses
and customers (such as the lack of availability of our value-added systems), as well as the operations of our customers or other
third parties. Continuous cyber-attacks could lead to damage to our reputation with our customers and other parties and the
market, additional costs (such as repairing systems, adding new personnel or protection technologies or compliance costs), regulatory
penalties, financial losses to both us and our customers and partners and the loss of customers and business opportunities. If
such attacks are not detected immediately, their effect could be compounded.
We have implemented
various measures to manage our risks related to 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. If these systems
are compromised, 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, which would have a material adverse effect on our consolidated operating results and financial position. 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 adversely affect our consolidated financial position and results of operations.
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.
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; |
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|
• |
expand existing facilities in no-growth
regulatory environments; |
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|
• |
increase revenues and profitability
at acquired and new facilities; |
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|
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|
• |
maintain the historical revenue and
earnings growth rates we have been able to obtain through facility openings and strategic acquisitions; |
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|
• |
create new vehicle storage facilities
that meet our current revenue and profitability requirements; or |
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• |
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; |
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|
• |
establish new relationships or expand
existing relationships with vehicle sellers; |
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• |
identify and acquire or lease suitable
premises on competitive terms; |
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• |
secure adequate capital; and |
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• |
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; |
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|
• |
the impact of foreign exchange gain
and loss as a result of international operations; |
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|
• |
our ability to successfully integrate
our newly acquired operations in international markets and any additional markets we may enter; |
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• |
the availability of salvage vehicles; |
|
• |
variations in vehicle accident rates; |
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|
• |
member participation in the Internet
bidding process; |
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• |
delays or changes in state title
processing; |
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• |
changes in international, state or
federal laws or regulations affecting salvage vehicles; |
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• |
changes in local laws affecting who
may purchase salvage vehicles; |
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• |
our ability to integrate and manage
our acquisitions successfully; |
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|
• |
the timing and size of our new facility
openings; |
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|
• |
the announcement of new vehicle supply
agreements by us or our competitors; |
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|
• |
the severity of weather and seasonality
of weather patterns; |
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|
• |
the amount and timing of operating
costs and capital expenditures relating to the maintenance and expansion of our business, operations and infrastructure; |
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• |
the availability and cost of general
business insurance; |
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|
• |
labor costs and collective bargaining; |
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|
• |
changes in the current levels of
out of state and foreign demand for salvage vehicles; |
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|
• |
the introduction of a similar Internet
product by a competitor; and |
|
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|
• |
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.
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, 20.0% of our common stock as of January 31, 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.
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:
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• | enhance
our existing services; |
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| |
|
• | develop
and license new services and technologies that address the increasingly sophisticated
and varied needs of our prospective customers; and |
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| |
|
• | 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.
Macroeconomic factors such as high
fuel prices, declines in commodity prices, and declines in used car prices 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 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.
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 is 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 January 31, 2015, the amount
of goodwill on our consolidated balance sheet subject to future impairment testing was $270.5 million.
Pursuant to ASC 350,
Intangibles—Goodwill 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.
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
DOR’s 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 DOR’s 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.
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10.19 |
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Credit Agreement among the Registrant, the lenders from time
to time party thereto, and Wells Fargo Bank, N.A., as administrative agent, dated as of December 3, 2014 (incorporated by
reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K (File No. 000-23255) filed with the SEC on
December 4, 2014). |
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10.20 |
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Security Agreement among the Registrant, the lenders from time to time
party thereto, and Wells Fargo Bank, N.A., as collateral agent, dated as of December 3, 2014 (incorporated by reference to
Exhibit 10.2 of the Registrant’s Current Report on Form 8-K (File No. 000-23255) filed with the SEC on December 4, 2014). |
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10.21 |
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Note Purchase Agreement among the Registrant and each of the purchasers
listed on Schedule B dated as of December 3, 2014 (incorporated by reference to Exhibit 10.3 of the Registrant’s Current
Report on Form 8-K (File No. 000-23255) filed with the SEC on December 4, 2014). |
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10.22 |
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2014 Employee Stock Purchase Plan (incorporated by reference to Exhibit
10.1 of the Registrant’s Current Report on Form 8-K (File No. 000-23255) filed with the SEC on December 5, 2014). |
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31.1 |
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Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
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32.1 |
(1) |
Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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32.2 |
(1) |
Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
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101.INS |
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XBRL Instance Document |
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101.SCH |
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XBRL Taxonomy Extension Schema Document |
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101.CAL |
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XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
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XBRL Extension Definition |
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101.LAB |
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XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
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XBRL Taxonomy Extension Presentation Linkbase Document |
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(1) |
In
accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 33-8238
and 34-47986, Final Rule: Management’s 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. |
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.
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COPART, INC. |
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/s/ William E. Franklin |
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William E. Franklin, Executive Vice President and |
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Chief Financial Officer (Principal Financial and |
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Accounting Officer and duly Authorized Officer) |
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Date: March 3, 2015
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. |
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I have reviewed this Quarterly Report on Form 10-Q of Copart,
Inc.; |
2. |
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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. |
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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. |
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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)
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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)
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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)
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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)
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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. |
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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)
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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)
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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. |
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Date: March 3, 2015 |
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/s/ A. Jayson Adair |
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A. Jayson Adair |
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Chief Executive Officer |
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. |
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I have reviewed this Quarterly Report on Form 10-Q of Copart,
Inc.; |
2. |
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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. |
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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. |
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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)
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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)
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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)
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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)
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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. |
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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)
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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)
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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. |
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Date: March 3, 2015 |
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/s/ William E. Franklin |
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William E. Franklin |
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Executive Vice President and Chief Financial Officer |
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 January 31, 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.
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.
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 January 31, 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.
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Executive Vice President and Chief Financial Officer |
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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.
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