PART I
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the fiscal year ended
July 31, 2018
, or this Form 10-K, 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-K 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-K and those discussed elsewhere in this Form 10-K. Unless the context otherwise requires, references in this Form 10-K 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.
Item 1.
Business
Corporate Information
We were incorporated in California in 1982, became a public company in 1994 and reincorporated into Delaware in January 2012. Our principal executive offices are located at 14185 Dallas Parkway, Suite 300, Dallas, Texas 75254 and our telephone number at that address is (972) 391-5000. Our website is
www.copart.com
. The contents of our website are not incorporated by reference into this Form 10-K. We provide free of charge through a link on our website access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as amendments to those reports, as soon as reasonably practical after the reports are electronically filed with, or furnished to, the SEC.
Copart
®
, VB
2®
, BID4U
®
, CI & Design
®
, DRIVE Auto Auctions
™
, 1-800 CAR BUYER
®
, CA$HFORCARS.COM
®
, COPART & DESIGN
®
, VB
2
& DESIGN
®
, VB3 & DESIGN
®
, VB3
®
and CrashedToys.com
®
are trademarks of Copart, Inc. or one of its direct or indirect wholly-owned subsidiaries. This Form 10-K also includes other trademarks of Copart and of other companies.
Overview
We are a
leading provider of online auctions and vehicle remarketing services with operations in the United States (U.S.), Canada, the United Kingdom (U.K.), Brazil, the Republic of Ireland, Germany, Finland, the United Arab Emirates (U.A.E.), Oman, Bahrain, and Spain
.
Our goals are to generate sustainable profits for our stockholders, while also producing environmental and social benefits for the world, by promoting vehicle restoration, repair, and recycling; parts refurbishment and re-use; and facilitating the recovery and resilience of communities affected by severe climate events.
We provide vehicle sellers with a full range of services to process and sell vehicles primarily over the internet through our Virtual Bidding Third Generation internet auction-style sales technology, which we refer to as VB3. Vehicle sellers consist primarily of insurance companies, but also include
banks, finance companies, charities, fleet operators, dealers and vehicles sourced directly from individual owners
.
We sell the vehicles principally to licensed vehicle dismantlers, rebuilders, repair licensees, used vehicle dealers 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 help expedite each stage of the vehicle sales process, minimize administrative and processing costs, and maximize the ultimate sales price.
In the U.S., Canada, Brazil, the Republic of Ireland, Germany, Finland, the U.A.E., Oman, Bahrain, and Spain, 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. and Germany, we operate
both as an agent and on a principal basis, in some cases purchasing salvage vehicles outright and reselling the vehicles
for our own account. In Germany and Spain, we also derive
revenue from listing vehicles on behalf of insurance companies and insurance experts to determine the vehicle’s residual value and/or to facilitate a sale for the insured.
Through our Virtual Bidding Third Generation (VB3) auction platform our sales process is open to registered buyers (whom we refer to as “members”) anywhere in the world with access to the internet. This technology and model employ a two-step bidding process. The first step is an open preliminary bidding feature that allows a member to enter bids either at a bidding station at the storage facility or over the internet during the preview period. To improve the effectiveness of bidding, the VB3 system lets members see the current high bids on the vehicles they want to purchase. The preliminary bidding step is an open bid format similar to eBay
®
. Members enter the maximum price they are willing to pay for a vehicle and VB3’s BID4U feature will incrementally bid on the vehicle on their behalf during all phases of the auction. Preliminary bidding ends at a specified time prior to the start of a second bidding step, an internet-only virtual auction. This second step allows bidders the opportunity to bid against each other and the high preliminary bidder. The bidders enter bids via the internet in real time while BID4U submits bids for the high preliminary bidder up to their maximum bid. When bidding stops, a countdown is initiated. If no bids are received during the countdown, the vehicle sells to the highest bidder.
We believe the introduction of our virtual auction platform increased the pool of available buyers for each sale, which resulted in added competition and an increase in the amount buyers are willing to pay for vehicles. We also believe that it improved the efficiency of our operations by eliminating the expense and capital requirements associated with live auctions.
For fiscal
2018
, sales of U.S. vehicles, on a unit basis, to members registered outside the state where the vehicle was located accounted for 52.3% of total vehicles sold; 30.9% of vehicles were sold to out of state members within the U.S. and 21.4% were sold to International members, based on the address submitted during registration.
We believe that we offer the highest level of service in the auction and vehicle remarketing industry and have established our leading market position by:
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providing coverage that facilitates seller access to buyers around the world, reducing towing and third-party storage expenses, offering a local presence for vehicle inspection stations, and providing prompt response to catastrophes and natural disasters by specially-trained teams;
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providing a comprehensive range of services that includes merchandising, efficient title processing, timely pick-up and delivery of vehicles, and internet sales;
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establishing and efficiently integrating new facilities and acquisitions;
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increasing the number of bidders that can participate at each sale through the ease and convenience of internet bidding;
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applying technology to enhance operating efficiency through internet bidding, web-based order processing, salvage value quotes, electronic communication with members and sellers, and vehicle imaging; and
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providing
a venue for insurance customers through our Virtual Insured Exchange (VIX) product to contingently sell a vehicle through our auction process to assess true market value, equipping our insurance customers with market data in its negotiations with owners who wish to retain their damaged vehicles.
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Historically, we believe our business has grown as a result of (i) acquisitions, (ii) increases in overall volume in the salvage car market, (iii) growth in market share, (iv) increases in the amount of revenue generated per sales transaction resulting from increases in the gross selling price and the addition of value-added services for both members and sellers, and (v) growth in non-insurance company sellers. For fiscal
2018
, our revenues were $
1.8 billion
and our operating income was $
584.3 million
.
In fiscal 2016, we opened new facilities and continue to operate in Castledermot, Republic of Ireland; Algete, Spain (Madrid); Dallas, Wilmer and Temple, Texas; Colorado Springs and Denver, Colorado; and Cartersville, Georgia.
In fiscal 2017, we opened new facilities and continue to operate in Bad Fallingbostel, Germany (Hanover); Newbury, U.K.; Betim, Minas Gerais, Brazil; Brighton and Littleton, Colorado (Denver); Sun Valley (Los Angeles) and Wilmington (Long Beach), California; Apopka (Orlando) and Okeechobee, Florida; Casper, Wyoming; Alorton, Illinois (St. Louis); Ogden, Utah (Salt Lake City); acquired the assets of an excavation company, which engages in earthwork, soil stabilization, equipment hauling and erosion control commercial contractor services; and acquired Cycle Express, LLC, which conducts business primarily as National Powersport Auctions (“NPA”), a leading non-salvage auction platform for motorcycles, snowmobiles, watercraft and other powersports vehicles. NPA currently operates facilities in Atlanta, Georgia; Cincinnati, Ohio; Dallas, Texas; Philadelphia, Pennsylvania; and San Diego, California.
In fiscal 2018, we opened new facilities and continue to operate in Andrews, Texas (Midland); Exeter, Rhode Island; Lumberton, North Carolina; Belfast, Northern Ireland; Nobitz, Germany (Leipzig); and acquired locations in the municipalities of Espoo; Pirkkala; Oulu; and Turku, Finland.
Our revenues consist of sales transaction fees charged to vehicle sellers and vehicle buyers, transportation revenue, purchased vehicle revenues, and other remarketing services. Revenues from sellers are generally generated either on a fixed fee contract basis, where we collect a fixed amount for selling each vehicle regardless of the selling price of the vehicle or under our Percentage Incentive Program, which we refer to as 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 or from our facility, storage of the vehicle, and other incidental costs. Under the consignment program or fixed fee 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.
Operating costs 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 purchase contracts. Costs associated with general and administrative expenses consist primarily of executive management, accounting, data processing, sales personnel, human resources, professional fees, information technology, and marketing expenses.
Industry Overview
The auction and vehicle remarketing services industry provides a venue for sellers to dispose of or liquidate vehicles to a broad domestic and international buyer pool. Sellers generally auction or sell their vehicles on a consignment basis either for a fixed fee or a percentage of the sales price. On occasion, companies in our industry will purchase vehicles from the largest segment of sellers, insurance companies, and resell the vehicles for their own account. The vehicles are usually purchased at a price based on the vehicles’ estimated pre-accident cash value and the extent of damage. Vehicle remarketers typically operate from multiple facilities where vehicles are processed, viewed, stored and delivered to the buyer. While most companies in this industry remarket vehicles through a physical auction or a hybrid internet and physical auction, we sell virtually all of our vehicles on our internet selling platform VB3, thus eliminating the requirement for buyers to travel to an auction location to participate in the sales process.
Although there are other sellers of vehicles, such as
banks, finance companies, charities, fleet operators, dealers and vehicles sourced directly from individual owners
, our primary sellers of vehicles are insurance companies.
The primary buyers of vehicles at our auctions are vehicle dismantlers, rebuilders, repair licensees, used vehicle dealers, exporters, and in some states, the general public. Vehicle dismantlers, which we believe are the largest group of vehicle buyers, based on volume of vehicles purchased, either dismantle a salvage vehicle and sell parts individually or sell the entire vehicle to rebuilders, used vehicle dealers, or the general public. Vehicle rebuilders and vehicle repair licensees generally purchase salvage vehicles to repair and resell. Used vehicle dealers generally purchase recovered stolen or slightly damaged vehicles for resale.
The majority of our vehicles are sold on behalf of insurance companies and are usually vehicles involved in an accident or to a lesser extent a natural disaster. Typically, the damaged vehicle is towed to a storage facility or a vehicle repair facility for temporary storage pending insurance company examination. The vehicle is inspected by the insurance company’s adjuster, who estimates the costs of repairing the vehicle and gathers information regarding the damaged vehicle’s mileage, options and condition in order to estimate its pre-accident value (PAV), otherwise known as actual cash value (ACV). The adjuster determines whether to pay for repairs or to classify the vehicle as a total loss based upon the adjuster’s estimate of repair costs, vehicle’s salvage value, and the PAV, as well as customer service considerations. If the cost of repair is greater than the PAV less the estimated salvage value, the insurance company generally will classify the vehicle as a total loss. The insurance company will thereafter assign the vehicle to a vehicle auction and remarketing services company, settle with the insured and receive title to the vehicle.
Automobile manufacturers continuously incorporate new standard features, including unibody construction utilizing exotic metals, passenger safety cages with surrounding crumple zones to absorb impacts, plastic and ceramic components, airbags, adaptive headlights, computer systems, advanced cameras, collision warning systems, and navigation systems. We believe that one effect of these additional features is that newer vehicles involved in accidents are more costly to repair and, accordingly, more likely to be deemed a total loss for insurance purposes.
We believe the primary factors that insurance companies consider when selecting an auction and vehicle remarketing services company include:
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the anticipated percentage return on salvage (i.e., gross salvage proceeds, minus vehicle handling and selling expenses, divided by the PAV);
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the services provided by the company and the degree to which such services reduce their administrative costs and expenses;
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the price the company charges for its services;
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the ability to respond to natural disasters;
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the ability to provide analytical data to the seller; and
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in the U.K., in certain situations, the actual amount paid for the vehicle.
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In the U.K., some insurance companies tender periodic contracts for the purchase of salvaged vehicles. Under these circumstances, insurance companies will generally award the contract to the company that is willing to pay the highest price for the vehicles.
Generally, upon receipt of the pickup order (the assignment), we arrange for the transport of a vehicle to a facility. As a service to the vehicle seller, we will customarily pay advance charges (reimbursable charges paid on behalf of vehicle sellers) to obtain the vehicle’s release from a towing company, vehicle repair facility or impound facility. Advance charges paid on behalf of the vehicle seller are either recovered upon sale of the vehicle, invoiced separately to the seller or deducted from the net proceeds due to the seller.
The salvage vehicle then remains in storage at one of our facilities until ownership documents are transferred from the insured vehicle owner and the title to the vehicle is cleared through the appropriate state’s motor vehicle regulatory agency, or DMV. In the U.S., total loss vehicles may be sold in most states only after obtaining a salvage title from the DMV. Upon receipt of the appropriate documentation from the DMV, which is generally received within 45 to 60 days of vehicle pick-up, the vehicle is sold either on behalf of the insurance company or for our own account, depending on the terms of the contract. In the U.K., upon release of interest by the vehicle owner, the insurance company notifies us that the vehicle is available for sale.
Generally, sellers of non-salvage vehicles will arrange to deliver the vehicle to one of our locations. At that time, the vehicle information will be uploaded to our system and made available for buyers to review online. The vehicle is then sold at auction on VB3 typically within seven days. Proceeds are then collected from the member, typically seller fees are subtracted, and the remainder is remitted to the seller.
Operating and Growth Strategy
Our growth strategy is to increase our revenues and profitability by, among other things, (i) acquiring and developing new facilities in key markets including foreign markets; (ii) pursuing national and regional vehicle supply agreements; and (iii) expanding our online auctions and vehicle remarketing service offerings to sellers and members. In addition, to maximize gross sales proceeds and cost efficiencies at each of our acquired facilities, we introduce our (i) pricing structure; (ii) selling processes; (iii) operational procedures; (iv) management information systems; and (v) when appropriate, redeploy existing personnel.
As part of our overall expansion strategy, our objective is to increase our revenues, operating profits, and market share in the vehicle sales industry. To implement our growth strategy, we intend to continue to do the following:
Acquire and Develop New Vehicle Storage Facilities in Key Markets Including Foreign Markets
Our strategy is to offer integrated services to vehicle sellers on a global, national or regional basis by acquiring or developing facilities in new and existing markets. We integrate our new acquisitions into our global network and capitalize on certain operating efficiencies resulting from, among other things, the reduction of duplicative overhead and the implementation of our operating procedures.
Pursue Global, National and Regional Vehicle Supply Agreements
Our broad global presence enhances our ability to enter into local, regional, national or global supply agreements with vehicle sellers. We actively seek to establish national and regional supply agreements with insurance companies by promoting our ability to achieve high net returns and broader access to buyers through our national coverage and electronic commerce capabilities. By utilizing our existing insurance company seller relationships, we are able to build new seller relationships and pursue additional supply agreements in existing and new markets.
Expand Our Service Offerings to Sellers and Members
Over the past several years, we have expanded our available service offerings to vehicle sellers and members. The primary focus of these new service offerings is to maximize returns to our sellers and maximize product value to our members. This includes, for our sellers, real-time access to sales data over the internet, national coverage, the ability to respond on a national scale and, for our members, the implementation of VB3 real-time bidding at substantially all of our facilities, permitting members at any location worldwide to participate in the sales at our yards. We plan to continue to refine and expand our services, including offering software that can assist our sellers in expediting claims and salvage management tools that help sellers integrate their systems with ours.
Our Competitive Advantages
We believe that the following attributes and the services that we offer position us to take advantage of many opportunities in the online vehicle auction and services industry:
Geographic Coverage and Ability to Respond on a National Scale
Since our inception in 1982, we have expanded from a single facility in Vallejo, California to an integrated network of facilities located in the U.S., Canada, the U.K., Brazil, the Republic of Ireland, Germany, Finland, the U.A.E., Oman, Bahrain, and Spain. In Germany and Spain, we also provide online vehicle remarketing services. We are able to offer integrated services to our vehicle sellers, which allow us to respond to the needs of our sellers and members with maximum efficiency. Our coverage provides our sellers with key advantages, including:
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attractiveness and efficiency to buyers, leading to enhanced selling prices for vehicles;
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a reduction in administrative time and effort;
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a reduction in overall vehicle towing costs;
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convenient local facilities;
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improved access to buyers throughout the world;
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a prompt response in the event of a natural disaster or other catastrophe; and
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consistency in products and services.
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Value-Added Services
We believe that we offer the most comprehensive range of services in our industry, including:
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internet bidding, internet proxy bidding, and virtual sales powered by VB3, which enhance the competitive bidding process;
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mobile applications, which allow members to search, bid, create watch lists, join auctions and bid in numerous languages from anywhere;
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a tailored experience by way of predictive analytics through collaborative filtering, such as the Recommendations Engine feature that suggests similar makes and models based on a member’s behavior;
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Buy It Now, which provides an option to our members to purchase specific pre-qualified vehicles immediately at a set price before the live auction process;
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online payment capabilities via our ePay product, credit cards and dealer financing programs;
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email notifications available in numerous languages to potential buyers of vehicles that match desired characteristics;
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sophisticated vehicle processing at storage sites, including digital imaging of each vehicle and the scanning of each vehicle’s title and other significant documents such as body shop invoices, all of which are available from us over the internet;
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specialty sales, which allow buyers the opportunity to focus on such select types of vehicles as motorcycles, heavy equipment, boats, recreational vehicles and rental cars;
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interactive online counter-bidding, which allows sellers who have placed a minimum bid or a bid to be approved on a vehicle to directly counter-bid the current high bidder;
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second chance bidding, which allows the second highest bidder the opportunity to purchase the vehicle for the seller’s current minimum bid after the high bidder fails to consummate the purchase; and
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Night Cap sales, which provides an additional opportunity for bidding on vehicles that have not previously achieved their minimum bid.
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Proven Ability to Acquire and Integrate Acquisitions
We have a proven track record of successfully acquiring and integrating facilities. Since becoming a public company in 1994, we have completed acquisitions of facilities in the U.S., Canada, the U.K., Brazil, the U.A.E., Germany, Finland, and Spain. As part of our acquisition and integration strategy, we seek to:
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expand our global presence;
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strengthen our networks and access new markets;
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utilize our existing corporate and technology infrastructure over a larger base of operations; and
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introduce our comprehensive services and operational expertise.
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We strive to integrate all new facilities, when appropriate, into our existing network without disruption of service to vehicle sellers. We work with new sellers to implement our fee structures and new service programs. We typically retain existing employees at acquired facilities in order to retain knowledge about, and respond to, the local market. We also assign a special integration team to help convert newly acquired facilities to our own management information and proprietary software systems, helping enable us to ensure a smooth and consistent transition to our business operating and sales systems.
Technology to Enhance and Expand Our Business
We have developed management information and proprietary software systems that allow us to deliver a fully integrated service offering. Our proprietary software programs provide vehicle sellers with online access to data and reports regarding their vehicles being processed at any of our facilities. This technology allows vehicle sellers to monitor each stage of our vehicle sales process, from pick up to sale and settlement by the buyer. Our full range of internet services allows us to expedite each stage of the vehicle sales process and helps to minimize the administrative and processing costs for us, as well as our sellers. We believe that our integrated technology systems generate improved capacity and financial returns for our clients, resulting in high client retention, and allow us to expand our national supply contracts.
Our Business Segments
Our U.S. and International regions are considered
two
separate operating segments and are disclosed as
two
reportable segments. The segments represent geographic areas and reflect how the chief operating decision maker allocates resources and measures results, including total revenues, operating income and income before income taxes. The segments continue to share similar business models, services and economic characteristics. Our revenues for the year ended
July 31, 2018
were distributed as follows: U.S.
82.6%
and International
17.4%
. Geographic information as well as comparative segment revenues and related financial information pertaining to the U.S. and International segments for the years ended
July 31, 2018
,
2017
and
2016
are presented in the tables in Note
14 — Segments and Other Geographic Reporting
, to the Notes to Consolidated Financial Statements, which are included in Part II, Item 8 of this Form 10-K.
Our Service Offerings
We offer vehicle sellers a full range of vehicle services, which expedite each stage of the vehicle sales process, helping to maximize proceeds and minimize costs. Not all service offerings are available in all markets. Additionally, in some cases a service offering may be applicable only to a particular subsidiary or operating segment. Our service offerings include the following:
Online Seller Access
Through Copart Access, our internet-based service for vehicle sellers, we enable sellers to assign vehicles for sale, check sales calendars, view vehicle images and history, view and reprint body shop invoices and towing receipts and view the historical performance of the vehicles sold at our sales.
Salvage Estimation Services
We offer Copart ProQuote, a proprietary service that assists sellers in the vehicle claims evaluation process by providing online salvage value estimates, which helps sellers determine whether to repair a particular vehicle or deem it a total loss.
Estimating Services
We offer vehicle sellers in the U.K. estimating services for vehicles taken to our facilities. Estimating services provide our insurance company sellers repair estimates which allow the insurance company to determine if the vehicle is a total loss vehicle. If the vehicle is determined to be a total loss, it is generally assigned to us to sell.
End-of-Life Vehicle Processing
In the U.K., we are an authorized treatment facility for the disposal of end-of-life vehicles.
Virtual Insured Exchange (VIX)
We provide
a venue for insurance customers through our Virtual Insured Exchange (VIX) product to contingently sell a vehicle through our auction process to assess true market value, equipping our insurance customers with market data in its negotiations with owners who wish to retain their damaged vehicles.
Transportation Services
In the U.S. and Canada, we perform transportation services through a combination of our fleet of over
50
vehicles and predominately using third-party vehicle transport companies. We maintain contracts with third-party vehicle transport companies, which enable us to pick up most of our sellers’ vehicles within 24 hours. Our national network and transportation capabilities provide cost and time savings to our vehicle sellers and ensure on-time vehicle pick up and prompt response to catastrophes and natural disasters in the U.S. and Canada. In the U.K., we perform transportation services through a combination of our fleet of over 200 vehicles and third-party vehicle transport companies.
Vehicle Inspection Stations
We offer some of our major insurance company sellers office and yard space to house vehicle inspection stations on-site at our facilities. We have over 90 vehicle inspection stations at our facilities. An on-site vehicle inspection station provides our insurance company sellers with a central location to inspect potential total loss vehicles, which reduces storage charges that otherwise may be incurred at the initial storage or repair facility.
On-Demand Reporting
We provide vehicle sellers with real time data for vehicles that we process for the particular seller. This includes vehicle sellers’ gross and net returns on each vehicle, service charges, and other data that enable our vehicle sellers to more easily administer and monitor the vehicle disposition process. In addition, we have developed a database containing over 300 fields of real-time and historical information accessible by our sellers allowing for their generation of custom ad hoc reports and customer specific analysis.
DMV Processing
We have extensive expertise in DMV document and title processing for salvage vehicles. We have developed a computer system which provides a direct link to the DMV computer systems of multiple states, allowing us to expedite the processing of vehicle title paperwork.
Flexible Vehicle Processing Programs
At the election of the seller, we sell vehicles pursuant to our Percentage Incentive Program, which we refer to as PIP, Consignment Program, or Purchase Program.
Percentage Incentive Program.
Our Percentage Incentive Program is an innovative processing program designed to broadly serve the needs of vehicle sellers. Under PIP, we agree to sell all of the vehicles of a seller in a specified market, usually for a predetermined percentage of the vehicle sales price. Because our revenues under PIP are directly linked to the vehicle’s sale price, we have an incentive to actively merchandise those vehicles to maximize the net return. We provide the vehicle seller, at our expense, with transport of the vehicle to our nearest facility, as well as DMV document and title processing. In addition, we provide merchandising services such as covering or taping openings to protect vehicle interiors from weather, washing vehicle exteriors, vacuuming vehicle interiors, cleaning and polishing dashboards and tires, making keys for drivable vehicles, and identifying drivable vehicles. We believe our merchandising efforts increase the sales prices of the vehicles, thereby increasing the return on salvage vehicles to both vehicle sellers and us.
Consignment Program.
Under our Consignment Program, we sell vehicles for a fixed consignment fee. Although sometimes included in the consignment fee, we may also charge additional fees for the cost of transporting the vehicle to our facility, storage of the vehicle, and other incidental costs.
Purchase Program.
Under the Purchase Program, we purchase vehicles from a vehicle seller at a formula price, based on a percentage of the vehicles’ estimated PAV, otherwise known as ACV, and sell the vehicles for our own account. Currently, the purchase program is offered primarily in the U.K.
Buy It Now, Make An Offer
We offer an option to our members to purchase specific pre-qualified vehicles immediately at a set price before the live auction process. This enables us to provide a fast, easy, transparent and comprehensive buying option on these pre-qualified vehicles. Additionally, members have the option of submitting an offer amount on certain selected vehicles. If an offer is accepted, the member can purchase the vehicle before the live auction process.
Member Network
We maintain a database of thousands of registered members in the vehicle dismantling and recycling, rebuilding, used vehicle dealer and export industries, as well as members that are a part of the general public, where applicable.
Our database includes each member’s vehicle preference and purchasing history. This data enables us to notify prospective buyers throughout the world via email of vehicles available for bidding that match their vehicle preferences. Listings of vehicles to be sold on a particular day and location are also made available on the internet.
Sales Process
We offer a flexible and unique sales process designed to maximize the sale prices of the vehicles utilizing VB3. VB3 opens our sales process to members and to individuals who have not registered to view auctions via our website and our mobile application anywhere in the world where internet access is available. The VB3 technology and model employs a two-step bidding process. The first step is an open preliminary bidding feature that allows a member to enter bids either at a bidding station at the storage facility during the preview days, or over the internet. To improve the effectiveness of bidding, the VB3 system lets a member see the current high bid on the vehicle they want to purchase. The preliminary bidding step is an open bid format similar to eBay
®
. Members enter the maximum price they are willing to pay for a vehicle and VB3’s BID4U feature will incrementally bid the vehicle on their behalf during all steps of the auction. Preliminary bidding ends at a specified time prior to the start of a second bidding step, an internet-only virtual auction. This second step allows bidders the opportunity to bid against each other and the highest preliminary bidder. The bidders enter bids via the internet in real time, and then BID4U submits bids for the highest preliminary bidder, up to their maximum bid. When bidding stops, a countdown is initiated. If no bids are received during the countdown or any extensions, the vehicle sells to the highest bidder.
Copart Dealer Services
We provide franchise and independent dealers with a convenient method to sell their trade-ins through any of our facilities. We have a dedicated group of employees in the U.S. that target these dealers and work with them throughout the sales process.
CashForCars.com
We provide the general public with a fast and convenient method to sell their vehicles. Anyone can go to CashForCars.com or call 1-888-961-5389 and arrange to obtain a valid offer to purchase their vehicle. Upon acceptance of our offer to purchase their vehicle, we give them a check for their vehicle and then sell the vehicle on our own behalf.
National Powersport Auctions
In the U.S., we provide non-salvage powersport vehicle remarketing services through live and online auction platforms to dealers, financial institutions and OEMs through our subsidiary National Powersport Auctions, or NPA. NPA, also offers comprehensive data services including the NPA Value Guide
TM
, which we believe is the industry’s most accurate wholesale valuation tool. NPA has facilities in San Diego, California; Philadelphia, Pennsylvania; Dallas, Texas; Cincinnati, Ohio; and Atlanta, Georgia.
U-Pull-It
In the U.K., we have two facilities from which the public can purchase parts from salvaged and end-of-life vehicles. In general, the buyer is responsible for detaching the parts from the vehicle and any associated hauling or transportation of the parts after detachment. After the valuable parts have been removed by the buyer, the remaining parts and car body are sold for their scrap value.
Sales
We process vehicles from hundreds of different vehicle sellers.
No single customer accounted for more than 10
% of our revenues for fiscal
2018
,
2017
and
2016
. We obtained 78% of the total number of vehicles processed during fiscal
2018
from insurance company sellers. We obtained 84% and 83% of the total number of vehicles processed during fiscal
2017
and
2016
, respectively, from insurance company sellers.
We typically contract with the regional or branch office of an insurance company or other vehicle sellers. The agreements are customized to each vehicle seller’s particular needs and often provide for the disposition of different types of salvage vehicles by differing methods. Our arrangements generally provide that we will sell total loss and recovered stolen vehicles generated by the vehicle seller in a designated geographic area.
We market our services to vehicle sellers through an in-house sales force that utilizes a variety of sales techniques, including targeted mailing of our sales literature, telemarketing, follow-up personal sales calls, internet search engines, employee referrals, tow shop referrals, participation in trade shows and vehicle and insurance industry conventions. We market our services to franchise and independent dealerships, as well as the general public. We may, when appropriate, provide vehicle sellers with detailed analysis of the net return on vehicles and a proposal setting forth ways in which we believe that we can improve net returns on vehicles and reduce administrative costs and expenses.
During the last three years, a majority of our revenue was generated within the U.S. and a majority of our long-lived assets are located within the U.S. Please see
Note
14 — Segments and Other Geographic Reporting
in our Notes to Consolidated Financial Statements for information regarding the geographic location of our sales and our long-lived assets.
Members
We maintain a database of thousands of registered members in the vehicle dismantling and recycling, rebuilding, used vehicle dealer and export industries, as well as members that are a part of the general public, where applicable.
We believe that we have established a broad international and domestic buyer base by providing members with a variety of programs and services. To become a registered member, a person or business must complete a basic application either online or through our mobile applications. Before any member may purchase a vehicle, they must provide copies of current government issued photo identification. Additionally, business members must provide current business information, including copies of licenses, which may include vehicle dismantler, dealer, resale, repair or export licenses, and as needed, completed sales tax exemption certificates. Registration entitles a member to transact business at any of our sales, subject to local licensing and permitting requirements. In certain venues, we may sell to the general public either directly or members may purchase a vehicle offered at Copart through a registered broker who meets local licensing and permitting requirements. A member may also bring guests to a facility for a fee to preview vehicles for sale. Strict admission procedures are intended to prevent frivolous bids that will not result in a completed sale. We market to members online and via email notifications, sales notices, telemarketing, direct mail, in-location marketing, search engines, social media, radio, television, trade publications and participation in trade show events.
Competition
We face significant competition from other remarketers of both salvage and non-salvage vehicles. We believe our principal competitors include vehicle auction and sales companies and vehicle dismantlers. These national, regional and local competitors may have established relationships with vehicle sellers and buyers and may have financial resources that are greater than ours. The largest national or regional vehicle auctioneers in the U.S. include KAR Auction Services, Inc. (including subsidiaries ADESA, Inc. and Insurance Auto Auctions, Inc.); Auction Broadcasting Company, LLC; and Manheim, Inc. The largest national dismantler is LKQ Corporation (LKQ). LKQ, in addition to trade groups of dismantlers such as the American Recycling Association and the United Recyclers Group, LLC, may purchase salvage vehicles directly from insurance companies, thereby bypassing vehicle remarketing companies entirely. In our International markets, our principal competitors are vehicle auction and sales companies, vehicle dismantlers and privately held independent remarketers.
Management Information Systems
Our primary yard management information system consists of an IBM AS/400 mainframe computer system which runs our proprietary software developed to process salvage sales vehicles throughout the auction process. This system is integrated with the internet to enable buyers to view salvage vehicles and bid on them. It can also be integrated with the seller’s system and enables the sellers to monitor their vehicles and analyze the progression of vehicles through the auction process. Our auction-style service product, VB3, is served by an array of identical high-density, high-performance servers. Each individual sale is configured to run on an available server in the array and can be rapidly provisioned to any other available server in the array as required.
We have invested in production data centers that are designed to continuously operate to support the business, even in the event of an emergency. The data centers’ electrical and mechanical systems are continually monitored. The data centers are located in areas generally considered to be free of frequent weather-related disasters and earthquakes. We operate fully redundant infrastructure to ensure ongoing operations, even in the event of physical damage to one of our data centers.
We have developed a proprietary system to enable us to address our international expansion needs. This proprietary system is designed to provide multi-language and multi-currency capabilities. We began using our new internally developed proprietary system with our expansion into Spain in fiscal 2016 and Germany in fiscal 2017. We intend to continue development of this system and implement it in certain additional international locations in the future.
Employees
As of
July 31, 2018
, we had
6,026
full-time employees, of whom 1,023 were engaged in general and administrative functions and 5,003 were engaged in yard operations. We are not currently subject to any collective bargaining agreements and believe our relationships with our employees are good. Employees per geographic region are as follows:
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United States
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4,431
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International
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1,595
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Total employees
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6,026
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Environmental Matters
Our operations are subject to federal, national, international, provincial, state 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 facilities which we may acquire in the future, 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.
Governmental Regulations
Our operations are subject to regulation, supervision and licensing under various federal, national, international, provincial, state and local statutes, ordinances and regulations. The acquisition and sale of damaged and recovered stolen vehicles is regulated by various state, provincial and foreign motor vehicle departments. In addition to the regulation of sales and acquisitions of vehicles, we are also subject to various local zoning requirements with regard to the location of our storage facilities. These zoning requirements vary from location to location. 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.
Intellectual Property and Proprietary Rights
In 2008, we obtained a patent issued by the United States Patent and Trademark Office that covers certain aspects of our virtual bidding auction platform. Generally, patents issued in the U.S. are effective for 20 years from the earliest asserted filing date of the patent application. The duration of foreign patents varies in accordance with the provisions of applicable local law.
We also rely on a combination of trade secret, copyright and trademark laws, as well as contractual agreements to safeguard our proprietary rights in technology and products. In seeking to limit access to sensitive information to the greatest practical extent, we routinely enter into confidentiality and assignment of invention agreements with certain of our employees and consultants and nondisclosure agreements with our key customers and vendors.
Seasonality
Historically, our consolidated results of operations have been subject to quarterly variations based on a variety of factors, of which the primary influence is the seasonal change in weather patterns. During the winter months we tend to have higher demand for our services because there are more weather-related accidents.
Item 1A.
Risk Factors
Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below before making an investment decision. Our business could be harmed if any of these risks, as well as other risks not currently known to us or that we currently deem immaterial, materialize. The trading price of our common stock could decline due to the occurrence of any of these risks, and you may lose all or part of your investment. In assessing the risks described below, you should also refer to the other information contained in this Form 10-K, including our consolidated financial statements and the related notes and schedules, and other filings with the SEC.
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 consolidated revenue for fiscal
2018
. Historically, a limited number of vehicle sellers have collectively accounted for a substantial portion of our revenues. Vehicle sellers have terminated agreements with us in the past in particular markets, which has affected revenues in those markets. There can be no assurance that our existing agreements will not be canceled. 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 the U.S., including 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 or operational capabilities established outside the U.S. could have an adverse effect on our consolidated results of operations, financial position or cash flows.
We first expanded our operations outside the U.S. in fiscal 2003 with an acquisition in Canada. Subsequently, in fiscal 2008 we made a significant acquisition in the U.K., followed by acquisitions in the U.A.E., Brazil, Germany, and Spain in fiscal 2013, expansions into Bahrain and Oman in fiscal 2015, expansion into the Republic of Ireland and India in fiscal 2016, and an acquisition in Finland in fiscal 2018. In addition, we continue to evaluate acquisitions and other opportunities outside of the U.S. Acquisitions or other strategies to expand our operations outside of the U.S. 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 and operations, acquiring buyers and sellers, and implementing shared services capabilities in international markets. Among other things, we plan to 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. For example, although we continue to operate a technology and operations center in India for administrative support, we recently decided to suspend our salvage operations in India, which did not have a material effect on our consolidated results of operations and financial position, until the Indian market develops in a manner better suited to our business model.
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. Moreover, success in opening and operating facilities in markets can be dependent upon establishing new relationships with buyers and sellers, and our failure to establish those relationships could have an adverse effect on our consolidated results of operations and future operating results.
In addition, we anticipate our international operations will continue to subject us to a variety of risks associated with operating on an international basis, including:
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the difficulty of managing and staffing foreign offices;
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the increased travel, infrastructure and legal compliance costs associated with multiple international locations;
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the need to localize our product offerings, particularly the need to implement our online auction platform in foreign countries;
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the need to comply with complex foreign and U.S. laws and regulations that apply to our international operations;
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tariffs and trade barriers and other regulatory or contractual limitations on our ability to operate in certain foreign markets;
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exposure to foreign currency exchange rate risk, which may have an adverse impact on our revenues and revenue growth rates;
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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
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repatriation of funds currently held in foreign jurisdictions to the U.S. may result in higher effective tax rates.
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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.
On June 23, 2016, the U.K. held a referendum in which voters approved an exit from the European Union, commonly referred to as “Brexit.” In February 2017, the British Parliament voted in favor of allowing the British government to begin negotiating the terms of the U.K.’s withdrawal from the European Union and discussions with the European Union began in March 2017. The ultimate effects of Brexit on us are difficult to predict, but adverse consequences concerning Brexit or the European Union could include deterioration in global economic conditions, instability in global financial markets, political uncertainty, volatility in currency exchange rates, or adverse changes in the cross-border agreements currently in place, any of which could have an adverse impact on our financial results in the future. The ultimate effects of Brexit on us will also depend on the terms of agreements, if any, that the U.K. and the European Union make to retain access to each other’s respective markets either during a transitional period or more permanently.
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 some cases, the enforcement practices of governmental regulators in certain foreign areas and the procedural and substantive rights and remedies available to us may vary significantly from those in the United States, which could have an adverse effect on our business.
Although we face risks associated with international expansion in each of the non-U.S. markets where we operate, our current focus on the German market heightens the risks we face relating to our expansion plans in Germany.
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, India’s Prevention of Corruption Act, 1988 or similar local anti-bribery laws. These laws generally prohibit companies and their employees or agents from making improper payments 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 U.S. 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 the U.S.
Some of our target markets outside the U.S. operate in a manner substantially different than our historic market in the U.S. 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 the U.S., in which we generally 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 the U.S., Canada, and the U.K. has been established and grown based largely on our ability to build relationships with insurance carriers. In other markets, including Germany, insurers have traditionally been less involved in the disposition of salvage vehicles. As we expand into markets outside the U.S., Canada, and the U.K., including Germany in particular, 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.
Acquisitions typically will increase our sales and profitability although, given the typical size of our acquisitions to date, 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 have developed a new proprietary enterprise operating system, and we may experience difficulties operating our business as we continue to design and develop this system.
We have developed a new proprietary enterprise operating system to address our international expansion needs. The ongoing design, development, and implementation of our enterprise operating systems carry 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. In addition, the transition to our new internally developed 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. We began using our new internally developed proprietary system with our expansion into Spain in fiscal 2016 and Germany in fiscal 2017.
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. Any failure to maintain the integrity of our systems and infrastructure may result in loss of customers due to
among other things, slow delivery times, unreliable service levels or insufficient capacity, which could have a material adverse effect on our business, consolidated financial position and results of operations.
The impairment of internally developed capitalized software 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. For example, during fiscal 2017, we recognized a $19.4 million charge primarily related to fully impairing costs previously capitalized in connection with the development of business operating software.
Disruptions to our information technology systems, including failure to prevent outages, maintain security, prevent unauthorized access to our information technology systems and other confidential information, could disrupt our business and materially and adversely affect our reputation, consolidated results of operations and financial condition.
Information availability and security risks for online commerce companies have significantly increased in recent years because of, in addition to other factors, the proliferation of new technologies, the use of the internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, and other external parties. These threats may derive from fraud or malice on the part of third parties or current or former employees. In addition, human error or accidental technological failure could make us vulnerable to information technology system disruptions and/or cyber-attacks, including the introduction of malicious computer viruses or code into our system, phishing attacks, or other information technology data security incidents.
Our operations rely on the secure processing, transmission and storage of confidential, proprietary and other information in our computer systems and networks. Our customers and other parties in the payments value chain rely on our digital technologies, computer and email systems, software and networks to conduct their operations. In addition, to access our products and services, our customers increasingly use personal smartphones, tablet PCs and other mobile devices that may be beyond our control.
Information technology system disruptions, cyber-attacks or other cyber security incidents could materially and adversely affect our reputation, operating results, or financial condition by, among other things, making our auction platform inoperable for a period of time, damaging our reputation with buyers, sellers, and insurance companies as a result of the unauthorized disclosure of confidential information (including account data information), or resulting in governmental investigations, litigation, liability, fines, or penalties against us. If such attacks are not detected immediately, their effect could be compounded. While we maintain insurance coverage that may, subject to policy terms and conditions, cover certain aspects of these cyber risks, our insurance coverage may be insufficient to cover all losses and would not remedy damage to our reputation.
We have in the past identified attempts by unauthorized third parties to access our systems and disrupt our online auctions. These attempts have caused minor service interruptions, which were promptly addressed and resolved, and our online service was restored to normal business. For example, in April 2015, we identified that unauthorized third parties had gained access to data provided to us by our members that is considered to be personal information in certain jurisdictions. We immediately investigated, including the engagement of an external expert security firm, and made the required notifications to members whose information may have been accessed and to regulatory agencies.
We are constantly evaluating and implementing new technologies and processes to manage risks relating to cyber-attacks and system and network disruptions, including but not limited to usage errors by our employees, power outages and catastrophic events such as fires, tornadoes, floods, hurricanes and earthquakes. We have further enhanced our security protocols based on the investigation we conducted in response to the security incident. Nevertheless, we cannot provide assurances that our efforts to address prior data security incidents and mitigate against the risk of future data security incidents or system failures will be successful. The techniques used by criminals to obtain unauthorized access to sensitive data change frequently and are often not recognized immediately. We may be unable to anticipate these techniques or implement adequate preventative measures and believe that cyber-attacks and threats against us have occurred in the past and are likely to continue in the future. If our systems are compromised again in the future, become inoperable for extended periods of time, or cease to function properly, we may have to make a significant investment to fix or replace them, and our ability to provide many of our electronic and online solutions to our customers may be impaired. In addition, as cyber-threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate
and remediate any information security vulnerabilities. Any of the risks described above could materially and adversely affect our consolidated financial position and results of operations.
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 and other points of access. 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, 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.
Our business is subject to a variety of domestic and international laws and other obligations regarding privacy and data protection.
We are subject to federal, state and international laws, directives, and regulations relating to the collection, use, retention, disclosure, security and transfer of personal data. These laws, directives, and regulations, and their interpretation and enforcement continue to evolve and may be inconsistent from jurisdiction to jurisdiction. Recent regulatory changes in Europe have created compliance uncertainty regarding certain transfers of personal data from Europe to the United States. For example, the General Data Protection Regulation (“GDPR”), which went into effect in the European Union (“EU”) on May 25, 2018, applies to all of our activities conducted from an establishment in the EU and may also apply to related products and services that we offer to EU users. Complying with the GDPR and similar emerging and changing privacy and data protection requirements may cause us to incur substantial costs or require us to change our business practices. Noncompliance with our legal obligations relating to privacy and data protection could result in penalties, legal proceedings by governmental entities or others, and significant legal and financial exposure and could affect our ability to retain and attract customers. Any of the risks described above could adversely affect 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 the U.S., Canada, 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 U.S., Canada, 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 those markets. In considering new markets, we consider the potential synergies from the implementation of our model based in large part on our experience in the U.S., Canada, and the U.K. However, 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, Sandy, and Harvey 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 2016, we opened new operational facilities in Castledermot, Republic of Ireland; Algete, Spain (Madrid); and six new operational facilities in the U.S. In fiscal 2017, we opened a new operational facility in Bad Fallingbostel, Germany (Hanover), a new operational facility in Betim, Minas Gerais, Brazil, nine new operational facilities in the U.S. and acquired Cycle Express, LLC, which conducts business primarily as National Powersport Auctions (NPA), a leading non-salvage auction platform for motorcycles, snowmobiles, watercraft and other powersports vehicles. NPA currently operates facilities in Atlanta, Georgia; Cincinnati, Ohio; Dallas, Texas; Philadelphia, Pennsylvania; and San Diego, California. In fiscal 2018, we opened new operational facilities in Andrews, Texas (Midland), Exeter, Rhode Island, and Lumberton, North Carolina, a new operational facility in Belfast, Northern Ireland, a new operational facility in Nobitz, Germany (Leipzig), and acquired locations in the municipalities of Espoo; Pirkkala; Oulu; and Turku, Finland. 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:
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continue to acquire additional facilities on favorable terms;
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expand existing facilities in no-growth regulatory environments;
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obtain or retain buyers, sellers, and sales volumes in new markets or facilities;
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increase revenues and profitability at acquired and new facilities;
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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.
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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:
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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.
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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:
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fluctuations in the market value of salvage and used vehicles;
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fluctuations in commodity prices, particularly the per ton price of crushed car bodies;
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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 or other vehicles we sell;
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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, regulations, or treaties affecting the vehicles we sell;
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changes in the application, interpretation, and enforcement of existing laws, regulations or treaties;
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trade disputes and other political, diplomatic, legal, or regulatory developments;
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inconsistent application or enforcement of laws or regulations by regulators, governmental or quasi-governmental entities, or law enforcement or quasi-law enforcement agencies, as compared to our competitors;
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changes in laws affecting who may purchase the vehicles we sell;
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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 or maintain necessary permits to operate.
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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. 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 also may not be able to acquire or maintain appropriate domain names in all countries in which we do business. Furthermore, regulations governing domain names may not protect our trademarks and similar proprietary rights. We may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon, or diminish the value of our trademarks and other proprietary rights.
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 primarily upon independent subhaulers to pick up and deliver vehicles to and from our storage facilities in the U.S., Canada, Brazil, the Republic of Ireland, Germany, Finland, the U.A.E., Oman, Bahrain, and Spain. 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, accidents and related injury claims, 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 our different lines of insurance coverage including, without limitation, 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, 15.9% of our common stock as of
July 31, 2018
. 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, or A. Jayson Adair, our Chief Executive 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 current and prospective customers; and
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respond to technological advances and emerging industry standards and practices in a cost-effective and timely basis.
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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 will 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, fiscal 2013 and fiscal 2018, we recognized substantial additional costs associated with Hurricanes Katrina, Rita, Sandy, and Harvey. 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 premiums for subhaulers, 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, declines in used car prices, and vehicle-related technological advances may have an adverse effect on our revenues and operating results, as well as our earnings growth rates.
Macroeconomic factors that affect oil prices and the automobile and commodity markets can have adverse effects on our revenues, revenue growth rates (if any), and operating results. Significant increases in the cost of fuel could lead to a reduction in miles driven per car and a reduction in accident rates. A material reduction in accident rates, whether due to, among other things, a reduction in miles driven per car, vehicle-related technological advances such as accident avoidance systems and, to the extent widely adopted, the advent of autonomous vehicles, could have a material impact on revenue growth. In addition, under our Percentage Incentive Program contracts, which we refer to as 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 vehicle sales industry is highly competitive and we may not be able to compete successfully.
We face significant competition for the supply of salvage and other 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., and other foreign markets, 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 vehicle sales industry may impair our operations, increase our costs of doing business and create potential liability.
Participants in the 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 but not limited to those governing vehicle registration, the environment, zoning and land use, and anti-money laundering. 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 vehicle buyers and may decrease demand for our vehicles.
Changes in laws or the interpretation of laws, including foreign laws and regulations, affecting the import and export of 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 vehicles now represent a significant part of our total buyer base. As a result our foreign buyers may be subject to a variety of foreign laws and regulations, including the imposition of import duties by foreign countries. Changes in laws, regulations, and treaties that restrict or impede or negatively affect the economics surrounding the importation of vehicles into foreign countries may reduce the demand for vehicles and impact our ability to maintain or increase our international buyer base. In addition, we and our vehicle buyers must work with foreign customs agencies and other non-U.S. governmental officials, who are responsible for the interpretation, application, and enforcement of these laws, regulations, and treaties. Any inability to obtain requisite approvals or agreements from such authorities could adversely impact the ability of our buyers to import vehicles into foreign countries. In addition, any disputes or disagreements with foreign agencies or officials over import duties, tariffs, or similar matters, including disagreements over the value assigned to imported vehicles, could adversely affect our costs and the ability and costs of our buyers to import vehicles into foreign countries. 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, changes in the
interpretation, application, and enforcement of laws, regulations, or treaties, any failure to comply with non-U.S. laws or regulatory interpretations, or any legal or regulatory interpretations or governmental actions that significantly increase our costs or the costs of our buyers could have a material adverse effect on our consolidated results of operations and financial position by reducing the demand for our products and services and our ability to compete in non-U.S. markets.
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, international, provincial and local laws and regulations regarding the protection of the environment in the countries which we have storage facilities. In some cases, we may acquire land with existing environmental issues, including landfills as an example. 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 facilities which we may acquire in the future, or the disposal of our waste at off-site locations. Environmental laws and regulations could become more stringent over time and there can be no assurance that we or our operations will not be subject to significant costs in the future. Although we have obtained indemnification for pre-existing environmental liabilities from many of the persons and entities from whom we have acquired facilities, there can be no assurance that such indemnifications will be adequate. Any such expenditures or liabilities could have a material adverse effect on our consolidated results of operations and financial position.
Adverse U.S. and international economic conditions may negatively affect our business, operating results, or financial condition.
The capital and credit markets have historically experienced extreme volatility and disruption, which has in the past and may in the future lead to economic downturns in the U.S. and abroad. As a result of any economic downturn, the number of miles driven may decrease, which may lead to fewer accident claims, a reduction of vehicle repairs, and fewer salvage vehicles. Increases in unemployment, as a result of any economic downturn, may lead to an increase in the number of uninsured motorists. Uninsured motorists are responsible for disposition of their vehicle if involved in an accident. Disposition generally is either the repair or disposal of the vehicle. In the situation where the owner of the wrecked vehicle, and not an insurance company, is responsible for its disposition, we believe it is more likely that vehicle will be repaired or, if disposed, disposed through channels other than us. Adverse credit markets may also affect the ability of members to secure financing to purchase salvaged vehicles which may adversely affect demand. In addition, if the banking system or the financial markets deteriorate or are volatile, our credit facility or our ability to obtain additional debt or equity financing may be affected. These adverse economic conditions and events may have a negative effect on our business, consolidated results of operations and financial position.
If we determine that our goodwill has become impaired, we could incur significant charges that would have a material adverse effect on our consolidated results of operations.
Goodwill represents the excess of cost over the fair market value of assets acquired in business combinations. As of
July 31, 2018
, the amount of goodwill on our consolidated balance sheet subject to future impairment testing was $
337.2 million
.
Pursuant to ASC 350,
Intangibles—Goodwill and Other
, we are required to annually test goodwill to determine if impairment has occurred, either through a quantitative or qualitative analysis. 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 and the implied fair value of the goodwill in the period the determination is made. The annual goodwill impairment analysis, which was performed qualitatively in the fourth quarter of fiscal
2018
, considered all relevant factors specific to our
reporting units, including macroeconomic conditions; industry and market considerations; overall financial performance and relevant entity-specific events.
Changes in these factors, or changes in actual performance could affect the fair value of goodwill, which may result in an impairment charge. For example, deterioration in worldwide economic conditions could affect these assumptions and lead us to determine that goodwill impairment is required. We cannot accurately predict the amount or timing of any impairment of assets. We considered the above factors noting none involved significant uncertainty. In addition, the industry in which we operate improved over the observable period, and our calculated fair value exceeded carrying value for each reporting unit by a substantial amount in our previous quantitative analysis, indicating no material risk as of
July 31, 2018
, with respect to potential goodwill impairments. Should the value of our goodwill 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.
Changes in federal, state and local, or foreign tax laws, changing interpretations of existing tax laws, or adverse determinations by tax authorities could increase our tax burden or otherwise adversely affect our financial condition or results of operations.
We are subject to taxation at the federal, state, provincial, and local levels in the United States, the United Kingdom, and various other countries and jurisdictions in which we operate, including income taxes, sales taxes, value-added (VAT) taxes, and similar taxes and assessments. The laws and regulations related to tax matters are extremely complex and subject to varying interpretations. Although we believe our tax positions are reasonable, we are subject to audit by the Internal Revenue Service in the United States, HM Revenue and Customs in the United Kingdom, state tax authorities in the states in which we operate, and other similar tax authorities in international jurisdictions. As previously disclosed, we have been subject to challenge by the Georgia Department of Revenue with respect to sales taxes and could face similar audits or challenges from applicable federal, state, or foreign tax authorities in the future. While we believe we comply with all applicable tax laws, rules, and regulations in the relevant jurisdictions, tax authorities may elect to audit us and determine that we owe additional taxes, which could result in a significant increase in our liabilities for taxes, interest, and penalties in excess of our accrued liabilities.
New tax legislative initiatives may be proposed from time to time, such as proposals for comprehensive tax reform in the United States, which may impact our effective tax rate and which could adversely affect our tax positions or tax liabilities. Our future effective tax rate could be adversely affected by, among other things, changes in the composition of earnings in jurisdictions with differing tax rates, changes in statutory rates and other legislative changes, changes in interpretations of existing tax laws, or changes in determinations regarding the jurisdictions in which we are subject to tax. From time to time, U.S. federal, state and local, and foreign governments make substantive changes to tax rules and their application, which could result in materially higher taxes than would be incurred under existing tax law and which could adversely affect our financial condition or results of operations.
The Tax Cuts and Jobs Act (“Tax Reform” or “Tax Act”) was enacted on December 22, 2017. The Tax Act significantly revamped U.S. taxation of corporations, including a reduction of the federal income tax rate from 35% to 21%, a repeal of the exceptions to the $1.0 million deduction limitation for performance-based compensation to covered employees, and a new tax regime for foreign earnings. The repeal of the $1.0 million deduction limit for performance-based compensation, the new U.S. taxes on accumulated and future foreign earnings and other adverse changes resulting from the Tax Act, or a change in the mix of domestic and foreign earnings, might offset the benefit from the reduced tax rate, and our future effective tax rates and/or cash taxes may increase, even significantly, or not decrease much, compared to recent or historical trends. Many of the provisions of the Tax Act are highly complex and may be subject to further interpretive guidance from the IRS or others. Some of the provisions of the Tax Act may be changed by a future Congress or challenged by the World Trade Organization (“WTO”). Although we cannot predict the nature or outcome of such future interpretive guidance, or actions by a future Congress or WTO, they could adversely impact our consolidated results of operations and financial position. Income tax expense on accumulated foreign earnings recorded as a result of the Tax Act is a provisional amount and reflects our current best estimate, which may be adjusted over the course of the next year and could adversely affect 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, Brazilian real, European Union euro, U.A.E. dirham, Omani rial, and Bahraini dinar could adversely affect our consolidated results of operations and financial position.
On June 23, 2016, the U.K. held a referendum in which voters approved an exit from the European Union, commonly referred to as “Brexit.” In February 2017, the British Parliament voted in favor of allowing the British government to begin negotiating the terms of the U.K.’s withdrawal from the European Union and discussions with the European Union began in March 2017. Adverse consequences concerning Brexit or the European Union could include deterioration in global economic conditions, instability in global financial markets, political uncertainty, volatility in currency exchange rates, or adverse changes in the cross-border agreements currently in place, any of which could have an adverse impact on our financial results in the future.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
Our corporate headquarters are located in Dallas, Texas. This facility consists of approximately 96,000 square feet of office space under a lease which expires in fiscal 2024. In the U.S., we own or lease facilities in every state except North Dakota, South Dakota, and Vermont. In Canada, we own or lease facilities in the provinces of Ontario, Quebec, Alberta, Nova Scotia and New Brunswick. In the U.K., we own or lease 18 operating facilities. In Brazil, we own or lease eight operating facilities. In the Republic of Ireland, we own one operating facility. In the U.A.E., Oman, and Bahrain, we lease one operating facility in each country. In Finland, we own or lease four operating facilities. In Germany we operate an online platform and own two operating facilities. In Spain, we operate an online platform, own one operating facility and lease three additional storage locations. We believe that our existing facilities are adequate to meet current requirements and that suitable additional or substitute space will be available as needed to accommodate any expansion of operations and additional offices on commercially acceptable terms.
Item 3.
Legal Proceedings
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, contract disputes, and handling or disposal of vehicles. The material pending legal proceedings to which we are party, or of which our property is subject, include the following matters.
On November 1, 2013, we filed suit against Sparta Consulting, Inc. (now known as KPIT). The suit arose 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 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. On June 8, 2016, we amended our complaint to include claims that KPIT stole certain intellectual property owned by us and acted negligently in its provision of services. The case was tried in April and May 2018. On
May 22, 2018
, the jury returned a verdict for us on our fraud claim against KPIT for
$4.7 million
, and on our professional negligence claim against KPIT for
$16.3 million
, and the jury found for KPIT on its implied covenant counterclaim against us for
$4.9 million
.
In a
September 10, 2018
, post-trial order, the Court reduced our professional negligence award to
$9.1 million
, found KPIT liable under California’s Unfair Competition Law (UCL) for fraudulent and unfair conduct and held that we could recover restitution of
$6.3 million
if the we choose to forego our fraud and professional negligence damages, found that we were not entitled to restitution on our unjust enrichment claim, and awarded KPIT prejudgment interest on its implied covenant counterclaim starting from December 26, 2016. Further post-trial proceedings are expected in this lawsuit, including the determination of our right to prejudgment interest on our successful claims.
We have provided 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 our 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. We believe that any ultimate liability will not have a material effect on our 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. We maintain insurance which may or may not provide coverage for claims made against us. There is no assurance that there will be insurance coverage available when and if needed. Additionally, the insurance that we carry requires that we 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 our operations in Georgia for the period from January 1, 2007 through June 30, 2011. As a result of their initial audit, the DOR issued a notice of proposed assessment for uncollected sales taxes in which it asserted that we failed to collect and remit sales taxes totaling
$73.8 million
, including penalties and interest.
Subsequently, we engaged a Georgia law firm and outside tax advisors to review the conduct of our business operations in Georgia, the notice of proposed assessment, and the DOR’s policy position. In particular, our outside legal counsel provided us with 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. Following our receipt of the notice of proposed assessment, we and our counsel engaged in active discussions with the DOR to resolve the matter.
During an extended remand period, it was determined that grounds exist for a substantial reduction in the Official Assessment, on the basis that (i) the transactions and resulting tax at issue were erroneously double-counted by the DOR in the audit sales transaction work papers on which the Assessment was based; and (ii) we were ultimately able to provide documentation showing that most of the remaining transactions were sales at wholesale, therefore qualifying for the sale for resale exemption from Georgia Sales and Use Tax. After these reductions, the remaining amount of principal Georgia Sales and Use Tax still in dispute between the parties is
$2.6 million
, plus applicable interest. A Consent Order to this effect was entered by the Georgia Tax Tribunal on
May 22, 2017
. Since the date of entry of the Consent Order, the DOR filed a Motion for Summary Judgment related to the remaining
$2.6 million
in dispute. We opposed the DOR’s motion and are awaiting a decision by the Court regarding the DOR’s motion.
Based on the opinion from our outside law firm, advice from our outside tax advisors, and our best estimate of a probable outcome, we believe that we have adequately provided for the payment of any assessment in our consolidated financial statements. We believe we have strong defenses to the remaining tax liability set forth above and intend to continue to defend this matter. 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 DOR. We understand that 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.
Item 4.
Mine Safety Disclosure
Not applicable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31,
2018
NOTE
1 — Summary of Significant Accounting Policies
Basis of Presentation and Description of Business
Copart, Inc. was incorporated under the laws of the State of California in 1982. In January 2012, the Company changed the state in which it is incorporated (the “Reincorporation”), and is now incorporated under the laws of the State of Delaware. All references to “we,” “us,” “our,” or “the Company” herein refer to the California corporation prior to the date of the Reincorporation, and to the Delaware corporation on and after the date of the Reincorporation.
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. The Company also had a
59.5%
voting interest in a company, which was acquired as part of the Cycle Express, LLC acquisition (“majority-owned subsidiary”), which provided various repossession services for the powersports auction industry. Noncontrolling interest consisted of a
40.5%
outside voting interest in the majority-owned subsidiary. Net income or loss of the majority-owned subsidiary was allocated to the members’ interests in accordance with the operating agreement. During the year ended
July 31, 2018
, the Company sold the majority-owned subsidiary and disposed of its related goodwill. The proceeds from the sale of the majority-owned subsidiary were
$1.8 million
resulting in a realized gain of
$0.9 million
recorded in other income. Significant intercompany transactions and balances have been eliminated in consolidation.
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, finance companies, charities, fleet operators, dealers and vehicles sourced directly from individual owners
. 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 (U.S.), Canada, Brazil, the Republic of Ireland, Germany, Finland, the United Arab Emirates (U.A.E.), Oman, Bahrain, and Spain, 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.) and Germany, the Company operates
both as an agent and on a principal basis, in some cases purchasing salvage vehicles outright and reselling the vehicles
for its own account. In Germany and Spain, the Company also derives
revenue from listing vehicles on behalf of insurance companies and insurance experts to determine the vehicle’s residual value and/or to facilitate a sale for the insured.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (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 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 the 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 legally 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 reports sales taxes on relevant transactions on a net basis in the Company’s consolidated results of operations, and therefore does not include sales taxes in revenues or costs.
The Company also charges members an annual registration fee for the right to participate in its vehicle sales program, which is recognized ratably over the term of the arrangement, and relist and late-payment fees, which are recognized upon receipt of payment by the member. No provision for returns has been established, as all sales are final with no right of return, although the Company provides for bad debt expense in the case of non-performance by its members or sellers.
The Company allocates arrangement consideration based upon 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 its 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.
In August 2017, Hurricane Harvey hit the Texas Gulf Coast. As a result of the extensive flooding that it caused, the Company expended
$68.6 million
in additional costs for the year ended
July 31, 2018
, for (i) temporary storage facilities, (ii) premiums for subhaulers, (iii) labor costs incurred for overtime, (iv) travel and lodging due to the reassignment of employees to the affected region, and (v) equipment lease expenses to handle the increased volume. These costs, which are characterized as "abnormal" under ASC 330, Inventory, were expensed as incurred and not included in vehicle pooling costs. As of
July 31, 2018
, substantially all of the incremental salvage vehicles received as a result of Hurricane Harvey have been sold.
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, British pound, Brazilian real, European Union euro, U.A.E. dirham, Omani rial, Bahraini dinar, and Indian rupee 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, 2016
|
|
$
|
(109,194
|
)
|
Gain on foreign currency translation
|
|
8,518
|
|
Cumulative loss on foreign currency translation as of July 31, 2017
|
|
$
|
(100,676
|
)
|
Loss on foreign currency translation
|
|
(7,252
|
)
|
Cumulative loss on foreign currency translation as of July 31, 2018
|
|
$
|
(107,928
|
)
|
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.
|
|
|
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, accrued liabilities and Revolving Loan Facility approximated their fair values as of
July 31, 2018
and
2017
, 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
8 — Long-Term Debt
, Note
10 – Fair Value Measures
, and Note
10 – Fair Value Measures
.
Cost of Vehicle Sales
Cost of vehicle sales includes the purchase price of vehicles sold for the Company’s own account.
Yard Operations
Yard operations consists primarily of operating personnel (which includes yard management, clerical and yard employees), rent, contract vehicle towing, insurance, fuel and equipment maintenance and repair. The Company recognizes the costs of pre-sale services, including towing, title processing, and preparation and storage within yard operation expenses at the time the related services are provided.
General and Administrative Expenses
General and administrative expenses consist primarily of executive, accounting and data processing, sales personnel, professional services, system maintenance and enhancements and marketing expenses.
Advertising
All advertising costs are expensed as incurred and are included in general and administrative expenses on the consolidated statements of income. Advertising expenses were
$5.9 million
,
$5.6 million
, and
$6.8 million
for the years ended
July 31, 2018
,
2017
and
2016
, respectively.
Other (Expense) Income
Other (expense) income consists primarily of interest expense, interest income, gains and losses from the disposal of fixed assets, rental income, earnings from unconsolidated affiliates, and currency related gains and losses.
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. Excess tax benefits and deficiencies related to exercises of stock options are recognized as expense or benefit in the income statement as discrete items in the reporting period in which they occur.
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 position 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.
Net Income Per Share
Basic net income per share amounts were computed by dividing consolidated net income by the weighted average number of common shares outstanding during the period. Diluted net income per share amounts were computed by dividing consolidated net income by the weighted average number of common shares outstanding plus dilutive potential common shares calculated for stock options outstanding during the period using the treasury stock method.
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, domestic certificates of deposit, 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.
Marketable Securities
Marketable securities consist of marketable equity securities and are classified as available-for-sale and stated at fair value. The cost basis of the marketable securities is based on the specific identification method. Unrealized gains or losses relating to available-for-sale securities are recorded in accumulated other comprehensive income, net of income taxes. Reclassification adjustments out of accumulated other comprehensive income resulting from realized gains or losses from the sale of available-for-sale securities are included in other income. During the year ended July 31, 2016, the Company sold all of its marketable securities. The cost basis of the marketable securities was
$21.1 million
and proceeds from the sale of the marketable securities were
$21.5 million
resulting in a realized gain of
$0.4 million
recorded in other income.
Inventory
Inventories of purchased vehicles are stated at the lower of cost or estimated realizable value. Cost includes the Company’s cost of acquiring ownership of the vehicle. The cost of vehicles sold is charged to cost of vehicle sales as sold on a specific identification basis.
Accounts Receivable
Accounts receivable, which consist primarily of advance charges due from insurance companies and the gross sales price of the vehicle due from members, are recorded when billed, advanced or accrued and represent claims against third parties that will be settled in cash.
Concentration of Credit Risk
Financial instruments, which subject the Company to potential credit risk, consist of its cash and cash equivalents, short-term investments and accounts receivable. The Company adheres to its investment policy when placing investments. The investment policy has established guidelines to limit the Company’s exposure to credit risk by placing investments with high credit quality financial institutions, diversifying its investment portfolio, limiting investments in any one issuer or pooled fund and placing investments with maturities that maintain safety and liquidity. The Company places its cash and cash equivalents with high credit quality financial institutions. Deposits with these financial institutions may exceed the amount of insurance provided; however, these deposits typically are redeemable upon demand and, therefore, the Company believes that the financial risks associated with these financial instruments are minimal.
The Company generally does not require collateral on its accounts receivable. The Company estimates its allowances for doubtful accounts based on historical collection trends, the age of outstanding receivables and existing economic conditions. If events or changes in circumstances indicate that specific receivable balances may be impaired, further consideration is given to the collectability of those balances and the allowance is adjusted accordingly. Past-due account balances are written off when the Company’s internal collection efforts have been unsuccessful in collecting the amounts due. The Company does not have off-balance sheet credit exposure related to its customers and to date, the Company has not experienced significant credit-related losses.
No single customer accounted for more than 10
% of total revenues for the years ended
July 31, 2018
,
2017
and
2016
. As of
July 31, 2018
and 2017,
no customer accounted for more than 10%
of the Company’s accounts receivable.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation and amortization. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful lives of the respective improvements, which is
between seven and ten years
. Significant improvements which substantially extend the useful lives of assets are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives:
three to seven years
for internally developed or purchased software;
three to twenty years
for transportation and other equipment;
three to five years
for office furniture and equipment; and
7 to 40 years or the lease term, whichever is shorter
, for buildings and improvements. Amortization of equipment under capital leases is included in depreciation expense.
In the fourth quarter of 2018, the Company modified its estimate of the useful life of its land improvements to better reflect the estimated periods during which these assets will remain in service. The change in estimate was accounted for prospectively as of the first day of the fourth quarter, and this change will not have a material effect on future periods.
Goodwill
In accordance with ASC 350-30-35,
Intangibles—Goodwill and Other
, goodwill is not amortized but is tested for potential impairment, at a minimum on an annual basis, or when indications of potential impairment exist. The Company assesses goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, referred to as a reporting unit. The Company has identified two reporting units, which are consistent with its two operating and reportable segments, U.S. and International. The Company has historically evaluated goodwill for impairment annually as of the end of the fourth quarter, or when an indicator of impairment exists. During the year ended July 31, 2017, the Company voluntarily changed the date of its annual goodwill impairment assessment for its reporting units from the end of fiscal fourth quarter, July 31, to the beginning of fiscal fourth quarter, May 1. This voluntary change in the annual goodwill assessment date was a change in accounting principle, which the Company concluded was preferable as it more closely aligns the timing of the annual goodwill impairment assessment date with the most current information from the Company’s planning and forecasting process and also provides management with additional time to complete the annual assessment in advance of the Company’s year-end reporting.
The Company’s annual goodwill impairment analysis, which was performed qualitatively during the fourth quarter of fiscal
2018
and
2017
, did not result in an impairment charge. This qualitative analysis, which is referred to as step zero under ASC 350, considered all relevant factors specific to the
reporting units, including macroeconomic conditions; industry and market considerations; overall financial performance and relevant entity-specific events.
Segments and Other Geographic Reporting
The Company’s U.S. and International regions are considered
two
separate operating segments and are disclosed as
two
reportable segments. The segments represent geographic areas and reflect how the chief operating decision maker allocates resources and measures results, including total revenues, operating income and income before income taxes. The segments continue to share similar business models, services and economic characteristics.
Capitalized Software Costs
The Company capitalizes system development costs and website development costs related to the 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
July 31, 2018
and
2017
was
$30.7 million
and
$38.5 million
, respectively. Accumulated amortization expense related to software as of
July 31, 2018
and
2017
totaled
$16.0 million
and
$25.7 million
, respectively. During the year ended July 31, 2018 and 2016, the Company retired fully amortized capitalized software of
$15.5 million
and
$29.8 million
, respectively, which were no longer being utilized. Additionally, during the year ended July 31, 2017, the Company recognized a
$19.4 million
charge primarily related to fully impairing costs previously capitalized in connection with the development of business operating software.
Stock-Based Payment Compensation
The Company accounts for stock-based awards to employees and non-employees using the fair value method as required by ASC 718,
Compensation—Stock Compensation
(ASC 718), which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees, consultants and directors based on estimated fair value. ASC 718 requires companies to estimate the fair value of stock-based payment awards on the measurement date using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized in expense over the requisite service periods. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Option valuation models require the input of subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options and because changes in the input assumptions can materially affect their fair value estimate, it is the Company’s opinion that the existing models do not necessarily provide a reliable single measure of the fair value of the employee stock options.
The fair value of each option was estimated on the measurement date using the
Black-Scholes Merton (BSM) option-pricing model
utilizing the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Expected life (in years)
|
|
5.3 – 6.9
|
|
|
5.5 – 7.4
|
|
|
5.3 – 7.2
|
|
Risk-free interest rate
|
|
1.88 – 2.62
|
|
|
1.20 – 2.07
|
|
|
1.16 – 2.06
|
|
Estimated volatility
|
|
20 – 21
|
|
|
20 – 23
|
|
|
21 – 26
|
|
Expected dividends
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Weighted average fair value at measurement date
|
|
$
|
8.88
|
|
|
$
|
7.05
|
|
|
$
|
5.04
|
|
Expected life—The Company’s expected life represents the period that the Company’s stock-based payment awards are expected to be outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based payment awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based payment awards.
Estimated volatility—The Company uses the trading history of its common stock in determining an estimated volatility factor when using the BSM option-pricing model to determine the fair value of options granted.
Expected dividend—The Company has not declared dividends. Therefore, the Company uses a zero value for the expected dividend value factor when using the BSM option-pricing model to determine the fair value of options granted.
Risk-free interest rate—The Company bases the risk-free interest rate used in the BSM option-pricing model on the implied yield currently available on U.S. Treasury zero-coupon issues with the same or substantially equivalent expected life.
Estimated forfeitures—When estimating forfeitures, the Company considers voluntary and involuntary termination behavior as well as analysis of actual option forfeitures.
During the year ended July 31, 2016, the Company adopted ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which impacted the accounting for share-based payments, including income tax consequences, classification of awards and the classification on the consolidated statements of cash flows. As a result of the adoption, the Company recognized excess tax benefits of
$14.7 million
as a reduction to tax expense in the consolidated statements of income, as though ASU 2016-09 had been in effect since the beginning of fiscal 2016, instead of reflected in stockholders’ equity.
Net cash proceeds from the exercise of stock options were
$44.5 million
,
$31.2 million
and
$13.2 million
for the years ended
July 31, 2018
,
2017
and
2016
, respectively. In accordance with ASC 718, the Company presents excess tax benefits from disqualifying dispositions of the exercise of incentive stock options, vested prior to August 1, 2005, if any, as financing cash flows rather than operating cash flows.
Comprehensive Income
Comprehensive income includes all changes in stockholders’ equity during a period from non-stockholder sources. For the years ended
July 31, 2018
,
2017
and
2016
, accumulated other comprehensive income (loss) was the effect of foreign currency translation adjustments and the effective portion of the interest rate swaps’ change in fair value. Deferred taxes are not provided on cumulative translation adjustments where the Company expects earnings of a foreign subsidiary to be indefinitely reinvested.
Acquisitions
The Company recognizes and measures
identifiable assets acquired and liabilities assumed in acquired entities in accordance with ASC 805,
Business Combinations
. The allocation of the purchase consideration for acquisitions can require extensive use of accounting estimates and judgments to allocate the purchase consideration to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values. The excess of the fair value of purchase consideration over the values of the identifiable assets and liabilities is recorded as goodwill. Critical estimates in valuing certain identifiable assets include but are not limited to expected long-term revenues; future expected operating expenses; cost of capital; appropriate attrition; and discount rates.
Recently Issued Accounting Pronouncements
Adopted
In November 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes
, which requires companies to classify all deferred tax assets and liabilities as non-current on the balance sheet, rather than separating deferred taxes into current and non-current amounts. This ASU is effective for annual and interim periods within those annual reporting periods beginning after December 15, 2016 and can be adopted prospectively or retrospectively; however, early adoption is permitted. The Company’s adoption of ASU 2015-17 on a prospective basis did not have a material impact on the Company’s consolidated results of operations and financial position.
20
In May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
, which amends the scope of modification accounting for stock-based payment arrangements and provides guidance on the types of changes to the terms or conditions of stock-based payment awards to which an entity would be required to apply modification accounting under ASC 718. For all entities, this ASU is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The Company’s adoption of ASU 2017-09 did not have a material impact on the Company’s consolidated results of operations and financial position.
Pending
In February 2018, the FASB issued ASU 2018-02,
Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
. The current standard, ASC Topic 740 -
Income Taxes
, requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. This includes the tax effects of items in accumulated other comprehensive income ("AOCI") that were originally recognized in other comprehensive income, subsequently creating stranded tax effects. ASU 2018-02 allows a reclassification from AOCI to retained earnings for stranded tax effects specifically resulting from the U.S. federal government's recently enacted tax bill, the Tax Cuts and Jobs Act. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those periods. Early adoption is permitted. The adoption of ASU 2018-02 will result in a reclassification from AOCI to retained earnings and will have no impact on the Company’s consolidated results of operations, financial position or cash flows.
In January 2017, the FASB issued ASU 2017-04,
Intangibles-Goodwill and Other (Topic 350).
ASU 2017-04 amends the requirement that entities compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, entities should perform their annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment if the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 is effective for annual periods beginning after December 15, 2019. The Company’s adoption of ASU 2017-04 will not have a material impact on the Company’s consolidated results of operations and financial position.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory.
ASU 2016-16
requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset, other than inventory. This ASU is effective for annual and interim periods within those annual periods beginning after December 15, 2017, and is required to be adopted using a modified retrospective approach; however early adoption is permitted. The Company is continuing its assessment of the impact of ASU 2016-16 may have on the Company’s consolidated results of operations and financial position.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230)
, which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. The guidance is required to be applied on a retrospective basis. The Company’s adoption of ASU 2016-15 will not have a material impact on the Company’s consolidated results of operations and financial position.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, that supersedes all existing guidance on accounting for leases in ASC Topic 840. ASU 2016-02 is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. ASU 2016-02 will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income. ASU 2016-02 is effective for annual and interim periods within those annual reporting periods beginning after December 15, 2018 and adoption is to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical expedients; however early adoption is permitted. Based on a preliminary assessment, the Company expects that most of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in a significant increase in the assets and liabilities on the Company’s consolidated balance sheets. The Company is continuing its assessment, which may identify additional impacts ASU 2016-02 may have on the Company’s consolidated results of operations, financial position, and related disclosures.
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 within those annual reporting periods beginning after December 15, 2017 and will be effective for the Company beginning with the first quarter of fiscal year 2019. ASU 2014-09 allows adoption with either retrospective application to each period presented, or modified retrospective application, with the cumulative effect recognized as of the date of initial application. The Company will use the modified retrospective application with the cumulative effect as its transition method.
Upon adoption, service revenue (revenue from buyers and sellers) and vehicle sales revenue will generally be recognized at the date the vehicles are sold at auction. This timing of revenue recognition under ASU 2014-09 is consistent with the Company’s current policy under ASC 605 for buyer and vehicle sales revenue. However, the adoption represents a change in the timing of revenue recognition for certain seller revenues, such as inbound tow and titling fees, which are currently recognized under ASC 605 when the services are performed. Related costs to prepare the vehicles for auction, including inbound tow and titling, will be deferred and recognized at the time of revenue recognition. The Company has evaluated the impact the adoption will have on the consolidated financial statements, and is finalizing the calculation of its cumulative effect adjustment. This change will result in a decrease to beginning retained earnings as of August 1, 2018, within a range of
$10.0 million
to
$15.0 million
as a result of the initial application of the standard and will not have a material impact to earnings.
NOTE
2 — Acquisitions
Fiscal 2018 Transactions
During the year ended July 31, 2018, the Company acquired
100%
of the voting stock of Autovahinkokeskus Oy (AVK), a salvage auto auction company based in Finland. AVK currently operates facilities in the municipalities of Espoo; Pirkkala; Oulu; and Turku, Finland. The aggregate purchase price of this acquisition totaled
$8.9 million
, net of cash acquired.
The purchase price allocation for AVK is not final for property and equipment, intangible assets and deferred taxes on acquired intangible assets, and other liabilities, pending the final valuation by the Company. The Company believes any potential changes to its preliminary purchase price allocations will not have a material impact on the Company’s consolidated financial position and results of operations.
Fiscal 2017 Transactions
During the year ended July 31, 2017, the Company acquired
100%
of the voting stock of Cycle Express, LLC, which conducts business primarily as National Powersport Auctions (NPA), a leading non-salvage auction platform for motorcycles, snowmobiles, watercraft and other powersports vehicles. NPA currently operates facilities in Atlanta, Georgia; Cincinnati, Ohio; Dallas, Texas; Philadelphia, Pennsylvania; and San Diego, California. NPA predominantly auctions pre-owned powersports vehicles on behalf of financing companies, dealers and manufacturers. The Company also acquired the assets of an excavation company, which engages in earthwork, soil stabilization, equipment hauling, and erosion control commercial contractor services. The aggregate purchase price of these acquisitions totaled
$160.7 million
, net of cash acquired.
During the year ended July 31, 2018, the purchase price allocations for NPA and the acquisition of the assets of an excavation company were finalized. As a result, from the preliminary purchase price allocation as of July 31, 2017, goodwill decreased
$1.3 million
, primarily related to a
$1.2 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.
The following table summarizes the purchase price allocation based on the estimated fair values of the assets acquired and liabilities assumed for these acquisitions (in thousands):
|
|
|
|
|
|
Allocation of the acquisition:
|
|
|
|
Accounts receivable and prepaid expenses
|
|
$
|
6,583
|
|
Vehicle pooling costs
|
|
571
|
|
Property and equipment
|
|
10,903
|
|
Inventory
|
|
1,067
|
|
Intangible assets
|
|
72,100
|
|
Goodwill
|
|
77,990
|
|
Liabilities assumed
|
|
(8,025
|
)
|
Noncontrolling interest
|
|
(500
|
)
|
Fair value of net assets and liabilities acquired
|
|
$
|
160,689
|
|
The NPA acquisition was undertaken because of its strategic fit, and the acquisition of certain excavation assets was undertaken to enhance the Company’s land development capabilities. These acquisitions 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 comparable multiples of earnings, cash flow and other factors at which similar businesses have been purchased by other acquirers; the complementary tactical development capability and cost control over the development of the Company’s yard locations; and the complementary strategic fit and resulting synergies brought to existing operations. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and is not amortized for financial reporting purposes.
The Company obtained a third party independent valuation to assist in the determination of the fair values of certain assets acquired. The valuation utilized the income approach (specifically the Multi-Period Excess Earnings Method (MPEEM) model and the Relief from Royalty model) to estimate the fair value of acquired supplier relationships and trade names, respectively. The valuation utilized the cost approach to estimate the fair value of acquired software. The valuation of these assets was performed using Level III inputs, as the calculated fair values are based on valuation models that utilize unobservable inputs that are significant to the overall fair value measurement. The unobservable inputs reflect the Company’s best estimate of what hypothetical market participants would use to determine the value of acquired assets based on the best information available in the circumstances. Intangible assets acquired include customer and supplier relationships, trade names, and software with a useful life ranging from
three
to
eleven years
. See
Note -
6 — Intangibles, Net
.
The purchase price allocation for NPA and the assets of an excavation company are not final for property and equipment, income taxes and intangible assets acquired, pending the final valuation by the Company. The Company believes any potential changes to its preliminary purchase price allocations will not have a material impact on the Company’s consolidated financial position and results of operations.
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 financial position and results of operations since the acquisition dates. The acquisition-related expenses incurred during the year ended July 31, 2017, were
$1.9 million
and were included in general and administrative expenses in the Company’s consolidated financial position and results of operations.
Fiscal 2016 Transactions
The Company made
no
acquisitions during the year ended July 31, 2016.
NOTE
3 — Accounts Receivable, Net
Accounts receivable, net consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
(In thousands)
|
|
2018
|
|
2017
|
Advance charges receivable
|
|
$
|
230,092
|
|
|
$
|
204,097
|
|
Trade accounts receivable
|
|
125,255
|
|
|
110,189
|
|
Other receivables
|
|
1,698
|
|
|
1,871
|
|
|
|
357,045
|
|
|
316,157
|
|
Less: Allowance for doubtful accounts
|
|
(5,444
|
)
|
|
(4,311
|
)
|
Accounts receivable, net
|
|
$
|
351,601
|
|
|
$
|
311,846
|
|
Advance charges receivable represents unbilled amounts paid to third parties on behalf of insurance companies for which the Company will be reimbursed when the vehicle is sold. Trade accounts receivable includes fees and gross auction proceeds to be collected from insurance companies and members.
The movements in the allowance for doubtful accounts were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
(In thousands)
|
|
2018
|
|
2017
|
|
2016
|
Balance at beginning of year
|
|
$
|
4,311
|
|
|
$
|
4,120
|
|
|
$
|
2,988
|
|
Charged to costs and expenses
|
|
4,255
|
|
|
2,928
|
|
|
3,646
|
|
Deductions to bad debt
|
|
(3,122
|
)
|
|
(2,737
|
)
|
|
(2,514
|
)
|
Balance at end of year
|
|
$
|
5,444
|
|
|
$
|
4,311
|
|
|
$
|
4,120
|
|
NOTE
4 — Property and Equipment, Net
Property and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
(In thousands)
|
|
2018
|
|
2017
|
Transportation and other equipment
|
|
$
|
190,900
|
|
|
$
|
120,420
|
|
Office furniture and equipment
|
|
58,477
|
|
|
51,778
|
|
Software
|
|
30,680
|
|
|
38,501
|
|
Land
|
|
762,524
|
|
|
629,826
|
|
Buildings and leasehold improvements
|
|
610,964
|
|
|
555,525
|
|
|
|
1,653,545
|
|
|
1,396,050
|
|
Less: Accumulated depreciation and amortization
|
|
(490,120
|
)
|
|
(451,994
|
)
|
Property and equipment, net
|
|
$
|
1,163,425
|
|
|
$
|
944,056
|
|
Depreciation expense on property and equipment was
$58.8 million
,
$39.6 million
and
$34.2 million
for the years ended
July 31, 2018
,
2017
and
2016
, respectively. Amortization expense of software was
$5.7 million
,
$10.6 million
and
$8.5 million
for the years ended
July 31, 2018
,
2017
and
2016
, respectively. During the year ended July 31, 2018 and 2016, the Company retired fully amortized capitalized software of
$15.5 million
and
$29.8 million
, respectively, which were no longer being utilized. Additionally, during the year ended July 31, 2017, the Company recognized a
$19.4 million
charge primarily related to fully impairing costs previously capitalized in connection with the development of business operating software.
NOTE
5 — Goodwill
The change in the carrying amount of goodwill was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
(In thousands)
|
|
2018
|
|
2017
|
Beginning balance
|
|
$
|
340,243
|
|
|
$
|
260,198
|
|
Goodwill recorded during the period
|
|
(1,839
|
)
|
|
79,256
|
|
Effect of foreign currency exchange rates
|
|
(1,169
|
)
|
|
789
|
|
Ending balance
|
|
$
|
337,235
|
|
|
$
|
340,243
|
|
In accordance with the guidance in ASC 350, goodwill is tested for impairment on an annual basis or upon the occurrence of circumstances that indicate that goodwill may be impaired. The Company’s annual impairment tests were performed during the fourth quarter of fiscal
2018
and
2017
and goodwill was not impaired. As of
July 31, 2018
and
2017
, the cumulative amount of goodwill impairment losses recognized totaled
$21.8 million
.
NOTE
6 — Intangibles, Net
The following table sets forth amortizable intangible assets by major asset class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Net
Book Value
|
|
Weighted Average
Remaining Useful
Life (in years)
|
|
|
July 31,
|
|
July 31,
|
|
July 31,
|
|
July 31,
|
(In thousands, except remaining useful life)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Amortized intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covenants not to compete
|
|
$
|
1,666
|
|
|
$
|
1,702
|
|
|
$
|
(1,656
|
)
|
|
$
|
(1,389
|
)
|
|
$
|
10
|
|
|
$
|
313
|
|
|
0
|
|
1
|
Supply contracts and customer relationships
|
|
71,787
|
|
|
75,462
|
|
|
(29,601
|
)
|
|
(22,248
|
)
|
|
42,186
|
|
|
53,214
|
|
|
10
|
|
9
|
Trade names
|
|
24,173
|
|
|
23,859
|
|
|
(6,405
|
)
|
|
(4,989
|
)
|
|
17,768
|
|
|
18,870
|
|
|
1
|
|
2
|
Licenses and databases
|
|
9,291
|
|
|
5,385
|
|
|
(4,363
|
)
|
|
(1,844
|
)
|
|
4,928
|
|
|
3,541
|
|
|
2
|
|
3
|
Intangibles, net
|
|
$
|
106,917
|
|
|
$
|
106,408
|
|
|
$
|
(42,025
|
)
|
|
$
|
(30,470
|
)
|
|
$
|
64,892
|
|
|
$
|
75,938
|
|
|
|
|
|
Aggregate amortization expense on intangible assets was
$14.0 million
,
$6.8 million
and
$5.8 million
for the years ended
July 31, 2018
,
2017
and
2016
, respectively. During the year ended July 31, 2018, the Company recognized a
$1.1 million
charge primarily related to fully impairing a supply contract in the International segment. Intangible amortization expense for the next five fiscal years based upon
July 31, 2018
intangible assets is expected to be as follows:
|
|
|
|
|
|
(In thousands)
|
|
|
2019
|
|
$
|
10,455
|
|
2020
|
|
8,421
|
|
2021
|
|
5,997
|
|
2022
|
|
5,939
|
|
2023
|
|
5,868
|
|
Thereafter
|
|
28,212
|
|
Total future intangible amortization expense
|
|
$
|
64,892
|
|
NOTE
7 — Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
(In thousands)
|
|
2018
|
|
2017
|
Trade accounts payable
|
|
$
|
65,057
|
|
|
$
|
20,626
|
|
Accounts payable to sellers
|
|
68,660
|
|
|
50,534
|
|
Buyer deposits and prepayments
|
|
62,443
|
|
|
50,603
|
|
Accrued compensation and benefits
|
|
37,218
|
|
|
31,173
|
|
Accrued insurance
|
|
4,376
|
|
|
5,263
|
|
Other accrued liabilities
|
|
33,190
|
|
|
50,216
|
|
Total accounts payable and accrued expenses
|
|
$
|
270,944
|
|
|
$
|
208,415
|
|
The Company is partially self-insured for certain losses related to general liability, workers’ compensation and auto liability. Accrued insurance liability represents an estimate of the ultimate cost of claims incurred as of the balance sheet date, including an estimate for reported and unreported claims. The estimated liability is not discounted and is established based upon analysis of historical data, including the severity of the Company’s frequency of claims, actuarial estimates and is reviewed periodically by management to ensure that the liability is appropriate.
NOTE
8 — Long-Term Debt
Credit Agreement
On
December 3, 2014
, the Company entered into a Credit Agreement (as amended from time to time, the “Credit Amendment”) with Wells Fargo Bank, National Association, as administrative agent, and Bank of America, N.A., as syndication agent. The Credit Agreement provided for (a) a secured revolving loan facility in an aggregate principal amount of up to
$300.0 million
(the “Revolving Loan Facility”), and (b) a secured term loan facility in an aggregate principal amount of
$300.0 million
(the “Term Loan”), which was fully drawn at closing. The Term Loan amortized
$18.8 million
per quarter.
On
March 15, 2016
, the Company entered into a First Amendment to Credit Agreement (the “Amendment to Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent and Bank of America, N.A. The Amendment to Credit Agreement amended certain terms of the Credit Agreement, dated as of
December 3, 2014
. The Amendment to Credit Agreement provided for (a) an increase in the secured revolving credit commitments by
$50.0 million
, bringing the aggregate principal amount of the revolving credit commitments under the Credit Agreement to
$350.0 million
, (b) a new secured term loan (the “Incremental Term Loan”) in the aggregate principal amount of
$93.8 million
having a maturity date of
March 15, 2021
, and (c) an extension of the termination date of the Revolving Loan Facility and the maturity date of the Term Loan from
December 3, 2019
to
March 15, 2021
. The Amendment to Credit Agreement extended the amortization period for the Term Loan, and decreased the quarterly amortization payments for that loan to
$7.5 million
per quarter. The Amendment to Credit Agreement additionally reduced the pricing levels under the Credit Agreement to a range of
0.15%
to
0.30%
in the case of the commitment fee,
1.125%
to
2.0%
in the case of the applicable margin for LIBOR loans, and
0.125%
to
1.0%
in the case of the applicable margin for base rate loans, based on the Company’s consolidated total net leverage ratio during the preceding fiscal quarter. The Company borrowed the entire
$93.8 million
principal amount of the Incremental Term Loan concurrent with the closing of the Amendment to Credit Agreement.
On
July 21, 2016
, the Company entered into a Second Amendment to Credit Agreement (the “Second Amendment to Credit Agreement”) with Wells Fargo Bank, National Association, SunTrust Bank, and Bank of America, N.A., as administrative agent (as successor in interest to Wells Fargo Bank). The Second Amendment to Credit Agreement amends certain terms of the Credit Agreement, dated as of
December 3, 2014
as amended by the Amendment to Credit Agreement, dated as of
March 15, 2016
. The Second Amendment to Credit Agreement provides for, among other things, (a) an increase in the secured revolving credit commitments by
$500.0 million
, bringing the aggregate principal amount of the revolving credit commitments under the Credit Agreement to
$850.0 million
, (b) the repayment of existing term loans outstanding under the Credit Agreement, (c) an extension of the termination date of the revolving credit facility under the Credit Agreement from
March 15, 2021
to
July 21, 2021
, and (d) increased covenant flexibility.
Concurrent with the closing of the Second Amendment to Credit Agreement, the Company prepaid in full the outstanding
$242.5 million
principal amount of the Term Loan and Incremental Term Loan under the Credit Agreement without premium or penalty. The Second Amendment to Credit Agreement reduced the pricing levels under the Credit Agreement to a range of
0.125%
to
0.20%
in the case of the commitment fee,
1.00%
to
1.75%
in the case of the applicable margin for LIBOR loans, and
0.0%
to
0.75%
in the case of the applicable margin for base rate loans, in each case depending on the Company’s consolidated total net leverage ratio. The principal purposes of these financing transactions were to increase the size and availability under the Company’s Revolving Loan Facility and to provide additional long-term financing. The proceeds are being used for general corporate purposes, including working capital and capital expenditures, potential share repurchases, acquisitions, or other investments relating to the Company’s expansion strategies in domestic and international markets.
The Revolving Loan Facility under the Credit Agreement bears 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
0.0%
to
0.75%
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
1.00%
to
1.75%
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
July 31, 2018
on the Company’s Revolving Loan Facility was the one month LIBOR rate of
2.09%
plus an applicable margin of
1.00%
. The carrying amount of the Credit Agreement is comprised of borrowings under which interest accrues under a fluctuating interest rate structure. Accordingly, the carrying value approximates fair value at
July 31, 2018
, and was classified within Level II of the fair value hierarchy.
Amounts borrowed under the Revolving Loan Facility may be repaid and reborrowed until the maturity date of
July 21, 2021
. The Company is obligated to pay a commitment fee on the unused portion of the Revolving Loan Facility. The commitment fee rate ranges from
0.125%
to
0.20%
, 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
July 31, 2018
. The Company had
$231.0 million
of outstanding borrowings under the Revolving Loan Facility as of
July 31, 2017
.
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 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 Credit Agreement contains no restrictions on the payment of dividends and other restricted payments, as defined, as long as (1) the consolidated total net leverage ratio, as defined, both before and after giving effect to any such dividend or restricted payment on a pro forma basis, is less than
3.25
:1, in an unlimited amount, (2) if clause (1) is not available, so long as the consolidated total net leverage ratio both before and after giving effect to any such dividend on a pro forma basis is less than
3.50
:1, in an aggregate amount not to exceed the available amount, as defined, and (3) if clauses (1) and (2) are not available, in an aggregate amount not to exceed
$50.0 million
; provided, that, minimum liquidity, as defined, shall be not less than
$75.0 million
both before and after giving effect to any such dividend or restricted payment. As of
July 31, 2018
, the consolidated total net leverage ratio was
0.21
:1. Minimum liquidity as of
July 31, 2018
was
$1.1 billion
. Accordingly, the Company does not believe that the provisions of the Credit Agreement represent a significant restriction to its ability to pay dividends or to the successful future operations of the business. The Company has not paid a cash dividend since becoming a public company in 1994. The Company was in compliance with all covenants related to the Credit Agreement as of
July 31, 2018
.
Note Purchase Agreement
On
December 3, 2014
, the Company entered into a Note Purchase Agreement and sold to certain purchasers (collectively, the “Purchasers”)
$400.0 million
in aggregate principal amount of senior secured notes (the “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 are being used for general corporate purposes.
On
July 21, 2016
, the Company entered into Amendment No. 1 to Note Purchase Agreement (the “First Amendment to Note Purchase Agreement”) which amended certain terms of the Note Purchase Agreement, including providing for increased flexibility substantially consistent with the changes included in the Second Amendment to Credit Agreement, including among other things increased covenant flexibility.
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 Note Purchase Agreement contains no restrictions on the payment of dividends and other restricted payments, as defined, as long as (1) the consolidated total net leverage ratio, as defined, both before and after giving effect to any such dividend or restricted payment on a pro forma basis, is less than
3.25
:1, in an unlimited amount, (2) if clause (1) is not available, so long as the consolidated total net leverage ratio both before and after giving effect to any such dividend on a pro forma basis is less than
3.50
:1, in an aggregate amount not to exceed the available amount, as defined, and (3) if clauses (1) and (2) are not available, in an aggregate amount not to exceed
$50.0 million
; provided, that, minimum liquidity, as defined, shall be not less than
$75.0 million
both before and after giving effect to any such dividend or restricted payment. As of
July 31, 2018
, the consolidated total net leverage ratio was
0.21
:1. Minimum liquidity as of
July 31, 2018
was
$1.1 billion
. Accordingly, the Company does not believe that the provisions of the Note Purchase Agreement represent a significant restriction to its ability to pay dividends or to the successful future operations of the business. The Company has not paid a cash dividend since becoming a public company in 1994. The Company was in compliance with all covenants related to the Note Purchase Agreement as of
July 31, 2018
.
Related to the execution of the Credit Agreement, First Amendment to Credit Agreement, Second Amendment to Credit Agreement, and the Note Purchase Agreement, the Company incurred
$3.4 million
in costs, of which
$2.0 million
was capitalized as debt issuance fees and
$1.4 million
was recorded as a reduction of the long-term debt proceeds as a debt discount. During the year ended July 31, 2016, the Company recognized an expense of
$0.6 million
for prior capitalized costs into interest expense relating to the Second Amendment to Credit Agreement and payoff of the outstanding Term Loans. Both the debt issuance fees and debt discount are amortized to interest expense over the term of the respective debt instruments and are classified as reductions of the outstanding liability.
As of
July 31, 2018
, future payments on the Revolving Loan Facility and Note Purchase Agreement were as follows:
|
|
|
|
|
|
(In thousands)
|
|
July 31,
(1)
|
2019
|
|
$
|
—
|
|
2020
|
|
—
|
|
2021
|
|
—
|
|
2022
|
|
—
|
|
2023
|
|
—
|
|
Thereafter
|
|
400,000
|
|
Total future payments
|
|
$
|
400,000
|
|
|
|
(1)
|
Currently there are no outstanding balances on the Revolving Loan Facility and none are currently expected based on management’s intent of the use of the Revolving Loan Facility, which may change on a quarter by quarter basis.
|
NOTE
9 — Derivatives and Hedging
The Company had entered into
two
interest rate swaps
to exchange its variable interest rate payments commitment for fixed interest rate payments through December 2015. The swaps were designated effective cash flow hedges under ASC 815,
Derivatives and Hedging
. Each quarter, the Company measured hedge effectiveness using the “
hypothetical derivative method
” and recorded in earnings any hedge ineffectiveness with the effective portion of the change in fair value recorded in other comprehensive income or loss. The interest rate swaps expired in December 2015. The Company reclassified
$0.5 million
for the year ended July 31, 2016, out of other comprehensive income into interest expense.
The interest rate swaps were classified within Level II of the fair value hierarchy as the derivatives were valued using observable inputs. The Company determined fair value of the derivative utilizing observable market data of swap rates and basis rates. These inputs were 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.
NOTE
10 – Fair Value Measures
The following table summarizes the fair value of the Company’s financial assets and liabilities measured and recorded at fair value on a recurring basis based on inputs used to derive their fair values:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2018
|
|
July 31, 2017
|
(In thousands)
|
Fair Value Total
|
|
Significant Observable Inputs
(Level II)
|
|
Fair Value Total
|
|
Significant Observable Inputs
(Level II)
|
Assets
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
130,769
|
|
|
$
|
130,769
|
|
|
$
|
3,498
|
|
|
$
|
3,498
|
|
Total Assets
|
$
|
130,769
|
|
|
$
|
130,769
|
|
|
$
|
3,498
|
|
|
$
|
3,498
|
|
Liabilities
|
|
|
|
|
|
|
|
Long-term fixed rate debt, including current portion
|
$
|
381,230
|
|
|
$
|
381,230
|
|
|
$
|
400,908
|
|
|
$
|
400,908
|
|
Revolving loan facility
|
—
|
|
|
—
|
|
|
231,000
|
|
|
231,000
|
|
Total Liabilities
|
$
|
381,230
|
|
|
$
|
381,230
|
|
|
$
|
631,908
|
|
|
$
|
631,908
|
|
During the
year ended July 31, 2018
, no transfers were made between any levels within the fair value hierarchy. See
Note
1 — Summary of Significant Accounting Policies
,
Note
2 — Acquisitions
, Note
8 — Long-Term Debt
, and
Note
9 — Derivatives and Hedging
.
NOTE
11 — Stockholders’ Equity
General
The Company has authorized the issuance of
400 million
shares of common stock, with a par value of
$0.0001
, of which
233,898,841
shares were issued and outstanding at
July 31, 2018
. As of
July 31, 2018
and
2017
, the Company had reserved
25,621,327
and
28,878,913
shares of common stock, respectively, for the issuance of options granted under the Company’s stock option plans and
1,603,741
and
1,788,909
shares of common stock, respectively, for the issuance of shares under the Copart, Inc. Employee Stock Purchase Plan (ESPP). The Company has authorized the issuance of
five million
shares of preferred stock, with a par value of
$0.0001
,
none
of which were issued or outstanding at
July 31, 2018
or
2017
, which have the rights and preferences as the Company’s Board of Directors shall determine, from time to time.
Stock Repurchases
On
September 22, 2011
, the Company’s Board of Directors approved an
80 million
share increase in the stock repurchase program, bringing the total current authorization to
196 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 we deem appropriate and may be discontinued at any time. For fiscal
2018
and
2017
, the Company did not repurchase any shares of its common stock under the program. For fiscal
2016
, the Company repurchased
5,877,038
shares of its common stock at a weighted average price of
$20.065
per share totaling
$117.9 million
. As of
July 31, 2018
, the total number of shares repurchased under the program was
106,913,602
, and
89,086,398
shares were available for repurchase under the program.
On
December 30, 2015
, the Company completed a modified “Dutch Auction” tender offer, or tender offer, to purchase up to
14,634,146
shares of its common stock at a price not greater than
$20.50
nor less than
$19.00
per share. In connection with the tender offer, the Company accepted for payment an aggregate of
16,666,666
shares of its common stock at a purchase price of
$19.50
per share for a total value of
$325.0 million
. The Company’s directors and executive officers did not participate in the tender offers. The shares purchased as a result of the tender offers were not part of the Company’s stock repurchase program.
During fiscal
2018
,
2017
and
2016
, certain executive officers, members of the Company’s Board of Directors and other employees 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 statutory tax withholding requirements. The Company remitted
$134.6 million
and
$15.0 million
for the years ended July 31,
2017
and
2016
, respectively, to the proper taxing authorities in satisfaction of the employees’ statutory withholding requirements.
The exercised stock options, utilizing a cashless exercise, are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Options Exercised
|
|
Weighted Average Exercise Price
|
|
Shares Net Settled for Exercise
|
|
Shares Withheld for Taxes
(1)
|
|
Net Shares to Employees
|
|
Weighted Average Share Price for Withholding
|
|
Employee Stock Based Tax Withholding (in 000s)
|
FY 2016—Q4
|
|
2,260,000
|
|
|
$
|
9.32
|
|
|
821,296
|
|
|
586,304
|
|
|
852,400
|
|
|
$
|
25.65
|
|
|
$
|
15,039
|
|
FY 2017—Q1
|
|
18,000,000
|
|
|
7.70
|
|
|
5,408,972
|
|
|
5,255,322
|
|
|
7,335,706
|
|
|
25.62
|
|
|
134,615
|
|
FY 2018—Q2
|
|
80,000
|
|
|
6.54
|
|
|
11,996
|
|
|
—
|
|
|
68,004
|
|
|
43.60
|
|
|
—
|
|
|
|
(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.
|
Employee Stock Purchase Plan
The ESPP provides for the purchase of up to an aggregate of
10 million
shares of common stock of the Company by employees pursuant to the terms of the ESPP. The Company’s ESPP was adopted by the Board of Directors and approved by the stockholders in 1994. The ESPP was amended and restated in 2003 and again approved by the stockholders. In 2014, a new ESPP was approved by the Board of Directors and approved by the stockholders. Under the ESPP, employees of the Company who elect to participate have the right to purchase common stock at a
15%
discount from the lower of the market value of the common stock at the beginning or the end of each
six
month offering period. The ESPP permits an enrolled employee to make contributions to purchase shares of common stock by having withheld from their salary an amount
up to 10%
of their compensation (which amount may be increased from time to time by the Company but
may not exceed 15
% of compensation). No employee may purchase more than
$25,000
worth of common stock (calculated at the time the purchase right is granted) in
any calendar year. The Compensation Committee of the Board of Directors administers the ESPP. The number of shares of common stock issued pursuant to the ESPP during the years ended
July 31, 2018
,
2017
and
2016
was
185,168
;
190,713
; and
216,264
; respectively. As of
July 31, 2018
, there were
8,476,333
shares of common stock issued pursuant to the ESPP and
1,603,741
shares remain available for purchase under the ESPP.
Stock Options
In December 2007, the Company adopted the Copart, Inc. 2007 Equity Incentive Plan (Plan), presently covering an aggregate of
32.0 million
shares of the Company’s common stock. The Plan provides for the grant of incentive stock options, restricted stock, restricted stock units and other equity-based awards to employees and non-qualified stock options, restricted stock, restricted stock units and other equity-based awards to employees, officers, directors and consultants at prices not less than 100% of the fair market value for incentive and non-qualified stock options, as determined by the Board of Directors at the grant date. Incentive and non-qualified stock options may have terms of up to
ten years
and vest over periods determined by the Board of Directors. Options generally vest ratably over a
five
-year period. The Plan replaced the Company’s 2001 Stock Option Plan. As of
July 31, 2018
,
7,823,728
shares were available for grant under the Plan.
In October 2013, the Compensation Committee of the Company’s Board of Directors, subject to stockholder approval (which was subsequently obtained at the December 16, 2013 annual meeting of stockholders), approved the grant to each of A. Jayson Adair, the Company’s Chief Executive Officer, and Vincent W. Mitz, the Company’s President, of nonqualified stock options to purchase
4,000,000
and
3,000,000
shares of the Company’s common stock, respectively, at an exercise price of
$17.81
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
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
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
100%
of the shares subject to his stock option will immediately vest. On June 2, 2015, the Compensation Committee of the Company’s Board of Directors approved the amendment of each of the stand-alone stock option agreements, by and between the Company and A. Jayson Adair and Vincent W. Mitz, respectively, to remove the provision providing at times prior to a “change in control” for the immediate vesting in full of the underlying option upon an involuntary termination of Mr. Adair or Mr. Mitz, as applicable, without “cause.” The fair value of each option at the date of grant using the Black-Scholes Merton option-pricing model was
$5.72
. 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
$7.2 million
in compensation expenses for these grants in the year ended
July 31, 2018
and
$7.5 million
for the years ended July 31,
2017
and
2016
, respectively.
The following table details stock-based payment compensation expense included in the company’s consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
(In thousands)
|
|
2018
|
|
2017
|
|
2016
|
General and administrative
|
|
$
|
19,351
|
|
|
$
|
17,622
|
|
|
$
|
18,194
|
|
Yard operations
|
|
3,870
|
|
|
3,286
|
|
|
2,670
|
|
Total stock-based payment compensation
|
|
$
|
23,221
|
|
|
$
|
20,908
|
|
|
$
|
20,864
|
|
There were no material compensation costs capitalized as part of the cost of an asset as of
July 31, 2018
and
2017
.
A summary of the status of the Company’s non-vested shares and its activity during the year ended
July 31, 2018
was as follows:
|
|
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
|
Number of
Shares
|
|
Weighted
Average Grant-
date Fair Value
|
Non-vested shares at July 31, 2017
|
|
6,667
|
|
|
$
|
5.57
|
|
Grants of non-vested shares
|
|
2,383
|
|
|
8.88
|
|
Vested
|
|
(3,376
|
)
|
|
5.67
|
|
Forfeitures or expirations
|
|
(158
|
)
|
|
4.89
|
|
Non-vested shares at July 31, 2018
|
|
5,516
|
|
|
$
|
6.96
|
|
Stock option activity for the year ended
July 31, 2018
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2017
|
|
18,774
|
|
|
$
|
17.14
|
|
|
6.48
|
|
$
|
269,449
|
|
Grants of options
|
|
2,383
|
|
|
36.78
|
|
|
|
|
|
Exercises
|
|
(3,202
|
)
|
|
14.05
|
|
|
|
|
|
Forfeitures or expirations
|
|
(158
|
)
|
|
20.93
|
|
|
|
|
|
Outstanding as of July 31, 2018
|
|
17,797
|
|
|
$
|
20.29
|
|
|
6.19
|
|
$
|
660,268
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of July 31, 2018
|
|
12,281
|
|
|
$
|
17.41
|
|
|
5.51
|
|
$
|
490,951
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest as of July 31, 2018
|
|
17,232
|
|
|
$
|
20.06
|
|
|
6.13
|
|
$
|
643,206
|
|
As required by ASC 718
, Compensation — Stock Compensation
, the Company made an estimate of expected forfeitures and recognized compensation cost only for those equity awards expected to vest.
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between the Company’s closing stock price on the last trading day of the year ended
July 31, 2018
and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their options on
July 31, 2018
. The aggregate intrinsic value of options exercised was
$111.5 million
,
$366.7 million
and
$53.6 million
in the years ended
July 31, 2018
,
2017
and
2016
, respectively, and represents the difference between the exercise price of the option and the estimated fair value of the Company’s common stock on the dates exercised. As of
July 31, 2018
, the total compensation cost related to non-vested stock-based payment awards granted to employees under the Company’s stock option plans but not yet recognized was
$30.1 million
, net of estimated forfeitures. This cost will be amortized on a straight-line basis over a weighted average remaining term of
2.51
years and will be adjusted for subsequent changes in estimated forfeitures. The fair value of options vested for the years ended
July 31, 2018
,
2017
and
2016
was
$19.1 million
,
$18.6 million
and
$21.0 million
, respectively.
The following table summarizes stock options outstanding and exercisable as of
July 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of Exercise Prices
|
|
Number
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Weighted
Average
Exercise
Price
|
|
Number
|
|
Weighted
Average
Exercise
Price
|
$8.19–$17.64
|
|
1,789
|
|
|
3.30
|
|
$
|
11.44
|
|
|
1,726
|
|
|
$
|
11.25
|
|
$17.73–$17.81
|
|
9,451
|
|
|
5.75
|
|
17.79
|
|
|
7,526
|
|
|
17.80
|
|
$18.06–$18.61
|
|
2,770
|
|
|
6.06
|
|
18.33
|
|
|
2,088
|
|
|
18.29
|
|
$18.84–$50.30
|
|
3,787
|
|
|
8.74
|
|
32.14
|
|
|
941
|
|
|
23.73
|
|
Outstanding and exercisable as of July 31, 2018
|
|
17,797
|
|
|
6.19
|
|
$
|
20.29
|
|
|
12,281
|
|
|
$
|
17.41
|
|
NOTE
12 — Income Taxes
Income before taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
(In thousands)
|
|
2018
|
|
2017
|
|
2016
|
U.S.
|
|
$
|
501,961
|
|
|
$
|
385,526
|
|
|
$
|
339,013
|
|
International
|
|
60,550
|
|
|
54,574
|
|
|
56,852
|
|
Total income before taxes
|
|
$
|
562,511
|
|
|
$
|
440,100
|
|
|
$
|
395,865
|
|
Income tax expense (benefit) from continuing operations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
(In thousands)
|
|
2018
|
|
2017
|
|
2016
|
Federal:
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
109,804
|
|
|
$
|
12,752
|
|
|
$
|
103,127
|
|
Deferred
|
|
17,094
|
|
|
20,094
|
|
|
7,019
|
|
|
|
126,898
|
|
|
32,846
|
|
|
110,146
|
|
State:
|
|
|
|
|
|
|
|
|
|
Current
|
|
9,100
|
|
|
1,659
|
|
|
5,347
|
|
Deferred
|
|
(111
|
)
|
|
499
|
|
|
151
|
|
|
|
8,989
|
|
|
2,158
|
|
|
5,498
|
|
International:
|
|
|
|
|
|
|
|
|
|
Current
|
|
8,820
|
|
|
11,468
|
|
|
10,855
|
|
Deferred
|
|
(203
|
)
|
|
(633
|
)
|
|
(994
|
)
|
|
|
8,617
|
|
|
10,835
|
|
|
9,861
|
|
Income tax expense
|
|
$
|
144,504
|
|
|
$
|
45,839
|
|
|
$
|
125,505
|
|
A reconciliation of the expected U.S. statutory tax rate to the actual effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
(In thousands)
|
|
2018
|
|
2017
|
|
2016
|
Federal statutory rate
|
|
26.9
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal income tax benefit
|
|
1.3
|
%
|
|
1.3
|
%
|
|
0.9
|
%
|
International rate differential
|
|
(0.8
|
)%
|
|
(1.8
|
)%
|
|
(1.8
|
)%
|
Compensation and fringe benefits
(1)
|
|
(3.5
|
)%
|
|
(24.3
|
)%
|
|
(3.6
|
)%
|
Provisional transition tax
|
|
2.2
|
%
|
|
—
|
%
|
|
—
|
%
|
Deferred tax remeasurement
|
|
(0.8
|
)%
|
|
—
|
%
|
|
—
|
%
|
Other differences
|
|
0.4
|
%
|
|
0.2
|
%
|
|
1.2
|
%
|
Effective tax rate
|
|
25.7
|
%
|
|
10.4
|
%
|
|
31.7
|
%
|
|
|
(1)
|
Included in the compensation and fringe benefits rate reconciliation is the impact of the Company’s adoption of ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting.
Under this standard, all excess tax benefits and tax deficiencies related to exercises of stock options are recognized as income tax expense or benefit in the income statement as discrete items in the reporting period in which they occur.
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
(In thousands)
|
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
1,068
|
|
|
$
|
1,177
|
|
Accrued compensation and benefits
|
|
17,704
|
|
|
26,621
|
|
State taxes
|
|
580
|
|
|
215
|
|
Accrued other
|
|
1,930
|
|
|
2,684
|
|
Deferred revenue
|
|
929
|
|
|
(371
|
)
|
Property and equipment
|
|
—
|
|
|
9,405
|
|
Losses carried forward
|
|
3,065
|
|
|
3,688
|
|
Federal tax benefit
|
|
6,441
|
|
|
10,542
|
|
Total gross deferred tax assets
|
|
31,717
|
|
|
53,961
|
|
Less: Valuation allowance
|
|
(4,592
|
)
|
|
(6,455
|
)
|
Net deferred tax assets
|
|
27,125
|
|
|
47,506
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Vehicle pooling costs
|
|
(6,523
|
)
|
|
(9,590
|
)
|
Property and equipment
|
|
(14,147
|
)
|
|
—
|
|
Prepaid insurance
|
|
(708
|
)
|
|
(1,333
|
)
|
Intangibles and goodwill
|
|
(25,010
|
)
|
|
(38,580
|
)
|
Total gross deferred tax liabilities
|
|
(46,388
|
)
|
|
(49,503
|
)
|
Net deferred tax liabilities
|
|
$
|
(19,263
|
)
|
|
$
|
(1,997
|
)
|
The above net deferred tax assets and liabilities have been reflected in the accompanying consolidated balance sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
(In thousands)
|
|
2018
|
|
2017
|
U.S. current liabilities
|
|
$
|
—
|
|
|
$
|
(92
|
)
|
U.S. non-current (liabilities) assets
|
|
(16,018
|
)
|
|
1,054
|
|
International non-current liabilities
|
|
(3,245
|
)
|
|
(2,959
|
)
|
Net deferred tax liabilities
|
|
$
|
(19,263
|
)
|
|
$
|
(1,997
|
)
|
As of
July 31, 2018
and
2017
, the Company had foreign operating losses and a U.S. federal tax credit carryforward of
$3.8 million
and
$5.5 million
, respectively. The foreign operating losses, subject to certain limitations, usually can be carried forward from a minimum of eight years to indefinitely. If not used, those foreign operating losses would start to expire after 2023. The U.S. federal related tax credit, if not used, would start to expire after 2026.
The Company’s ability to realize deferred tax assets is dependent on its ability to generate future taxable income. Accordingly, the Company has established a valuation allowance in taxable jurisdictions where the utilization of the tax assets is uncertain. Additional timing differences or future tax losses may occur which could warrant a need for establishing additional valuation allowances against certain deferred tax assets. The valuation allowance for the years ended
July 31, 2018
and
2017
was
$4.6 million
and
$6.5 million
, respectively. The valuation allowance for deferred tax assets primarily related to operating losses in certain international jurisdictions and certain tax credits that are unlikely to be realized.
As of
July 31, 2018
and
2017
, if recognized, the portion of liabilities for unrecognized tax benefits that would favorably affect the Company’s effective tax rate w
as
$16.0 million
and
$13.0 million
, respectively. It is possible that the amount of unrecognized tax benefits will change in the next twelve months, due to tax legislation updates or future audit outcomes; however, an estimate of the range of the possible change cannot be made at this time.
The following table summarizes the activities related to the Company’s unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
(In thousands)
|
|
2018
|
|
2017
|
|
2016
|
Beginning balance
|
|
$
|
19,269
|
|
|
$
|
20,715
|
|
|
$
|
17,428
|
|
Increases related to current year tax position
|
|
5,169
|
|
|
2,807
|
|
|
4,311
|
|
Prior year tax positions:
|
|
|
|
|
|
|
|
|
|
Prior year increase
|
|
554
|
|
|
2,694
|
|
|
1,120
|
|
Prior year decrease
|
|
(2,079
|
)
|
|
(3,605
|
)
|
|
—
|
|
Cash settlement
|
|
(519
|
)
|
|
(1,123
|
)
|
|
(412
|
)
|
Lapse of statute of limitations
|
|
(1,072
|
)
|
|
(2,219
|
)
|
|
(1,732
|
)
|
Ending balance
|
|
$
|
21,322
|
|
|
$
|
19,269
|
|
|
$
|
20,715
|
|
It is the Company’s continuing practice to recognize interest and penalties related to income tax matters in income tax expense. As of
July 31, 2018
,
2017
and
2016
, the Company had accrued interest and penalties related to unrecognized tax benefits of
$6.0 million
,
$5.3 million
and
$4.9 million
, respectively.
The Company is currently under examination by certain taxing authorities in the U.S. for fiscal years 2013 to 2016. 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’s effective income tax rates were
25.7%
,
10.4%
, and
31.7%
for fiscal
2018
,
2017
and
2016
, respectively. The tax rates in the prior years were impacted primarily from the result of recognizing excess tax benefits from the exercise of employee stock options of
$21.3 million
,
$107.6 million
and
$14.7 million
, for the years ended
July 31, 2018
,
2017
and
2016
, respectively. The effective tax rate was computed based on a reduced blended U.S. federal corporate tax rate of
26.9%
for the fiscal year ending July 31, 2018, and included the effects of the Tax Cuts and Jobs Act.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Reform” or “Tax Act”). Tax Reform makes broad and complex changes to the U.S. tax code, including, but not limited to (i) reducing the U.S. federal corporate tax rate from
35.0%
to
21.0%
; (ii) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries (“Transition Tax”); (iii) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (iv) creating a new provision designed to tax global intangible low-taxed income (“GILTI”) which allows for the possibility of using foreign tax credits (“FTCs”) and a deduction of up to
50.0%
to offset the income tax liability (subject to some limitations); (v) allowing for full expensing of qualified property through bonus depreciation; and (vi) creating limitations on the deductibility of certain executive compensation.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of Tax Reform. SAB 118 provides a measurement period that should not extend beyond one year from enactment for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of Tax Reform for which the accounting under ASC 740 is complete in the financial statements. To the extent that a company’s accounting for certain income tax effects of Tax Reform is incomplete, but a reasonable estimate is able to be made, the company must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the tax laws that were in effect immediately before the enactment of Tax Reform.
The Company has not completed its accounting for the tax effects of the enactment of the Tax Act. Specifically, the amount recorded for the Transition Tax is a provisional amount based on the Company’s estimates. The Company expects to complete the accounting for these impacts of the Tax Act in the fiscal quarter ending January 31, 2019 as it finalizes its cumulative earnings and profits of its foreign subsidiaries and receives additional guidance from the IRS pertaining to the Tax Act. The impacts of additional guidance and changes in estimates related to the effects of the Tax Act, if any, will be recorded in the period the additional guidance or information is available. The Company recognized a provisional net tax charge of
$10.6 million
during the three months ended January 31, 2018. Subsequently it was raised to
$12.4 million
in the three months ended July 31, 2018, as more IRS guidance was released with respect to the calculation of the Transition Tax.
The Company re-measured deferred tax assets and liabilities based on the U.S. statutory income tax rate. In the three months ended January 31, 2018, a
$0.6 million
tax benefit was initially recorded. The tax benefit was further increased to
$4.3 million
in the three months ended July 31, 2018.
The Tax Act contains Global Intangible Low-Taxed Income (“GILTI”) rules, which first impact the Company in fiscal year 2019. Under the GILTI rules certain income earned by the Company's foreign subsidiaries is subject to current U.S. taxation. The Company is continuing to evaluate this provision of the Act and the application of ASC 740. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either treat future U.S. tax generated by the GILTI rules as a current-period expense when incurred or to factor such amounts into the Company's measurement of its deferred taxes. The Company has not recorded any amounts related to potential GILTI tax in its financial statements and will make an accounting policy election after it completes its evaluation of the GILTI rules and the application of ASC 740.
The Tax Act eliminated any additional federal tax upon repatriation of outside basis difference primarily resulted from undistributed foreign earnings; however, those undistributed earnings may still be subject to foreign withholding taxes if they are repatriated. As of July 31, 2018, the Company's foreign subsidiaries have accumulated undistributed earnings of
$160.0 million
. No deferred tax liability has been recognized for the repatriation of these earnings or any residual outside basis difference as the Company intends to permanently reinvest them.
During the year ended
July 31, 2018
, the Company repatriated
$93.9 million
of earnings that will be considered previously taxed, from the U.K. to the U.S. and concluded that there were no material additional taxes incurred.
During the year ended July 31, 2016, the Company adopted ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which impacted the accounting for share-based payments, including income tax consequences, classification of awards and the classification on the consolidated statements of cash flows. As of
July 31, 2018
,
2017
and
2016
the Company recognized excess tax benefits of
$21.3 million
,
$107.6 million
and
$14.7 million
, respectively, as a reduction to tax expense in the consolidated statements of income.
NOTE
13 — Net Income Per Share
The table below reconciles basic weighted shares outstanding to diluted weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
(In thousands)
|
|
2018
|
|
2017
|
|
2016
|
Weighted average common shares outstanding
|
|
231,793
|
|
|
228,686
|
|
|
228,846
|
|
Effect of dilutive securities — stock options
|
|
10,084
|
|
|
8,333
|
|
|
15,449
|
|
Weighted average common and dilutive potential common shares outstanding
|
|
241,877
|
|
|
237,019
|
|
|
244,295
|
|
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
4,788,004
;
3,058,808
; and
11,594,014
options to purchase the Company’s common stock for the years ended
July 31, 2018
,
2017
and
2016
, respectively, because their inclusion would have been anti-dilutive. During the year ended July 31, 2016, the Company adopted ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which caused an impact on dilutive potential common shares outstanding, as the Company excluded the excess tax benefits and deficiencies from the proceeds portion of the diluted earnings per share calculations as they are no longer recorded in equity, which caused dilutive potential common shares outstanding to increase for all periods in fiscal 2016.
NOTE
14 — Segments and Other Geographic Reporting
The Company’s U.S. and International regions are considered
two
separate operating segments and are disclosed as
two
reportable segments. The segments represent geographic areas and reflect how the chief operating decision maker allocates resources and measures results, including total revenues, operating income and income before income taxes. The segments continue to share similar business models, services and economic characteristics. Intercompany income (expense) primarily related to charges for services provided by the U.S. segment.
The following tables present financial information by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31, 2018
|
(In thousands)
|
|
United States
|
|
International
|
|
Total
|
Total service revenues and vehicle sales
|
|
$
|
1,491,022
|
|
|
$
|
314,673
|
|
|
$
|
1,805,695
|
|
Yard operations
|
|
730,865
|
|
|
116,003
|
|
|
846,868
|
|
Cost of vehicle sales
|
|
101,130
|
|
|
95,331
|
|
|
196,461
|
|
General and administrative
|
|
144,140
|
|
|
32,750
|
|
|
176,890
|
|
Impairment of long-lived assets
|
|
—
|
|
|
1,131
|
|
|
1,131
|
|
Operating income
|
|
514,887
|
|
|
69,458
|
|
|
584,345
|
|
Interest (expense) income, net
|
|
(19,996
|
)
|
|
921
|
|
|
(19,075
|
)
|
Other income, net
|
|
(3,285
|
)
|
|
526
|
|
|
(2,759
|
)
|
Intercompany income (expense)
|
|
10,355
|
|
|
(10,355
|
)
|
|
—
|
|
Income before income tax expense
|
|
501,961
|
|
|
60,550
|
|
|
562,511
|
|
Income tax expense
|
|
136,136
|
|
|
8,368
|
|
|
144,504
|
|
Net income
|
|
$
|
365,825
|
|
|
$
|
52,182
|
|
|
$
|
418,007
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
67,779
|
|
|
$
|
10,819
|
|
|
$
|
78,598
|
|
Capital expenditures, including acquisitions
|
|
255,868
|
|
|
40,829
|
|
|
296,697
|
|
Total assets
|
|
1,856,058
|
|
|
451,640
|
|
|
2,307,698
|
|
Goodwill
|
|
256,434
|
|
|
80,801
|
|
|
337,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31, 2017
|
(In thousands)
|
|
United States
|
|
International
|
|
Total
|
Total service revenues and vehicle sales
|
|
$
|
1,193,188
|
|
|
$
|
254,793
|
|
|
$
|
1,447,981
|
|
Yard operations
|
|
585,587
|
|
|
92,814
|
|
|
678,401
|
|
Cost of vehicle sales
|
|
61,484
|
|
|
76,068
|
|
|
137,552
|
|
General and administrative
|
|
130,392
|
|
|
20,972
|
|
|
151,364
|
|
Impairment of long-lived assets
|
|
19,365
|
|
|
—
|
|
|
19,365
|
|
Operating income
|
|
396,360
|
|
|
64,939
|
|
|
461,299
|
|
Interest (expense) income, net
|
|
(23,373
|
)
|
|
1,000
|
|
|
(22,373
|
)
|
Other income, net
|
|
(10
|
)
|
|
1,184
|
|
|
1,174
|
|
Intercompany income (expense)
|
|
12,549
|
|
|
(12,549
|
)
|
|
—
|
|
Income before income tax expense
|
|
385,526
|
|
|
54,574
|
|
|
440,100
|
|
Income tax expense
|
|
34,985
|
|
|
10,854
|
|
|
45,839
|
|
Net income
|
|
$
|
350,541
|
|
|
$
|
43,720
|
|
|
$
|
394,261
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
47,507
|
|
|
$
|
9,493
|
|
|
$
|
57,000
|
|
Capital expenditures, including acquisitions
|
|
317,646
|
|
|
15,344
|
|
|
332,990
|
|
Total assets
|
|
1,514,018
|
|
|
468,483
|
|
|
1,982,501
|
|
Goodwill
|
|
259,162
|
|
|
81,081
|
|
|
340,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31, 2016
|
(In thousands)
|
|
United States
|
|
International
|
|
Total
|
Total service revenues and vehicle sales
|
|
$
|
1,016,036
|
|
|
$
|
252,413
|
|
|
$
|
1,268,449
|
|
Yard operations
|
|
494,146
|
|
|
88,758
|
|
|
582,904
|
|
Cost of vehicle sales
|
|
55,866
|
|
|
85,093
|
|
|
140,959
|
|
General and administrative
|
|
118,315
|
|
|
19,801
|
|
|
138,116
|
|
Operating income
|
|
347,709
|
|
|
58,761
|
|
|
406,470
|
|
Interest (expense) income, net
|
|
(23,178
|
)
|
|
1,021
|
|
|
(22,157
|
)
|
Other income, net
|
|
1,216
|
|
|
10,336
|
|
|
11,552
|
|
Intercompany income (expense)
|
|
13,266
|
|
|
(13,266
|
)
|
|
—
|
|
Income before income tax expense
|
|
339,013
|
|
|
56,852
|
|
|
395,865
|
|
Income tax expense
|
|
115,667
|
|
|
9,838
|
|
|
125,505
|
|
Net income
|
|
$
|
223,346
|
|
|
$
|
47,014
|
|
|
$
|
270,360
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
39,083
|
|
|
$
|
9,492
|
|
|
$
|
48,575
|
|
Capital expenditures, including acquisitions
|
|
153,451
|
|
|
20,466
|
|
|
173,917
|
|
Total assets
|
|
1,249,755
|
|
|
400,065
|
|
|
1,649,820
|
|
Goodwill
|
|
179,906
|
|
|
80,292
|
|
|
260,198
|
|
NOTE
15 — Commitments and Contingencies
Leases
The Company leases certain facilities and certain equipment under non-cancelable capital and operating leases. In addition to the minimum future lease commitments presented below, the leases generally require the Company to pay property taxes, insurance, maintenance and repair cost which are not included in the table because the Company has determined these items are not material. Certain leases provide the Company with either a right of first refusal to acquire or an option to purchase a facility at fair value. Certain leases also contain escalation clauses and renewal option clauses calling for increased rents. Where a lease
contains an escalation clause or a concession, such as a rent holiday or tenant improvement allowance, rent expense is recognized on a straight-line basis over the lease term in accordance with ASC 840,
Operating Leases.
The future minimum lease commitments for the next five fiscal years, under non-cancelable capital and operating leases with initial or remaining lease terms in excess of one year were as follows:
|
|
|
|
|
|
|
|
|
|
Years Ending July 31, (In thousands)
|
|
Capital Leases
|
|
Operating Leases
|
2019
|
|
$
|
966
|
|
|
$
|
29,773
|
|
2020
|
|
30
|
|
|
22,471
|
|
2021
|
|
13
|
|
|
18,515
|
|
2022
|
|
—
|
|
|
13,782
|
|
2023
|
|
—
|
|
|
11,680
|
|
Thereafter
|
|
—
|
|
|
54,068
|
|
Subtotal
|
|
1,009
|
|
|
150,289
|
|
Less: Amount relating to interest
|
|
(29
|
)
|
|
—
|
|
Total
|
|
$
|
980
|
|
|
$
|
150,289
|
|
Facilities rental expense for the years ended
July 31, 2018
,
2017
and
2016
was
$45.6 million
,
$26.8 million
and
$21.6 million
, respectively. Yard operations equipment rental expense for the years ended
July 31, 2018
,
2017
and
2016
was
$2.8 million
,
$2.9 million
and
$3.1 million
, respectively.
Commitments
Letters of Credit
Under a letter of credit facility separate from our Revolving Loan Facility, the Company had outstanding letters of credit of
$17.3 million
at
July 31, 2018
, which are primarily used to secure certain insurance obligations.
Contingencies
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, contract disputes, and handling or disposal of vehicles. The material pending legal proceedings to which the Company is a party, or of which any of the Company’s property is subject, include the following matters.
On November 1, 2013, the Company filed suit against Sparta Consulting, Inc. (now known as KPIT). The suit arose 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 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. On June 8, 2016, the Company amended its complaint to include claims that KPIT stole certain intellectual property owned by the Company and acted negligently in its provision of services. The case was tried in April and May 2018. On
May 22, 2018
, the jury returned a verdict for the Company on its fraud claim against KPIT for
$4.7 million
, and on its professional negligence claim against KPIT for
$16.3 million
, and the jury found for KPIT on its implied covenant counterclaim against the Company for
$4.9 million
.
In a
September 10, 2018
, post-trial order, the Court reduced the Company’s professional negligence award to
$9.1 million
, found KPIT liable under California’s Unfair Competition Law (UCL) for fraudulent and unfair conduct and held that the Company could recover restitution of
$6.3 million
if the Company chooses to forego its fraud and professional negligence damages, found that the Company was not entitled to restitution on its unjust enrichment claim, and awarded KPIT prejudgment interest on its implied covenant counterclaim starting from December 26, 2016. Further post-trial proceedings are expected in this lawsuit, including the determination of the Company’s right to prejudgment interest on its successful claims.
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 their initial audit, the DOR issued a notice of proposed assessment for uncollected sales taxes in which it asserted that the Company failed to collect and remit sales taxes totaling
$73.8 million
, including penalties and interest.
The Company subsequently engaged a Georgia law firm and outside tax advisors to review the conduct of its business operations in Georgia, the notice of proposed assessment, and the DOR’s policy position. In particular, the Company’s outside legal counsel provided the Company 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, 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. Following the Company’s receipt of the notice of proposed assessment, the Company and its counsel engaged in active discussions with the DOR to resolve the matter.
During an extended remand period, it was determined that grounds exist for a substantial reduction in the Official Assessment, on the basis that (i) the transactions and resulting tax at issue were erroneously double-counted by the DOR in the audit sales transaction work papers on which the Assessment was based; and (ii) the Company was ultimately able to provide documentation showing that most of the remaining transactions were sales at wholesale, therefore qualifying for the sale for resale exemption from Georgia Sales and Use Tax. After these reductions, the remaining amount of principal Georgia Sales and Use Tax still in dispute between the parties is
$2.6 million
, plus applicable interest. A Consent Order to this effect was entered by the Georgia Tax Tribunal on
May 22, 2017
. Since the date of entry of the Consent Order, the DOR filed a Motion for Summary Judgment related to the remaining
$2.6 million
in dispute. The Company opposed the DOR’s motion and is awaiting a decision by the Court regarding the DOR’s motion.
Based on the opinion from the Company’s outside law firm, advice from its outside tax advisors, and the Company’s best estimate of a probable outcome, the Company has adequately provided for the payment of any assessment in its consolidated financial statements. The Company believes it has strong defenses to the remaining tax liability set forth above and intends to continue to defend this matter. 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 DOR. The Company understands that 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
16 — Guarantees — Indemnifications to Officers and Directors
The Company typically enters into indemnification agreements with its directors and certain of its officers to indemnify them to the extent permitted by law against any and all liabilities, costs, expenses, amounts paid in settlement and damages incurred by the directors as a result of any lawsuit, or any judicial, administrative or investigative proceeding in which the directors are sued as a result of their service as members of its Board of Directors.
NOTE
17 — Related Party Transactions
During the year ended July 31, 2016, the Company acquired interest in a partnership which was partially owned by an executive and which held the lease on property where the Company is operating a facility and totaled
$2.0 million
.
There were
no
amounts due to or from related parties as of
July 31, 2018
and
2017
that are not separately or previously disclosed.
NOTE
18 — Employee Benefit Plan
The Company sponsors a 401(k) defined contribution plan covering its eligible employees. The plan is available to all U.S. employees who meet minimum age and service requirements and provides employees with tax deferred salary deductions and alternative investment options. The Company matches
20%
of employee contributions up to
15%
of employee salary deferral. The Company recognized expenses of
$0.9 million
for the years ended
July 31, 2018
,
2017
and
$0.8 million
for the year ended July 31,
2016
, respectively, related to this plan.
The Company also sponsors an additional defined contribution plan for its U.K. employees, which is available to all U.K. employees who meet minimum service requirements. The Company matches up to
5%
of employee contributions. The Company recognized expenses of
$0.7 million
, for the years ended
July 31, 2018
and
2017
, and
$0.6 million
for the year ended July 31,
2016
, related to this plan.
NOTE
19 — Quarterly Financial Information (Unaudited)
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter
|
Fiscal Year 2018 (In thousands, except per share data)
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
Total revenue
|
|
$
|
419,168
|
|
|
$
|
459,106
|
|
|
$
|
478,198
|
|
|
$
|
449,223
|
|
Gross profit
|
|
163,264
|
|
|
191,609
|
|
|
219,068
|
|
|
188,425
|
|
Operating income
|
|
123,942
|
|
|
150,947
|
|
|
174,619
|
|
|
134,837
|
|
Income before income taxes
|
|
114,128
|
|
|
144,438
|
|
|
171,216
|
|
|
132,729
|
|
Net income attributable to Copart, Inc.
|
|
77,515
|
|
|
103,256
|
|
|
127,348
|
|
|
109,748
|
|
Basic net income per common share
|
|
$
|
0.34
|
|
|
$
|
0.45
|
|
|
$
|
0.55
|
|
|
$
|
0.47
|
|
Diluted net income per common share
|
|
$
|
0.32
|
|
|
$
|
0.43
|
|
|
$
|
0.52
|
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter
|
Fiscal Year 2017 (In thousands, except per share data)
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
Total revenue
|
|
$
|
345,991
|
|
|
$
|
349,532
|
|
|
$
|
373,862
|
|
|
$
|
378,596
|
|
Gross profit
|
|
145,293
|
|
|
146,765
|
|
|
172,505
|
|
|
167,465
|
|
Operating income
|
|
104,824
|
|
|
108,880
|
|
|
136,788
|
|
|
110,807
|
|
Income before income taxes
|
|
102,534
|
|
|
100,099
|
|
|
131,088
|
|
|
106,379
|
|
Net income attributable to Copart, Inc.
|
|
167,280
|
|
|
66,066
|
|
|
90,546
|
|
|
70,335
|
|
Basic net income per common share
|
|
$
|
0.74
|
|
|
$
|
0.29
|
|
|
$
|
0.39
|
|
|
$
|
0.31
|
|
Diluted net income per common share
|
|
$
|
0.70
|
|
|
$
|
0.28
|
|
|
$
|
0.38
|
|
|
$
|
0.30
|
|
|
|
(1)
|
Earnings per share were computed independently for each of the periods presented; therefore, the sum of the earnings per share amounts for the quarters may not equal the total for the year.
|