advances from the proceeds of auctioned salvage vehicles. Our business is seasonal as inclement weather during the winter months increases the frequency of accidents and, consequently, the number of cars totaled by the insurance companies. During the winter months, most of our facilities process 10% to 30% more vehicles than at other times of the year. This increased volume requires the increased use of our cash to pay out advances and handling costs of the additional business.
Our primary source of working capital is net income. Accordingly, factors affecting net income are the principal factors affecting the generation of working capital. Those primary factors: (i) seasonality, (ii) market wins and losses, (iii) supplier mix, (iv) accident frequency, (v) salvage frequency, (vi) change in market share of our existing suppliers, (vii) commodity pricing, (viii) used car pricing, (ix) foreign currency exchanges rates, (x) product mix, and (xi) contract mix to the extent appropriate, are discussed in the Results of Operations and Risk Factors sections in this Form 10-K.
As of July 31, 2011,2012, we had working capital of $75.2$134.9 million, including cash, and cash equivalents of $74.0$140.1 million. Cash and cash equivalents consisted primarily of USU.S. Treasury Bills and funds invested in money market accounts, which bear interest at a variable rate. Cash and cash equivalents decreasedincreased by $194.2$66.1 million from fiscal 20102011 to fiscal 2011.2012. The decreaseincrease in cash was due primarily to the $125.0 million of proceeds from additional debt, proceeds from the sale of assets held for sale and from stock option exercises and cash from operations which were offset by share repurchase activity, payments on outstanding debt and capital expenditures during fiscal 2011. We repurchased $739.6 million of common stock of which $400 million was financed with term debt borrowings in connection with the tender offer discussed below in financing activities.
2012. We believe that our currently available cash and cash equivalents and cash generated from operations will be sufficient to satisfy our operating and working capital requirements for at least the next 12 months. However, if we experience significant growth in the future, we may be required to raise additional cash through the issuance of new debt or additional equity.
As of July 31, 2012, $58.8 million of the $140.1 million of cash and cash equivalents was held by our foreign subsidiaries. If these funds are needed for our operations in the U.S., we would be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.
Operating Activities
Net cash provided by operating activities decreased by $13.3 million to $229.7 million during fiscal 2012 when compared to fiscal 2011. The decrease was driven in part by increased deferred income taxes of $15.5 million, a $12.1 million increase in vehicle pooling costs as a result of the adoption of ASU 2009-13 in fiscal 2011 offset by an increase in net income of $15.7 million. The remaining decrease of $1.4 million is due to the timing of routine changes in working capital items.
Net cash provided by operating activities increased by $43.5 million to $242.9 million during fiscal 2011 when compared to fiscal 2010. The increase was driven in part by an increase in net income of $14.7 million, a reduction in income tax receivables of $8.6 million and by a reduction in vehicle pooling costs of $14.4 million as a result of the adoption of ASU 2009-13. The remaining increase of $5.8 million is due to the timing of routine changes in working capital items.
Net cash provided by operating activities decreased by $3.9 million to $199.4 million during fiscal 2010 when compared to fiscal 2009, due to the timing of routine changes in working capital items.
Net cash provided by operating activities increased by $9.3 million to $203.3 million during fiscal 2009 when compared to fiscal 2008. The increase was driven primarily by a reduction in income taxes receivable of $18.0 million which was offset by a decrease in net income of $15.8 million. The remaining increase of $7.1 million is due to the timing of routine changes in working capital items.
Investing Activities
Capital expenditures related to continuing operations (excluding those associated with fixed assets attributable to acquisitions) were $54.8 million, $70.2 million $75.8 million and $78.9$75.8 million for fiscal 2012, 2011 2010 and 2009,2010, respectively. Our capital expenditures are primarily related to lease buyouts of certain facilities, opening and improving facilities, software development, and acquiring yard equipment. We continue to expand and invest in new and existing facilities and standardize the appearance of existing locations. We have no material commitments for future capital expenditures as of July 31, 2011.2012. During fiscal 2011, we sold our corporate headquarters building in Fairfield, CACalifornia for $16.5 million and entered into a two yeartwenty-one month lease with a six month extension option at the end of the lease term. During fiscal 2013, we terminated this lease.
37
Included in capital expenditures for the year ended July 31, 20112012 are capitalized software development costs for new software for internal use and major software enhancements to existing software. The cumulative total capitalized costs were $55.0 million, $46.8 million, $22.9 million, and $10.0$22.9 million for the years ended July 31, 2012, 2011 2010 and 2009,2010, respectively. 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 impaired.
During the fiscal year ended July 31, 2011, we used $34.9 million in cash primarily for the purchases of Hewitt and Barodge Auto Pool. During the fiscal year ended July 31, 2010, we used $21.4 million in cash for the acquisition of D Hales. We made no acquisitions during the fiscal year ended July 31, 2009.
Financing Activities
In fiscal 2012, 2011 2010 and 2009,2010, we generated $13.7 million, $7.1 million $6.3 million and $3.1$6.3 million, respectively, through the exercise of stock options.
In fiscal 2012, 2011 2010 and 2009,2010, we generated $2.0 million, $2.0 million and $1.9$2.0 million, respectively, through the issuance of shares under the Employee Stock Purchase Plan.
In fiscal 2012, 2011 2010 and 2009,2010, we used $203.3 million, $739.6 million $12.7 million and $9.8$12.7 million, respectively, for the repurchase of common stock.
In fiscal 2009, we used $17.5 million through changes in2012, our book overdraft.
Our Board of Directors has authorizedapproved a 2940 million share increase in the stock repurchase program.program, bringing the total current authorization to 98 million shares. The repurchases may be effected through solicited or unsolicited transactions in the open market or in privately negotiated transactions. No time limit has been placed on the duration of the sharestock repurchase program. Subject to applicable securities laws, such repurchases will be made at such times and in such amounts as we deem appropriate and may be discontinued at any time. For the fiscal year ended July 31, 2011,2012, we repurchased 6,682,3178,880,708 shares of our common stock at a weighted average price of $40.83.$22.51. For the fiscal year ended July 31, 2010,2011, we repurchased 121,25113,364,634 shares of our common stock at a weighted average price of $36.76.$20.42. For the fiscal year ended July 31, 2009,2010, we did not repurchase anyrepurchased 242,502 shares underof our common stock repurchase program.at a weighted average price of $18.38. As of July 31, 2011,2012, the total number of shares repurchased under the program was 20,453,03749,786,782 and 8,546,96348,213,218 shares were available for repurchase under our program.
Additionally, on January 14, 2011, we completed a tender offer to purchase up to 10,526,31521,052,630 shares of our common stock at a price of $38.00$19.00 per share. DirectorsOur directors and executive officers of Copart were expressly prohibited from participating in the tender offer by our board of directors under our Securities Trading Policy. In connection with the tender offer, we accepted for purchase 12,172,08824,344,176 shares of our common stock totaling $462.5 million.stock. The shares accepted for purchase are comprised of the 10,526,31521,052,630 shares we offered to purchase and an additional 1,645,7733,291,546 shares purchased pursuant to our right to purchase additional shares up to 2% of our outstanding shares. The shares purchased as a result of the tender offer are not part of our repurchase program. The purchase of the shares of common stock was funded by the proceeds relating to the issuance of $400.0 million of long term debt. DuringThe dilutive earnings per share impact of all repurchased shares on the weighted average number of common shares outstanding for the year ended July 31, 2011, we made principal payments of $25.0 million.2012 is $0.04.
In the second and fourth quarters of fiscal year 2009 and the first quarter of fiscal year 2010, Mr. Jay Adair, Chief Executive Officer (and then President), exercised stock options through cashless exercises. In the fourth quarter of fiscal year 2010, Mr. Willis J. Johnson, Chairman of the Board, exercised stock options through a cashless exercise. In the second, third and fourth quarters of fiscal year 2011 certain executive officers exercised stock options through cashless exercises. In the first, second and third quarters of fiscal year 2012 certain executive officers exercised stock options through cashless exercises. A portion of the options exercised were net settled in satisfaction of the exercise price and federal and state minimum statutory tax withholding requirements. We remitted $2.6 million, $4.2 million $7.4 million and $9.8$7.4 million, in fiscal 2012, 2011 2010 and 2009,2010, respectively, to the proper taxing
38
authorities in satisfaction of the employees’ minimum statutory withholding requirements. The exercises are summarized in the following table:
Period
| | | Options Exercised
| | Exercise Price
| | Shares Net Settled for Exercise
| | Shares Withheld for Taxes(1)
| | Net Shares to Employee
| | Share Price for Withholding
| | Tax Withholding (in 000’s)
| | | Options Exercised
| | Exercise Price
| | Shares Net Settled for Exercise
| | Shares Withheld for Taxes(1)
| | Net Shares to Employee
| | Share Price for Withholding
| | Tax Withholding (in 000’s)
|
---|
FY 2009—Q2 | | | 600,000 | | | $ | 4.47 | | | | 96,929 | | | | 222,817 | | | | 280,254 | | | $ | 26.93 | | | $ | 6,000 | | |
FY 2009—Q4 | | | 361,035 | | | $ | 11.12 | | | | 116,741 | | | | 109,595 | | | | 134,699 | | | $ | 34.39 | | | $ | 3,769 | | |
FY 2010—Q1 | | | 323,631 | | | $ | 13.03 | | | | 114,354 | | | | 95,746 | | | | 113,531 | | | $ | 36.89 | | | $ | 3,532 | | | | 647,262 | | | $ | 6.52 | | | | 228,708 | | | | 191,492 | | | | 227,062 | | | $ | 18.45 | | | $ | 3,533 | |
FY 2010—Q4 | | | 350,000 | | | $ | 12.91 | | | | 122,922 | | | | 105,827 | | | | 121,251 | | | $ | 36.76 | | | $ | 3,890 | | | | 700,000 | | | $ | 6.46 | | | | 245,844 | | | | 211,654 | | | | 242,502 | | | $ | 18.38 | | | $ | 3,890 | |
FY 2011—Q2 | | | 88,750 | | | $ | 16.93 | | | | 38,025 | | | | 18,917 | | | | 31,808 | | | $ | 39.51 | | | $ | 748 | | | | 177,500 | | | $ | 8.47 | | | | 76,050 | | | | 37,834 | | | | 63,616 | | | $ | 19.76 | | | $ | 748 | |
FY 2011—Q3 | | | 274,167 | | | $ | 22.03 | | | | 147,748 | | | | 59,016 | | | | 67,403 | | | $ | 40.80 | | | $ | 2,410 | | | | 548,334 | | | $ | 11.02 | | | | 295,496 | | | | 118,032 | | | | 134,806 | | | $ | 20.40 | | | $ | 2,408 | |
FY 2011—Q4 | | | 90,000 | | | $ | 18.95 | | | | 38,198 | | | | 24,183 | | | | 27,619 | | | $ | 44.65 | | | $ | 1,080 | | | | 180,000 | | | $ | 9.48 | | | | 76,396 | | | | 48,366 | | | | 55,238 | | | $ | 22.33 | | | $ | 1,080 | |
FY 2012—Q1 | | | | 40,000 | | | $ | 9.00 | | | | 16,082 | | | | 8,974 | | | | 14,944 | | | $ | 22.39 | | | $ | 201 | |
FY 2012—Q2 | | | | 20,000 | | | $ | 9.00 | | | | 7,506 | | | | 4,584 | | | | 7,910 | | | $ | 23.98 | | | $ | 110 | |
FY 2012—Q3 | | | | 322,520 | | | $ | 10.74 | | | | 131,298 | | | | 85,684 | | | | 105,538 | | | $ | 26.38 | | | $ | 2,260 | |
(1) | | Shares withheld for taxes are treated as a repurchase of shares for accounting purposes but do not count against our stock repurchase program. |
Contractual Obligations
We lease certain domestic and foreign facilities, and certain equipment under non-cancelable operating leases. In addition to the minimum future lease commitments presented, the leases generally require the company to pay property taxes, insurance, maintenance and repair costs which are not included in the table because we have determined these items are not material. The following table summarizes our significant contractual obligations and commercial commitments as of July 31, 20112012 (in thousands):
| | | Payments Due By Period
| | | | Payments Due By Period
| |
---|
Contractual Obligations
| | | Total
| | Less than 1 Year
| | 1–3 Years
| | 3–5 Years
| | More than 5 Years
| | Other
| | | Total
| | Less than 1 Year
| | 1–3 Years
| | 3–5 Years
| | More than 5 Years
| | Other
|
---|
Long-term debt including current portion | | $ | 375,139 | | | $ | 50,139 | | | $ | 100,000 | | | $ | 225,000 | | | $ | — | | | $ | — | | | $ | 443,750 | | | $ | 75,000 | | | $ | 150,000 | | | $ | 218,750 | | | $ | — | | | $ | — | |
Interest payments on long-term debt including current portion | | | | 24,399 | | | | 9,326 | | | | 13,484 | | | | 1,589 | | | | — | | | | — | |
Operating leases(1) | | | 95,872 | | | | 18,984 | | | | 25,617 | | | | 14,242 | | | | 37,029 | | | | — | | | | 105,283 | | | | 17,208 | | | | 24,840 | | | | 16,839 | | | | 46,396 | | | | — | |
Capital leases(1) | | | 617 | | | | 231 | | | | 386 | | | | — | | | | — | | | | — | | | | 324 | | | | 198 | | | | 126 | | | | — | | | | — | | | | — | |
Tax liabilities(2) | | | 24,773 | | | | — | | | | — | | | | — | | | | — | | | | 24,773 | | | | 22,531 | | | | — | | | | — | | | | — | | | | — | | | | 22,531 | |
Total contractual obligations | | $ | 496,401 | | | $ | 69,354 | | | $ | 126,003 | | | $ | 239,242 | | | $ | 37,029 | | | $ | 24,773 | | | $ | 596,287 | | | $ | 101,732 | | | $ | 188,450 | | | $ | 237,178 | | | $ | 46,396 | | | $ | 22,531 | |
| | | Amount of Commitment Expiration Per Period
| | | | Amount of Commitment Expiration Per Period
| |
---|
Commercial Commitments(3)
| | | Total
| | Less than 1 Year
| | 1–3 Years
| | 3–5 Years
| | More than 5 Years
| | Other
| | | Total
| | Less than 1 Year
| | 1–3 Years
| | 3–5 Years
| | More than 5 Years
| | Other
|
---|
Letters of credit | | $ | 6,709 | | | $ | 6,709 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 6,659 | | | $ | 6,659 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
(1) | | Contractual obligations consist of future non-cancelable minimum lease payments under capital and operating leases, used in the normal course of business. |
(2) | | Tax liabilities include the long-term liabilities in the consolidated balance sheet for unrecognized tax positions. At this time we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the timing of tax audit outcomes. |
(3) | | Commercial commitments consist primarily of letters of credit provided for insurance programs and certain business transactions. |
39
Credit Facilities
On December 14, 2010, we entered into an Amended and Restated Credit Facility Agreement (Credit Facility), which supersedes our previously disclosed credit agreement with Bank of America, N.A. (Bank of America). The Credit Facility is an unsecured credit agreement providing for (i) a $100.0 million Revolving Credit Facility, including a $100.0 million alternative currency borrowing sublimit and a $50.0 million letter of credit sublimit (Revolving Credit) and (ii) a term loan facility of $400.0 million (Term Loan).
On January 14, 2011 the full $400.0 million provided under the Term Loan was borrowed. On September, 29, 2011, we amended the credit agreement increasing the amount of the term loan facility from $400.0 million to $500.0 million.
The Term Loan, matures andwhich at July 31, 2012 had $443.8 million outstanding, amortizes $18.8 million each quarter beginning December 31, 2011 with all outstanding borrowings are due on December 14, 2015, with quarterly payments of $12.5 million in principal plus interest to be made beginning March 31, 2011 through the maturity date.2015. All amounts borrowed under the Term Loan may be prepaid without premium or penalty. During the year ended July 31, 2011,2012, we made principal repayments of $25.0$56.3 million. AtWe currently have $1.6 million deferred financing costs in other assets as of July 31, 2011, the outstanding Term Loan balance is $375.1 million.2012.
Amounts borrowed under the Credit Facility bear interest, subject to certain restrictions, at a fluctuating rate based on (i) the Eurocurrency Rate,Rate; (ii) the Federal Funds RateRate; or (iii) the Prime Rate as described in the Credit Facility. We have entered into two interest rate swaps (which is further described in the Notes to Consolidated Financial Statements —Note 10. Derivatives and Hedging) to exchange our variable interest rate payments commitment for fixed interest rate payments on the Term Loan balance, which at July 31, 2012, totaled $443.8 million. A default interest rate applies on all obligations during an event of default under the credit facility, at a rate per annum equal to 2.0% above the otherwise applicable interest rate. At July 31, 2011 the2012, our interest rate wasis the 0.25% Eurocurrency Rate plus 1.50%. At July 31, 2011, the Eurocurrency1.50% Applicable Rate. The Applicable Rate was 1.69%can fluctuate between 1.5% and 2.0% depending on our consolidated net leverage ratio (as defined in the Credit Facility). The Credit Facility is guaranteed by our material domestic subsidiaries. The carrying valueamount of the loan payableCredit Facility is comprised of borrowing under which the interest accrued under a fluctuating interest rate structure. Accordingly, the carrying value approximates its fair value at July 31, 2011 due to the variable rate nature of the loan.2012.
Amounts borrowed under the Revolving Credit may be repaid and reborrowed until the maturity date, which is December 14, 2015. The Credit Facility requires us to pay a commitment fee on the unused portion of the Revolving Credit. The commitment fee ranges from 0.075% to 0.125% per annum depending on our leverage ratio, as of the end of the previous quarter.ratio. We had no outstanding borrowings under the Revolving Credit at the end of the period.
The Amended and Restated Credit AgreementFacility contains customary representations and warranties and may place certain business operating restrictions on us relating to, among other things, indebtedness, liens and other encumbrances, investments, mergers and acquisitions, asset sales, dividends and distributions and redemptions of capital stock. In addition, the Amended and Restated Credit AgreementFacility provides for the following financial covenants: 1)(i) earnings before income tax, depreciation and amortization (EBITDA), 2); (ii) leverage ratio, 3)ratio; (iii) interest coverage ratio,ratio; and 4)(iv) limitations on capital expenditures. The Amended and Restated Credit AgreementFacility contains events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, cross-defaults to certain other indebtedness, bankruptcy and insolvency defaults, material judgments, invalidity of the loan documents and events constituting a change of control. We are in compliance with all covenants as of July 31, 2011.2012. Please refer to the commercial commitment tabletables under the caption “Contractual Obligations” above in the Lease, Purchase, and Other Contractual Obligations“Long-term debt including current portion” section for the payment schedule.
Restructuring
We will be relocatingrelocated our corporate headquarters to Dallas, TXTexas in 2012. We will also create three divisional processing centers located in Fairfield, CA, Grand Prairie, TX and Hartford, CT. Certain functions currently performed at the Fairfield, CA corporate headquartersCalifornia location may transition to these centersthe corporate headquarters over the next twofew years. We recognized restructuring-related costs of$2.2 million and $1.4 million for the year ended July 31, 2012 and 2011, respectively, in general and administrative expense. We also recognized restructuring-related costs of $1.1 million in impairment of long-lived assets and $0.8 million in yard operations expense for the year ended July 31, 2012. Restructuring-
40
related costs for the year ended July 31, 2012 are $1.7 million for severance and $2.4 million for the costs of relocating employees to Texas. Restructuring-related costs for the year ended July 31, 2011 are $1.2 million for severance and $0.2 million for the costs of relocating employees to Texas.
Off-Balance Sheet Arrangements
As of July 31, 2011,2012, we had no off-balance sheet arrangements (asas defined in Item 303(a)(4)(ii) of Regulation S-K).S-K promulgated under the Exchange Act.
40
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to vehicle pooling costs, self-insured reserves, allowance for doubtful accounts, income taxes, revenue recognition, share-basedstock-based compensation, long-lived asset impairment calculations and contingencies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Management has discussed the selection of critical accounting policies and estimates with the Audit Committee of the Board of Directors and the Audit Committee has reviewed our disclosure relating to critical accounting policies and estimates in this Annual Report on Form 10-K. Our significant accounting policies are described in the Notes to Consolidated Financial Statements —Note 1 to our consolidated financial statements for fiscal 2011.1. Summary of Significant Accounting Policies. The following is a summary of the more significant judgments and estimates included in our critical accounting policies used in the preparation of our consolidated financial statements. Where appropriate, we discuss sensitivity to change based on other outcomes reasonably likely to occur.
Revenue Recognition
We provide a portfolio of services to our sellers and buyers that facilitate the sale and delivery of a vehicle from seller to buyer. These services include the ability to use our Internet sales technology and vehicle delivery, loading, title processing, preparation and storage. We evaluate multiple-element arrangements relative to our member and seller agreements.
The services we provide to the seller of a vehicle involve disposing of a vehicle on the seller’s behalf and, under most of our current North American contracts, collecting the proceeds from the member. Upon adoption of the new accounting standard for evaluating multiple-element arrangements, pre-sale services, including towing, title processing, preparation and storage sale fees and other enhancement service fees meet the criteria for separate units of accounting. The revenue associated with each service is recognized upon completion of the respective service, net of applicable rebates or allowances. For certain sellers who are charged a proportionate fee based on high bid of the vehicle, the revenue associated with the pre-sale services are recognized upon completion of the sale when the total arrangement is fixed and determinable. The selling price of each service is determined based on management’s best estimate and allotted based on the relative selling price method.
Vehicle sales, where we purchase and remarket vehicles on our own behalf, are recognized on the sale date, which is typically the point of high bid acceptance. Upon high bid acceptance, a legal binding contract is formed with the member, and we record the gross sales price as revenue.
We also provide a number of services to the buyer of the vehicle, charging a separate fee for each service. Each of these services has been assessed to determine whether we have met the requirements to
41
separate them into units of accounting within a multiple-element arrangement. We have concluded that the sale and the post-sale services are separate units of accounting.
The fees for sale services are recognized upon completion of the sale, and the fees for the post-sale services are recognized upon successful completion of those services using the relative selling price method.
We also charge members an annual registration fee for the right to participate in our vehicle sales program, which is recognized ratably over the term of the arrangement, and relist and late-payment fees, which are recognized upon receipt of payment by the member. No provision for returns has been established, as all sales are final with no right of return, although we provide for bad debt expense in the case of non-performance by our members or sellers.
41
In October 2009, the Financial Accounting Standards Board (FASB) amended the accounting standards for multiple deliverable revenue arrangements to:
(i) | | provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the arrangement consideration should be allocated; |
(ii) | | require an entity to allocate consideration in an arrangement using its best estimate of selling prices (BSP) of deliverables if a vendor does not have vendor-specific objective evidence of selling price (VSOE) or third-party evidence of selling price (TPE); and |
(iii) | | eliminate the use of the residual method and require an entity to allocate arrangement consideration using the relative selling price method. |
On August 1, 2010, we prospectively adopted ASU 2009-13. Consequently, we recognize in the period earned certain revenues, primarily towing fees, titling fees and other enhancement service fees, which were previously deferred until the period the car associated with those revenues was sold. As a result of this adoption, for the twelve months ended July 31, 2011, we accelerated recognition of $14.4 million in service revenue and $13.5 million in related yard operation expenses.
We allocate arrangement consideration based on the relative estimated selling prices of the separate units of accounting contained within an arrangement containing multiple deliverables. Estimated selling prices are determined using management’s best estimate. Significant inputs in our estimates of the selling price of separate units of accounting include market and pricing trends, pricing customization and practices, and profit objectives for the services. Prior to the adoption of ASU 2009-13, we used the residual method to allocate the arrangement consideration when the fair value of delivered items had not been established and deferred all arrangement consideration when fair value was not available for undelivered items.
Fair Value of Financial Instruments
We record our financial assets and liabilities at fair value in accordance with the framework for measuring fair value in generally accepted accounting principles. In accordance with ASC 820, Fair Value Measurements and Disclosures (ASC 820), as amended by Accounting Standards Update 2011-04, we consider fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants under current market conditions. This framework establishes a fair value hierarchy that prioritizes the inputs used to measure fair value:
Level I | | | | Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets. |
Level II | | | | Inputs other than quoted prices included within Level I that are observable for the asset or liability, either directly or indirectly. Interest rate hedges are valued at exit prices obtained from the counter-party. |
Level III | | | | Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate |
42
The amounts recorded for financial instruments in our consolidated financial statements, which included cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values as of July 31, 2012 and July 31, 2011, due to the short-term nature of those instruments. See the Notes to Consolidated Financial Statements —Note 9. Long-Term Debt.
Derivatives and Hedging
We have entered into interest rate swaps to eliminate interest rate risk on our variable rate Term Loan, and the swaps are designated as effective cash flow hedges under ASC 815, Derivatives and Hedging (see the Notes to Consolidated Financial Statements —Note 10. Derivatives and Hedging). Each quarter, we measure hedge effectiveness using the “hypothetical derivative method” and record in earnings any hedge ineffectiveness with the effective portion of the hedges change in fair value recorded in other comprehensive income or loss.
Capitalized Software Costs
We capitalize system development costs and website development costs related to our enterprise computing services during the application development stage. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Internal-use software is amortized on a straight line basis over its estimated useful life, generally three years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. Total capitalized software as of July 31, 2012, 2011 and 2010 and 2009 was $55.0 million, $46.8 million, $22.9 million, and $10.0$22.9 million, respectively. Accumulated amortization expense related to software for July 31, 2012, 2011 and 2010 and 2009 totaledwas $19.1 million, $10.2 million, $9.3 million, and $9.1,$9.3, respectively.
Vehicle Pooling Costs
We defer in vehicle pooling costs certain yard operation expenses associated with vehicles consigned to and received by us, but not sold as of the balance sheet date. We quantify the deferred costs using a calculation that includes the number of vehicles at our facilities at the beginning and end of the period, the number of vehicles sold during the period and an allocation of certain yard operation expenses of the period. The primary expenses allocated and deferred are certain facility costs, labor, and vehicle processing. If our allocation factors change, then yard operation expenses could increase or decrease correspondingly in the future. These costs are expensed as vehicles are sold in the subsequent periods on an average cost basis. Given the fixed cost nature of our business there is not a direct correlation in an increase in expenses or units processed on vehicle pooling costs.
We apply the provisions of the guidance for subsequent measurement of inventory to our vehicle pooling costs. The provision requires that items such as idle facility expense, excessive spoilage, double freight and rehandlingre-handling costs be recognized as current period charges regardless of whether they meet the criteria of “so 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.
42
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts in order to provide for estimated losses resulting from disputed amounts billed to sellers or members and the inability of our sellers or members to make required payments. If billing disputes exceed expectations and/or if the financial condition of our sellers or members were to deteriorate, additional allowances may be required. The allowance is calculated by taking both seller and buyer accounts receivables written off during the previous 12 month period as a percentage of the total accounts receivable balance, i.e. total write-offs/total accounts receivable (write-off percentage). We note that a one percentage point deviation in the write-off percentage would have resulted in an increase or decrease to the allowance for doubtful accounts balance of less than $1.1$1.2 million.
43
Valuation of Goodwill
We evaluate the impairment of goodwill of our North America and UKU.K. operating segments annually (or on an interim basis if certain indicators are present) by comparing the fair value of the operating segment to its carrying value. Future adverse changes in market conditions or poor operating results of the operating segments could result in an inability to recover the carrying value of the investment, thereby requiring impairment charges in the future.
Income Taxes and Deferred Tax Assets
We account for income tax exposures as required under ASC 740,Income Taxes. We are subject to income taxes in the US,U.S., Canada and UK.U.K. In arriving at a provision of income taxes, we first calculate taxes payable in accordance with the prevailing tax laws in the jurisdictions in which we operate; we then analyze the timing differences between the financial reporting and tax basis of our assets and liabilities, such as various accruals, depreciation and amortization. The tax effects of the timing difference are presented as deferred tax assets and liabilities in the consolidated balance sheet. We assess the probability that the deferred tax assets will be realized based on our ability to generate future taxable income. In the event that it is more likely than not the full benefit would not be realized from the deferred tax assets we carry on our consolidated balance sheet, we record a valuation allowance to reduce the carrying value of the deferred tax assets to the amount expected to be realized. As of July 31, 2011,2012, we had $0.9$1.2 million of valuation allowance arising from the netstate operating losses in states where we had discontinued certain operations previously and from capital losses in prior yearsthe U.S. and the potential losses if certain capital assets are sold in the UK.U.K. To the extent we establish a valuation allowance or change the amount of valuation allowance in a period, we reflect the change with a corresponding increase or decrease in our income tax provision in the consolidated statements of income.
Historically, our income taxes have been sufficiently provided to cover our actual income tax liabilities among the jurisdictions in which we operate. Nonetheless, our future effective tax rate could still be adversely affected by several factors, including (i) the geographical allocation of our future earnings, (ii) the change in tax laws or our interpretation of tax laws, (iii) the changes in governing regulations and accounting principles, (iv) the changes in the valuation of our deferred tax assets and liabilities and (v) the outcome of the income tax examinations. As a result, we routinely assess the possibilities of material changes resulting from the aforementioned factors to determine the adequacy of our income tax provision.
Based on our results for the twelve months ended July 31, 2011,2012, a one percentage point change in our provision for income taxes as a percentage of income before taxes would have resulted in an increase or decrease in the provision of $2.6$2.8 million.
We apply the provision of ASC 740, which contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.
43
Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest settlement of any particular position, could require the use of cash. In addition, we are subject to the continuous examination of our income tax returns by various taxing authorities, including the Internal Revenue Service and USU.S. states. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.
44
Long-lived Asset Valuation, Including Intangible Assets
We evaluate long-lived assets, including property and equipment and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the use of the asset. If the estimated undiscounted cash flows change in the future, we may be required to reduce the carrying amount of an asset.
Share-BasedStock-Based Compensation
We account for our share-based paymentstock-based awards to employees and non-employees using the fair value method. Compensation cost related to share-basedstock-based payment transactions measuredare recognized based on the fair value of the equity or liability instruments issued, be recognized in the consolidated financial statements.issued. Determining the fair value of options using the Black-Scholes Merton option pricing model, or other currently accepted option valuation models, requires highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated fair value on the measurement date. If actual results are not consistent with our assumptions and judgments used in estimating the key assumptions, we may be required to record additional compensation or income tax expense, which could have a material impact on our consolidated financial position and results of operations.operations and financial position.
Retained Insurance Liabilities
We are partially self-insured for certain losses related to medical, general liability, workers’ compensation and auto liability. Our insurance policies are subject to a $250,000 deductible per claim, with the exception of our medical policy which is $225,000 per claim. In addition, each of our policies contains an aggregate stop loss which limits our ultimate exposure. Our liability represents an estimate of the ultimate cost of claims incurred as of the balance sheet date. The estimated liability is not discounted and is established based upon analysis of historical data and actuarial estimates. The primary estimates used in the actuarial analysis include total payroll and revenue. Our estimates have not materially fluctuated from actual results. While we believe these estimates are reasonable based on the information currently available, if actual trends, including the severity of claims and medical cost inflation, differ from our estimates, our consolidated financial position, results of operations, financial position or cash flows could be impacted. The process of determining our insurance reserves requires estimates with various assumptions, each of which can positively or negatively impact those balances. The total amount reserved for all policies is $5.5$5.7 million as of July 31, 2011.2012. If the total number of participants in the medical plan changed by 10% we estimate that our medical expense would change by $0.9$0.6 million and our medical accrual would change by $350,000.$0.4 million. If our total payroll changed by 10% we estimate that our workers’ compensation expense would change by $50,000 and our accrual for workers’ compensation expenses would change by $50,000. A 10% change in revenue would change our insurance premium for the general liability and umbrella policy by less than $25,000.
44
Segment Reporting
Our North American and UKU.K. regions are considered two separate operating segments, which have been aggregated into one reportable segment because they share similar economic characteristics.
Recently Issued Accounting Standards
For a description of the new accounting standards that affect us, refer to the Notes to Consolidated Financial Statements —Note 1 to the consolidated financial statements included in this Annual Report on Form 10-K.1. Summary of Significant Accounting Policies.
Item 7A. | | Quantitative and Qualitative Disclosures About Market Risk |
Our principal exposures to financial market risk are interest rate risk, foreign currency risk and translation risk.
45
Interest Income Risk
The primary objective of our investment activities is to preserve principal while secondarily maximizing yields without significantly increasing risk. To achieve this objective in the current uncertain global financial markets, as of July 31, 2011,2012, all of our total cash and cash equivalents were held in bank deposits US Treasury Bills, and money market funds. As the interest rates on a material portion of our cash and cash equivalents are variable, a change in interest rates earned on our investment portfolio would impact interest income along with cash flows, but would not materially impact the fair market value of the related underlying instruments. As of July 31, 2011,2012, we held no direct investments in auction rate securities, collateralized debt obligations, structured investment vehicles or mortgaged-backed securities. Based on the average cash balance held during the twelve months ended July 31, 2011,2012, a 10% change in our interest yield would not materially affect our operating results. We do not hedge interest rate fluctuation risks.
Interest Expense Risk
Our total borrowings under the Credit Facility were $375.1$443.8 million as of July 31, 2011.2012. Amounts borrowed under the Credit Facility bear interest, subject to certain restrictions, at a fluctuating rate based on (i) the Eurocurrency Rate, (ii) the Federal Funds Rate or (iii) the Prime Rate as described in the Credit Facility. A default interest rate applies on all obligations during an event of default under the Credit Facility, at a rate per annum equal to 2.0% above the otherwise applicable interest rate. At July 31, 2011, the interest rate was the Eurocurrency Rate plus 1.50%.
Changes in the overall level of interest rates affect the interest expense that we recognize in our consolidated statements of income. An interest rate risk sensitivity analysis is used to measure interest rate risk by computing estimated changes in cash flows as a result of assumed changes in market interest rates. As of July 31, 2011, if the Eurocurrency Rate increased by 100 basis points, the change wouldWe have increased our interest expense by $2.1 million for the year ended July 31, 2011. As of July 31, 2011, we have not entered into anytwo interest rate swaps of forwardto exchange our variable interest rate contracts to mitigatepayments commitment for fixed interest rate payments on the risk.Term Loan balance.
Foreign Currency and Translation Exposure
Fluctuations in the foreign currencies create volatility in our reported results of operations because we are required to consolidate the results of operations of our foreign currency denominated subsidiaries. International net revenues result from transactions by our Canadian and UKU.K. operations and are typically denominated in the local currency of each country. These operations also incur a majority of their expenses in the local currency, the Canadian dollar and the British pound. Our international operations are subject to risks associated with foreign exchange rate volatility. Accordingly, our future results could be materially adversely impacted by changes in these or other factors. A hypothetical uniform 10% strengthening or weakening in the value of the USU.S. dollar relative to the Canadian dollar and British pound in which our revenues and profits are
45
denominated would result in a decrease/increase to revenue of $19.1$19.9 million for the twelve months ended July 31, 2011. There are inherent limitations in the sensitivity analysis presented, due primarily to the assumption that foreign exchange rate movements are linear and instantaneous. As a result, the analysis is unable to reflect the potential effects of more complex market changes that could arise, which may positively or negatively affect income.2012.
Fluctuations in the foreign currencies create volatility in our reported consolidated financial position because we are required to remeasure substantially all assets and liabilities held by our foreign subsidiaries at the current exchange rate at the close of the accounting period. At July 31, 2011,2012, the cumulative effect of foreign exchange rate fluctuations on our consolidated financial position was a net translation loss of $23.2$34.9 million. This loss is recognized as an adjustment to stockholders’ equity through accumulated other comprehensive income. A 10% strengthening or weakening in the value of the USU.S. dollar relative to the Canadian dollar or the British pound will not have a material effect on our consolidated financial position.
We do not hedge our exposure to translation risks arising from fluctuations in foreign currency exchange rates.
Item 8. | | Financial Statements and Supplementary Data |
The response to this item is submitted as a separate section of this Annual Report on Form 10-K in Item 15. See Part IV, Item 15(a) for an index to the consolidated financial statements and supplementary financial information.
46
Item 9. | | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
None.
Item 9A. | | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), or “DisclosureDisclosure Controls,” as of the end of the period covered by this Annual Report on Form 10-K. This evaluation, or “ControlsControls Evaluation,” was performed under the supervision and with the participation of management, including our Chief Executive Officer and Director (our CEO) and our Senior Vice President and Chief Financial Officer (our CFO). Disclosure Controls are controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified in the US Securities and Exchange Commission’sSEC’s rules and forms. Disclosure Controls include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Our Disclosure Controls include some, but not all, components of our internal control over financial reporting.
Based upon the Controls Evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our Disclosure Controls were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is accumulated and communicated to management, including the CEO and CFO, to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission.
46
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining internal control over financial reporting (as such item is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Management assessed our internal control over financial reporting as of July 31, 2011,2012, the end of our fiscal year. Management based its assessment on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. This assessment is supported by testing and monitoring performed by our Finance department.
Based on our assessment, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with generally accepted accounting principles. The certifications of our principal executive officer
47
and principal financial officer attached as Exhibits 31.1 and 31.2 to this report include, in paragraph 4 of such certifications, information concerning our disclosure controls and procedures and internal controls over financial reporting. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors.
Our independent registered public accounting firm, Ernst & Young LLP, independently assessed the effectiveness of our internal control over financial reporting as of July 31, 2011.2012. Ernst & Young LLP has issued an attestation report which appears on the following page of this Annual Report on Form 10-K.
4748
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and ShareholdersStockholders of Copart, Inc.
We have audited Copart, Inc.’s internal control over financial reporting as of July 31, 2011,2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Copart, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Management’s Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Copart, Inc. maintained, in all material respects, effective internal control over financial reporting as of July 31, 2011,2012, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Copart, Inc. as of July 31, 20112012 and 2010,2011, and the related consolidated statements of income, shareholders’ equity and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended July 31, 20112012 of Copart, Inc. and our report dated September 27, 2011October 1, 2012 expressed an unqualified opinion thereon.
San Francisco, CaliforniaDallas, Texas
September 27, 2011October 1, 2012
4849
Limitations on the Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Copart have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Control Over Financial Reporting
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act), during the most recent fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Item 9B. | | Other Information |
None.An updated form of indemnification agreement applicable to our directors and certain of our officers was approved in January 2012. The form was intended to update the current form for our reincorporation into Delaware and general developments in corporate law since the adoption of our original form of indemnification agreement and was done as part of our ordinary course of corporate governance matters. A copy of the form of agreement is attached as Exhibit 10.17 to this Report on Form 10-K.
4950
PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K because we intend to file a definitive proxy statement for our 20112012 Annual Meeting of ShareholdersStockholders (the Proxy Statement) not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and certain information to be included therein is incorporated herein by reference.
Item 10. | | Directors, Executive Officers of the Registrant and Corporate Governance |
Information required by this item concerning our Board of Directors, the members of our Audit Committee, our Audit Committee Financial Expert, and compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the sections entitled “Proposal Number One Election of Directors,” “Corporate Governance and Board of Directors” and “Related Person Transactions and Section 16(a) Beneficial Ownership Compliance” in our Proxy Statement.Statement (to be filed with the Securities and Exchange Commission within 120 days of our July 31, 2012 fiscal year end).
Information required by this item concerning our Executive Officers is incorporated by reference to the section entitled “Executive Officers” in our Proxy Statement.Statement (to be filed with the Securities and Exchange Commission within 120 days of our July 31, 2012 fiscal year end).
Information required by this item with respect to material changes to the procedures by which our shareholdersstockholders may recommend nominees to our Board of Directors is incorporated herein by reference from the information provided under the heading “Corporate Governance and Board of Directors,” subheading “Director Nomination Process,” of our Proxy Statement.Statement (to be filed with the Securities and Exchange Commission within 120 days of our July 31, 2012 fiscal year end).
Code of Ethics
We have adopted the Copart, Inc. Code of Ethics for Principal Executive and Senior Financial Officers (Code of Ethics). The Code of Ethics applies to our principal executive officer, our principal financial officer, our principal accounting officer or controller, and persons performing similar functions and responsibilities who shall be identified by our Audit Committee from time to time.
The Code of Ethics is available at our website, located athttp://www.copart.com. It may be found at our website as follows:
1. | | From our main web page, click on “Company Info.” |
2. | | Next, click on “Investor Relations.” |
3. | | Finally, click on “Code of Ethics for Principal Executive and Senior Financial Officers.” |
We intend to satisfy disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of the Code of Ethics by posting such information on our website, at the address and location specified above, or as otherwise required by the NasdaqNASDAQ Global Select Market.
Item 11. Executive Compensation
Item 11. | | Executive Compensation |
The information required by this item is incorporated herein by reference from the Proxy Statement (to be filed with the Securities and Exchange Commission within 120 days of our July 31, 2012 fiscal year end) under the heading “Executive Compensation,” “Compensation of Non-Employee Directors,” and “Corporate Governance and Board of Directors.”
51
Item 12. | | Security Ownership of Certain Beneficial Owners and Management and Related ShareholderStockholder Matters |
The information required by this item is incorporated herein by reference from the Proxy Statement (to be filed with the Securities and Exchange Commission within 120 days of our July 31, 2012 fiscal year end) under the headings “Security Ownership” and “Execution Compensation,” subheading “Equity Compensation Plan Information.”
50
Item 13. | | Certain Relationships and Related Transactions, and Director Independence |
The information required by this item is incorporated herein by reference from the Proxy Statement (to be filed with the Securities and Exchange Commission within 120 days of our July 31, 2012 fiscal year end) under the heading “Related Person Transactions and Section 16(a) Beneficial Ownership Compliance,” “Corporate Governance and Board of Directors,” and “Proposal Number One Election of Directors.”
Item 14. Principal Accountant Fees and Services
Item 14. | | Principal Accountant Fees and Services |
The information required by this item is incorporated herein by reference from the section captioned “Proposal FiveThree — Ratification of Appointment of Independent Registered Public Accounting Firm” in the Proxy Statement.Statement (to be filed with the Securities and Exchange Commission within 120 days of our July 31, 2012 fiscal year end).
5152
PART IV
Item 15. | | Exhibits and Financial Statement Schedules |
The following documents are filed as part of this Form 10-K:
| | | | | | Page
|
---|
(a)1. | | | | Financial Statements:Index to Consolidated Financial Statements
| | | | |
| | | | Report of Independent Registered Public Accounting Firm | | | 5859 | |
| | | | Consolidated Balance Sheets at July 31, 20112012 and 20102011 | | | 5960 | |
| | | | Consolidated Statements of Income for the years ended July 31, 2012, 2011 2010 and 20092010 | | | 6061 | |
| | | | Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the years ended July 31, 2012, 2011 2010 and 20092010 | | | 6162 | |
| | | | Consolidated Statements of Stockholders’ Equity for the years ended July 31, 2012, 2011 and 2010 | | | 63 | |
| | | | Consolidated Statements of Cash Flows for the years ended July 31, 2012, 2011 2010 and 20092010 | | | 6264 | |
| | | | Notes to Consolidated Financial Statements | | | 6365 | |
2. | | | | Financial Statement Schedules:All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. thereto | | | | |
3. | | | | Exhibits:The following Exhibits are filed as part of, or incorporated by reference into this report.
| | | | |
| | | | | | Incorporated by reference herein
| |
---|
Exhibit Number
|
|
|
| Description
|
| Form
|
| Date
|
---|
3.1 | | | | Amended and restated ArticlesCopart, Inc. Certificate of Incorporation | | Annual Report on
Form 10-K, (File
No. 000-23254),
Exhibit No. 3.1 | | October 26, 2000 |
3.1b | | | | Certificate of Amendment of Articles of Incorporation | | Annual Report on
Form 10-K (File
No. 000-23254),
Exhibit No. 3.1b | | October 26, 2000 |
3.1c | | | | Certificate of Amendment of Articles of Incorporation from 2002 | | — | | Filed herewith |
3.2 | | | | Amended and Restated Bylaws of Registrant | | Annual Report on
Form 10-K, Exhibit
No. 3.2 | | October 21, 1995 |
3.2b | | | | Certificate of Amendment of Bylaws | | Quarterly Report on
Form 10-Q (File
No. 000-23255),
Exhibit No. 3.4 | | December 15, 2003 |
3.2c | | | | Certificate of Amendment of Bylaws | | Annual Report on
Form 10-K (File
No. 000-23255),
Exhibit No. 3.2b | | October 14, 2004 |
3.2d | | | | Amendment to Section 3.2 to the Bylaws of Copart, Inc. effective as of January 13, 2009 | | Current Report on Form 8-K, (File No. 000-23255), Exhibit No. 3.1 | | December 5, 2008January 10, 2012 |
52
| | | | | | Incorporated by reference herein
| |
---|
Exhibit
Number
|
|
|
| Description
|
| Form
|
| Date
|
---|
3.33.2 | | | | CertificateBylaws of Determination of Rights, Preferences and
Privileges of Series A Participating Preferred Stock of Copart, Inc. | | 8/A-12/GCurrent Report on Form 8-K, (File No. 000-23255), Exhibit No. 3.33.2 | | March 11, 2003January 10, 2012 |
4.1 | | | | Preferred Stock Rights Agreement, dated as of March 6, 2003, between Copart and Equiserve Trust Company N.A., including the Certificate of Determination, the form of Rights Certificate and the Summary of Rights attached thereto as Exhibits A, B and C, respectively | | 8/A-12/G (File No. 000-23255), Exhibit No. 4.1 | | March 11, 2003 |
4.2 | | | | Amendment to Preferred Stock Rights Agreement, as of March 14, 2006, between Copartthe Registrant and Computershare Trust Company, N.A. (formerly Equiserve Trust Company, N.A.) | | 8/A-12G/A (File No. 000-23255), Exhibit 4.2 | | March 15, 2006 |
10.1*4.3 | | | | Copart Inc. 1992Amendment to Preferred Stock Option Plan,Rights Agreement, as amended,of January 10, 2012, between the Registrant and form of stock option agreementComputershare Trust Company, N.A. (formerly Equiserve Trust Company, N.A.) | | Registration
Statement on
Form S-88/A-12G/A (File No. 333-93887)000-23255), Exhibit No. 10.1 | | December 30, 1999 |
10.2* | | | | 1994 Employee Stock Purchase Plan (as amended December 8, 2003) with form of subscription agreement | | Registration
Statement on
Form S-8 (File
No. 333-112597),
Exhibit No. 4.1 | | February 6, 2004 |
10.3* | | | | 1994 Director Option Plan with form of subscription agreement | | Registration
Statement on
Form S-1 (File
No. 333-74250)4.3 | | January 19, 199410, 2012 |
10.4*10.1* | | | | Copart Inc. 2001 Stock Option Plan | | Registration Statement on Form S-8 (File No. 333-90612), Exhibit No. 4.1 | | June 17, 2002 |
10.5* | | | | Form of Indemnification Agreement signed by executive officers and directors | | Annual Report on
Form 10-K (File
No. 000-23254),
Exhibit No. 10.5 | | October 29, 2002 |
10.8* | | | | Copart Inc. 2007 Equity Incentive Plan (2007 EIP) | | Current Report on
Form 8-K (File
No. 000-23255),
Exhibit No. 10.1 | | December 12, 2007 |
10.9* | | | | Form of Performance Share Award Agreement for use with 2007 EIP | | Current Report on
Form 8-K (File
No. 000-23255),
Exhibit No. 10.2 | | December 12, 2007 |
10.10* | | | | Form of Restricted Stock Unit Award Agreement for use with
2007 EIP | | Current Report on
Form 8-K (File
No. 000-23255),
Exhibit No. 10.3 | | December 12, 2007 |
53
| | | | | | Incorporated by reference herein
| |
---|
Exhibit Number
|
|
|
| Description
|
| Form
|
| Date
|
---|
10.11*10.2* | | | | Copart Inc. 2007 Equity Incentive Plan (2007 EIP) | | Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.1 | | December 12, 2007 |
10.3* | | | | Form of Performance Share Award Agreement for use with 2007 EIP | | Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.2 | | December 12, 2007 |
10.4* | | | | Form of Restricted Stock Unit Award Agreement for use with 2007 EIP | | Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.3 | | December 12, 2007 |
10.5* | | | | Form of Stock Option Award Agreement for use with 2007 EIP | | Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.5 | | December 12, 2007 |
10.12*10.6* | | | | Form of Restricted Stock Award Agreement for use with 2007 EIP | | Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.4 | | December 12, 2007 |
10.1310.7 | | | | Credit Agreement dated as of December 14, 2010 by and between Copart Inc.the Registrant and Bank of America, N.A. | | Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.1 | | December 15, 2010 |
10.14*10.8 | | | | Amendment to Credit Agreement between and between the Registrant and Bank of America, N.A., dated as of September 29, 2011 | | Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.13b | | October 4, 2011 |
10.9* | | | | Copart, Inc. Executive Bonus Plan | | Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.13 | | August 3, 2006 |
10.15*10.10* | | | | Amended and Restated Executive Officer Employment Agreement between the CompanyRegistrant and William E. Franklin, dated September 25, 2008 | | Quarterly Report on Form 10-Q (File No. 000-23255), Exhibit No. 10.1 | | December 10, 2008 |
10.16*10.11* | | | | Form of Copart, Inc. Stand-Alone Stock Option Award Agreement for grant of options to purchase 2,000,000 shares of the Company’sRegistrant’s common stock to each of Willis J. Johnson and A. Jayson Adair | | Registration Statement on Form S-8 (File No. 333-159946), Exhibit No. 4.1 | | June 12, 2009 |
10.17*10.12* | | | | Amendment dated June 9, 2010 to Option Agreements dated June 6, 2001, October 21, 2002 and August 19, 2003 between the CompanyRegistrant and Willis J. Johnson | | Annual Report on Form 10-K (File No. 000-23255), Exhibit No. 10-17 | | September 23, 2010 |
10.1810.13 | | | | Executive Officer Employment Agreement between the CompanyRegistrant and Thomas Wylie, dated September 25, 2008 | | Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.2 | | December 15, 2010 |
10.19 | | | | Executive Officer Employment Agreement between the Company and Greg A. Tucker, dated October 29, 2008 | | Current Report on
Form 8-K (File
No. 000-23255),
Exhibit No. 10.3 | | December 15, 2010 |
10.20 | | | | Executive Officer Employment Agreement between the Company and Vincent Phillips, dated April 12, 2010 | | Current Report on
Form 8-K (File
No. 000-23255),
Exhibit No. 10.4 | | December 15, 2010 |
10.21 | | | | Standard Industrial/Commercial single tenant lease-net dated
January 3, 2011 between Partnership HealthPlan of California and the Registrant | | — | | Filed herewith |
14.01 | | | | Code of Ethics for Principal Executive and Senior Financial
Officers | | Annual Report on
Form 10-K (File
No. 000-23254),
Exhibit No. 14-01 | | October 17, 2003 |
21.1 | | | | List of subsidiaries of Registrant | | — | | Filed herewith |
54
| | | | | | Incorporated by reference herein
| |
---|
Exhibit Number
|
|
|
| Description
|
| Form
|
| Date
|
---|
10.14 | | | | Executive Officer Employment Agreement between the Registrant and Greg A. Tucker, dated October 29, 2008 | | Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.3 | | December 15, 2010 |
10.15 | | | | Executive Officer Employment Agreement between the Registrant and Vincent Phillips, dated April 12, 2010 | | Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.4 | | December 15, 2010 |
10.16 | | | | Standard Industrial/Commercial single tenant lease-net dated January 3, 2011 between Partnership HealthPlan of California and the Registrant | | Annual Report on Form 10-K (File No. 000-23254), Exhibit No. 10.21 | | September 28, 2011 |
10.17* | | | | Form of Indemnification Agreement signed by executive officers and directors | | — | | Filed herewith |
10.18 | | | | Standard Industrial/Commercial single tenant lease-net dated February 3, 2012 between Garden Centura, L.P. and the Registrant | | — | | Filed herewith |
14.01 | | | | Code of Ethics for Principal Executive and Senior Financial Officers | | Annual Report on Form 10-K (File No. 000-23254), Exhibit No. 14-01 | | October 17, 2003 |
21.1 | | | | List of subsidiaries of Registrant | | — | | Filed herewith |
23.1 | | | | Consent of Independent Registered Public Accounting Firm | | — | | Filed herewith |
24.1 | | | | Power of Attorney (included on signature page) | | — | | Filed herewith |
31.1 | | | | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | — | | Filed herewith |
31.2 | | | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | — | | Filed herewith |
32.132.1(1) | | | | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | — | | Filed herewith |
32.232.2(1) | | | | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | — | | Filed herewith |
101.INS(2) | | | | XBRL Instance Document | | | | | | | | |
101.SCH(2) | | | | XBRL Taxonomy Extension Schema Document | | | | | | | | |
101.CAL(2) | | | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | |
101.DEF(2) | | | | XBRL Extension Definition | | | | | | | | |
101.LAB(2) | | | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | |
101.PRE(2) | | | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | |
55
(1) | | | | In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
(2) | | | | XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Exchange Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
* | | Management contract, plan or arrangement |
5556
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Registrant
COPART, INC.
| | | | Registrant |
|
| | | | COPART, INC. |
|
| | | | By:
| | /s/ A.A. JAYSON ADAIR
|
| | | | | | A. Jayson Adair Chief Executive Officer |
September 27, 2011
COPART, INC.October 1, 2012
| | | | COPART, INC. |
|
| | | | By:
| | /s/ WILLIAM E. FRANKLIN
|
| | | | | | William E. Franklin Chief Financial Officer |
September 27, 2011October 1, 2012
5657
POWER OF ATTORNEY
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints A. Jayson Adair and William E. Franklin, and each of them, as his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
|
|
|
| Capacity in Which Signed
|
| Date
|
---|
/s/ A. JAYSON ADAIR A. Jayson Adair
| | | | Chief Executive Officer (Principal Executive Officer and Director) | | September 27, 2011October 1, 2012 |
|
/s/ WILLIAM E. FRANKLIN William E. Franklin | | | | Senior Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer) | | September 27, 2011October 1, 2012 |
|
/s/ WILLIS J. JOHNSON Willis J. Johnson | | | | Chairman of the Board | | September 27, 2011October 1, 2012 |
|
/s/ JAMES E. MEEKS James E. Meeks | | | | Director | | September 27, 2011October 1, 2012 |
|
/s/ STEVEN D. COHAN Steven D. Cohan | | | | Director | | September 27, 2011October 1, 2012 |
|
/s/ DANIEL ENGLANDER Daniel Englander | | | | Director | | September 27, 2011October 1, 2012 |
|
/s/ THOMAS WN. STMITHRYFOROS Thomas W. SmithN. Tryforos | | | | Director | | September 27, 2011October 1, 2012 |
|
/s/ MATT BLUNT Matt Blunt | | | | Director | | September 27, 2011October 1, 2012 |
|
/s/ VINCENT W. MITZ Vincent W. Mitz | | | | President and Director | | October 1, 2012 |
5758
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and ShareholdersStockholders of Copart, Inc.
We have audited the accompanying consolidated balance sheets of Copart, Inc. as of July 31, 20112012 and 2010,2011, and the related consolidated statements of income, shareholders’ equity and comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended July 31, 2011.2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Copart, Inc. at July 31, 20112012 and 2010,2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended July 31, 2011,2012, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective August 1, 2010, the Company adopted on a prospective basis Auditing Standards Update 2009 -13,Revenue Arrangements with Multiple Deliverables.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Copart, Inc.’s internal control over financial reporting as of July 31, 2011,2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 27, 2011October 1, 2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
San Francisco, CaliforniaDallas, Texas
September 27, 2011October 1, 2012
5859
COPART, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
| | | July 31, 2011
| | July 31, 2010
| | | July 31, 2012
| | July 31, 2011
|
---|
ASSETS
| ASSETS
| ASSETS
| | |
Current assets:
| | | | |
Cash and cash equivalents | | $ | 74,009 | | | $ | 268,188 | | | $ | 140,112 | | | $ | 74,009 | |
Accounts receivable, net | | | 122,859 | | | | 109,061 | | | | 138,966 | | | | 122,859 | |
Vehicle pooling costs | | | 17,026 | | | | 29,890 | | | | 15,728 | | | | 17,026 | |
Inventories | | | 8,016 | | | | 4,976 | | | | 8,494 | | | | 8,016 | |
Income taxes receivable | | | 5,145 | | | | 10,958 | | | | 2,312 | | | | 5,145 | |
Deferred income taxes | | | | 3,600 | | | | — | |
Prepaid expenses and other assets | | | 14,813 | | | | 14,342 | | | | 9,155 | | | | 14,813 | |
Assets held for sale | | | | 3,926 | | | | — | |
Total current assets | | | 241,868 | | | | 437,415 | | | | 322,293 | | | | 241,868 | |
Property and equipment, net | | | 600,388 | | | | 573,514 | | | | 587,163 | | | | 600,388 | |
Intangibles, net | | | 12,748 | | | | 13,016 | | | | 7,985 | | | | 12,748 | |
Goodwill | | | 198,620 | | | | 175,870 | | | | 196,438 | | | | 198,620 | |
Deferred income taxes | | | 9,425 | | | | 10,213 | | | | 22,280 | | | | 9,425 | |
Other assets | | | 21,387 | | | | 18,784 | | | | 18,907 | | | | 21,387 | |
Total assets | | $ | 1,084,436 | | | $ | 1,228,812 | | | $ | 1,155,066 | | | $ | 1,084,436 | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY
| |
LIABILITIES AND STOCKHOLDERS’ EQUITY
| | LIABILITIES AND STOCKHOLDERS’ EQUITY
| | |
Current liabilities:
| | | | |
Accounts payable and accrued liabilities | | $ | 101,708 | | | $ | 93,740 | | | $ | 102,958 | | | $ | 101,708 | |
Deferred revenue | | | 5,636 | | | | 10,642 | | | | 5,390 | | | | 5,636 | |
Income taxes payable | | | 3,543 | | | | 1,314 | | | | 3,082 | | | | 3,543 | |
Deferred income taxes | | | 440 | | | | 1,154 | | | | — | | | | 440 | |
Current portion of long-term debt and capital lease obligations | | | 50,370 | | | | 374 | | | | 75,170 | | | | 50,370 | |
Other current liabilities | | | 4,929 | | | | — | | | | 785 | | | | 4,929 | |
Total current liabilities | | | 166,626 | | | | 107,224 | | | | 187,385 | | | | 166,626 | |
Deferred income taxes | | | 10,057 | | | | 9,748 | | | | 7,186 | | | | 10,057 | |
Income taxes payable | | | 24,773 | | | | 23,369 | | | | 22,531 | | | | 24,773 | |
Long-term debt and capital lease obligations | | | 325,386 | | | | 601 | | | | 368,950 | | | | 325,386 | |
Other liabilities | | | 2,422 | | | | 636 | | | | 7,897 | | | | 2,422 | |
Total liabilities | | | 529,264 | | | | 141,578 | | | | 593,949 | | | | 529,264 | |
| Commitments and contingencies
| Commitments and contingencies
| | |
Shareholders’ equity:
| | | |
Common stock, no par value — 180,000,000 shares authorized; 66,005,517 and 84,363,063 shares issued and outstanding at July 31, 2011 and 2010, respectively | | | 313,940 | | | | 365,507 | | |
Stockholders’ equity:
| | | |
Preferred stock, $0.0001 par value — 5,000,000 shares authorized; no shares issued and outstanding at July 31, 2012 and July 31, 2011, respectively | | | | — | | | | — | |
Common stock, $0.0001 par value — 180,000,000 shares authorized; 124,393,700 and 132,011,034 shares issued and outstanding at July 31, 2012 and 2011, respectively | | | | 12 | | | | 13 | |
Additional paid-in capital | | | | 326,187 | | | | 313,927 | |
Accumulated other comprehensive loss | | | (23,225 | ) | | | (32,741 | ) | | | (38,043 | ) | | | (23,225 | ) |
Retained earnings | | | 264,457 | | | | 754,468 | | | | 272,961 | | | | 264,457 | |
Total shareholders’ equity | | | 555,172 | | | | 1,087,234 | | |
Total liabilities and shareholders’ equity | | $ | 1,084,436 | | | $ | 1,228,812 | | |
Total stockholders’ equity | | | | 561,117 | | | | 555,172 | |
Total liabilities and stockholders’ equity | | | $ | 1,155,066 | | | $ | 1,084,436 | |
SeeThe accompanying notes toare an integral part of these consolidated financial statements.
5960
COPART, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
| | | Years Ended July 31,
| | | | Years Ended July 31,
| |
---|
| | | 2011
| | 2010
| | 2009
| | | 2012
| | 2011
| | 2010
|
---|
Service revenues and vehicle sales:
| | | | |
Service revenues | | $ | 723,610 | | | $ | 642,134 | | | $ | 615,352 | | | $ | 757,272 | | | $ | 713,093 | | | $ | 634,606 | |
Vehicle sales | | | 148,636 | | | | 130,745 | | | | 127,730 | | | | 166,919 | | | | 159,153 | | | | 138,273 | |
Total service revenues and vehicle sales | | | 872,246 | | | | 772,879 | | | | 743,082 | | | | 924,191 | | | | 872,246 | | | | 772,879 | |
Operating costs and expenses:
| | | | |
Yard operations | | | 374,149 | | | | 320,212 | | | | 324,793 | | | | 377,604 | | | | 374,149 | | | | 320,212 | |
Cost of vehicle sales | | | 125,202 | | | | 104,673 | | | | 106,029 | | | | 136,971 | | | | 125,202 | | | | 104,673 | |
General and administrative | | | 107,605 | | | | 108,924 | | | | 86,935 | | | | 114,492 | | | | 107,605 | | | | 108,924 | |
Impairment of long-lived assets | | | | 8,771 | | | | — | | | | — | |
Total operating costs and expenses | | | 606,956 | | | | 533,809 | | | | 517,757 | | | | 637,838 | | | | 606,956 | | | | 533,809 | |
Operating income | | | 265,290 | | | | 239,070 | | | | 225,325 | | | | 286,353 | | | | 265,290 | | | | 239,070 | |
|
Other income (expense):
| | | |
Other (expense) income:
| | | |
Interest expense | | | (4,078 | ) | | | (216 | ) | | | (274 | ) | | | (11,341 | ) | | | (4,078 | ) | | | (216 | ) |
Interest income | | | 493 | | | | 205 | | | | 1,692 | | | | 357 | | | | 493 | | | | 205 | |
Other income, net | | | 2,172 | | | | 436 | | | | 989 | | | | 2,687 | | | | 2,172 | | | | 436 | |
Total other income (expense) | | | (1,413 | ) | | | 425 | | | | 2,407 | | |
Income from continuing operations before income taxes | | | 263,877 | | | | 239,495 | | | | 227,732 | | |
Total other (expense) income | | | | (8,297 | ) | | | (1,413 | ) | | | 425 | |
Income before income taxes | | | | 278,056 | | | | 263,877 | | | | 239,495 | |
Income taxes | | | 97,502 | | | | 87,868 | | | | 88,186 | | | | 95,937 | | | | 97,502 | | | | 87,868 | |
Income from continuing operations | | | 166,375 | | | | 151,627 | | | | 139,546 | | |
| |
Discontinued operations:
| | | |
Income from discontinued operations, net of income tax effects | | | — | | | | — | | | | 1,557 | | |
Net income | | $ | 166,375 | | | $ | 151,627 | | | $ | 141,103 | | | $ | 182,119 | | | $ | 166,375 | | | $ | 151,627 | |
|
Earnings per share — basic
| | | | |
Income from continuing operations | | $ | 2.20 | | | $ | 1.80 | | | $ | 1.67 | | |
Income from discontinued operations | | | — | | | | — | | | | 0.02 | | |
Basic net income per share | | $ | 2.20 | | | $ | 1.80 | | | $ | 1.69 | | | $ | 1.42 | | | $ | 1.10 | | | $ | 0.90 | |
Weighted average common shares outstanding | | | 75,649 | | | | 84,165 | | | | 83,537 | | | | 128,120 | | | | 151,298 | | | | 168,330 | |
|
Earnings per share — diluted
| | | | |
Income from continuing operations | | $ | 2.17 | | | $ | 1.78 | | | $ | 1.64 | | |
Income from discontinued operations | | | — | | | | — | | | | 0.02 | | |
Diluted net income per share | | $ | 2.17 | | | $ | 1.78 | | | $ | 1.66 | | | $ | 1.39 | | | $ | 1.08 | | | $ | 0.89 | |
Diluted weighted average common shares outstanding | | | 76,676 | | | | 85,027 | | | | 84,930 | | | | 131,428 | | | | 153,352 | | | | 170,054 | |
SeeThe accompanying notes toare an integral part of these consolidated financial statements.
6061
COPART, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(in thousands)
| | | | Years Ended July 31,
| |
---|
| | | | 2012
| | 2011
| | 2010
|
---|
Net income, as reported | | | | $ | 182,119 | | | $ | 166,375 | | | $ | 151,627 | |
Other comprehensive income:
| | | | | | | | | | | | | | |
Interest rate swap, net of tax effects of $1,762, $0, and $0 | | | | | (3,110 | ) | | | — | | | | — | |
Foreign currency translation adjustments | | | | | (11,708 | ) | | | 9,516 | | | | (5,659 | ) |
Total comprehensive income | | | | $ | 167,301 | | | $ | 175,891 | | | $ | 145,968 | |
The accompanying notes are an integral part of these consolidated financial statements.
62
COPART, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)
| | | | Common Stock
| |
---|
| | | | Outstanding Shares
| | Amount
| | Accumulated Other Comprehensive Income (Loss)
| | Retained Earnings
| | Shareholders’ Equity
|
---|
Balances at July 31, 2008 | | | | | 83,274,995 | | | $ | 316,673 | | | $ | 833 | | | $ | 481,490 | | | $ | 798,996 | |
Net income | | | | | — | | | | — | | | | — | | | | 141,103 | | | | 141,103 | |
Currency translation adjustment | | | | | — | | | | — | | | | (27,915 | ) | | | — | | | | (27,915 | ) |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | 113,188 | |
Exercise of stock options, net of repurchased shares | | | | | 580,985 | | | | 1,842 | | | | — | | | | (8,492 | ) | | | (6,650 | ) |
Employee share-based compensation and related tax benefit | | | | | — | | | | 13,983 | | | | — | | | | — | | | | 13,983 | �� |
Shares issued for Employee Stock Purchase Plan | | | | | 82,834 | | | | 1,942 | | | | — | | | | — | | | | 1,942 | |
Balances at July 31, 2009 | | | | | 83,938,814 | | | | 334,440 | | | | (27,082 | ) | | | 614,101 | | | | 921,459 | |
Net income | | | | | — | | | | — | | | | — | | | | 151,627 | | | | 151,627 | |
Currency translation adjustment | | | | | — | | | | — | | | | (5,659 | ) | | | — | | | | (5,659 | ) |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | 145,968 | |
Exercise of stock options, net of repurchased shares | | | | | 477,465 | | | | 5,351 | | | | — | | | | (7,315 | ) | | | (1,964 | ) |
Employee share-based compensation and related tax benefit | | | | | — | | | | 24,184 | | | | — | | | | — | | | | 24,184 | |
Shares issued for Employee Stock Purchase Plan | | | | | 68,035 | | | | 2,044 | | | | — | | | | — | | | | 2,044 | |
Shares repurchased | | | | | (121,251 | ) | | | (512 | ) | | | — | | | | (3,945 | ) | | | (4,457 | ) |
Balances at July 31, 2010 | | | | | 84,363,063 | | | | 365,507 | | | | (32,741 | ) | | | 754,468 | | | | 1,087,234 | |
Net income | | | | | — | | | | — | | | | — | | | | 166,375 | | | | 166,375 | |
Currency translation adjustment | | | | | — | | | | — | | | | 9,516 | | | | — | | | | 9,516 | |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | 175,891 | |
Exercise of stock options, net of repurchased shares | | | | | 433,263 | | | | 6,486 | | | | — | | | | (3,639 | ) | | | 2,847 | |
Employee share-based compensation and related tax benefit | | | | | — | | | | 22,645 | | | | — | | | | — | | | | 22,645 | |
Shares issued for Employee Stock Purchase Plan | | | | | 63,596 | | | | 1,957 | | | | — | | | | — | | | | 1,957 | |
Shares repurchased | | | | | (18,854,405 | ) | | | (82,655 | ) | | | — | | | | (652,747 | ) | | | (735,402 | ) |
Balances at July 31, 2011 | | | | | 66,005,517 | | | $ | 313,940 | | | $ | (23,225 | ) | | $ | 264,457 | | | $ | 555,172 | |
| | | | Common Stock
| |
---|
| | | | Outstanding Shares
| | Amount
| | Additional Paid in Capital
| | Accumulated Other Comprehensive Income (Loss)
| | Retained Earnings
| | Stockholders’ Equity
|
---|
Balances at July 31, 2009 | | | | | 167,877,628 | | | $ | 17 | | | $ | 334,423 | | | $ | (27,082 | ) | | $ | 614,101 | | | $ | 921,459 | |
Net income | | | | | — | | | | — | | | | — | | | | — | | | | 151,627 | | | | 151,627 | |
Currency translation adjustment | | | | | — | | | | — | | | | — | | | | (5,659 | ) | | | — | | | | (5,659 | ) |
Exercise of stock options, net of repurchased shares | | | | | 954,930 | | | | — | | | | 5,351 | | | | — | | | | (7,315 | ) | | | (1,964 | ) |
Employee stock-based compensation and related tax benefit | | | | | — | | | | — | | | | 24,184 | | | | — | | | | — | | | | 24,184 | |
Shares issued for Employee Stock Purchase Plan | | | | | 136,070 | | | | — | | | | 2,044 | | | | — | | | | — | | | | 2,044 | |
Shares repurchased | | | | | (242,502 | ) | | | — | | | | (512 | ) | | | — | | | | (3,945 | ) | | | (4,457 | ) |
Balances at July 31, 2010 | | | | | 168,726,126 | | | | 17 | | | | 365,490 | | | | (32,741 | ) | | | 754,468 | | | | 1,087,234 | |
Net income | | | | | — | | | | — | | | | — | | | | — | | | | 166,375 | | | | 166,375 | |
Currency translation adjustment | | | | | — | | | | — | | | | — | | | | 9,516 | | | | — | | | | 9,516 | |
Exercise of stock options, net of repurchased shares | | | | | 866,526 | | | | — | | | | 6,486 | | | | — | | | | (3,639 | ) | | | 2,847 | |
Employee stock-based compensation and related tax benefit | | | | | — | | | | — | | | | 22,645 | | | | — | | | | — | | | | 22,645 | |
Shares issued for Employee Stock Purchase Plan | | | | | 127,192 | | | | — | | | | 1,957 | | | | — | | | | — | | | | 1,957 | |
Shares repurchased | | | | | (37,708,810 | ) | | | (4 | ) | | | (82,651 | ) | | | — | | | | (652,747 | ) | | | (735,402 | ) |
Balances at July 31, 2011 | | | | | 132,011,034 | | | | 13 | | | | 313,927 | | | | (23,225 | ) | | | 264,457 | | | | 555,172 | |
Net income | | | | | — | | | | — | | | | — | | | | — | | | | 182,119 | | | | 182,119 | |
Currency translation adjustment | | | | | — | | | | — | | | | — | | | | (11,708 | ) | | | — | | | | (11,708 | ) |
Interest rate swap, net of tax effects | | | | | — | | | | — | | | | — | | | | (3,110 | ) | | | — | | | | (3,110 | ) |
Exercise of stock options, net of repurchased shares | | | | | 1,165,605 | | | | — | | | | 13,202 | | | | — | | | | (2,777 | ) | | | 10,425 | |
Employee stock-based compensation and related tax benefit | | | | | — | | | | — | | | | 26,158 | | | | — | | | | — | | | | 26,158 | |
Shares issued for Employee Stock Purchase Plan | | | | | 97,769 | | | | — | | | | 1,957 | | | | — | | | | — | | | | 1,957 | |
Shares repurchased | | | | | (8,880,708 | ) | | | (1 | ) | | | (29,057 | ) | | | — | | | | (170,838 | ) | | | (199,897 | ) |
Balances at July 31, 2012 | | | | | 124,393,700 | | | $ | 12 | | | $ | 326,187 | | | $ | (38,043 | ) | | $ | 272,961 | | | $ | 561,117 | |
SeeThe accompanying notes toare an integral part of these consolidated financial statements.
6163
COPART, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | Years Ended July 31,
| | | | Years Ended July 31,
| |
---|
| | | 2011
| | 2010
| | 2009
| | | 2012
| | 2011
| | 2010
|
---|
Cash flows from operating activities:
| | | | | | | | | | | | |
Net income | | $ | 166,375 | | | $ | 151,627 | | | $ | 141,103 | | | $ | 182,119 | | | $ | 166,375 | | | $ | 151,627 | |
Adjustments to reconcile net income to net cash provided by operating activities:
| | | | |
Income from discontinued operations | | | — | | | | — | | | | (2,440 | ) | |
Depreciation and amortization | | | 45,694 | | | | 43,242 | | | | 41,354 | | | | 48,167 | | | | 45,694 | | | | 43,242 | |
Allowance for doubtful accounts | | | 270 | | | | 442 | | | | (174 | ) | | | (192 | ) | | | 270 | | | | 442 | |
Other long-term liabilities | | | (428 | ) | | | (440 | ) | | | (1,171 | ) | |
Share-based compensation | | | 19,007 | | | | 17,955 | | | | 9,413 | | |
Excess benefit from share-based compensation | | | (3,547 | ) | | | (5,643 | ) | | | (4,570 | ) | |
Loss on sale of property and equipment | | | 1,882 | | | | 659 | | | | 647 | | |
Impairment of long-lived assets | | | | 8,771 | | | | — | | | | — | |
Stock-based compensation | | | | 21,791 | | | | 19,007 | | | | 17,955 | |
Excess benefits from stock-based compensation | | | | (4,367 | ) | | | (3,547 | ) | | | (5,643 | ) |
(Gain)/loss on sale of property and equipment | | | | (143 | ) | | | 1,882 | | | | 659 | |
Deferred income taxes | | | (2,099 | ) | | | (4,512 | ) | | | (2,393 | ) | | | (17,579 | ) | | | (2,099 | ) | | | (4,512 | ) |
Changes in operating assets and liabilities, net of effects from acquisitions:
| | | | |
Accounts receivable | | | (12,865 | ) | | | 2,436 | | | | 982 | | | | (16,202 | ) | | | (12,865 | ) | | | 2,436 | |
Vehicle pooling costs | | | 13,201 | | | | (1,210 | ) | | | 1,361 | | | | 1,142 | | | | 13,201 | | | | (1,210 | ) |
Inventories | | | (2,666 | ) | | | (256 | ) | | | (54 | ) | | | (218 | ) | | | (2,666 | ) | | | (256 | ) |
Prepaid expenses and other current assets | | | 4,785 | | | | (8,896 | ) | | | 1,376 | | | | 6,026 | | | | 4,785 | | | | (8,896 | ) |
Other assets | | | 739 | | | | 311 | | | | (6,386 | ) | | | (1,951 | ) | | | 739 | | | | 311 | |
Accounts payable and accrued liabilities | | | 5,614 | | | | 8,098 | | | | (2,479 | ) | | | (3,607 | ) | | | 5,614 | | | | 8,098 | |
Deferred revenue | | | (5,015 | ) | | | (2,527 | ) | | | (1,324 | ) | | | (243 | ) | | | (5,015 | ) | | | (2,527 | ) |
Income taxes receivable | | | 9,456 | | | | 861 | | | | 18,021 | | | | 7,082 | | | | 9,456 | | | | 861 | |
Income taxes payable | | | 2,529 | | | | (2,740 | ) | | | 10,073 | | | | (2,545 | ) | | | 2,529 | | | | (2,740 | ) |
Other liabilities | | | | 1,622 | | | | (428 | ) | | | (440 | ) |
Net cash provided by operating activities | | | 242,932 | | | | 199,407 | | | | 203,339 | | | | 229,673 | | | | 242,932 | | | | 199,407 | |
Cash flows from investing activities:
| | | | | | | | | | | | |
Principal payments from (issuance of) notes receivable | | | — | | | | (1,300 | ) | | | 12,000 | | |
Issuance of notes receivable | | | | — | | | | — | | | | (1,300 | ) |
Purchases of property and equipment | | | (70,170 | ) | | | (75,840 | ) | | | (78,912 | ) | | | (54,832 | ) | | | (70,170 | ) | | | (75,840 | ) |
Proceeds from sale of property and equipment | | | 20,602 | | | | 2,477 | | | | 7,008 | | | | 1,268 | | | | 20,602 | | | | 2,477 | |
Purchase of assets and liabilities in connection with acquisitions, net of cash acquired | | | (34,912 | ) | | | (21,362 | ) | | | — | | |
Proceeds from sale of assets held for sale | | | | 8,041 | | | | — | | | | — | |
Purchases of assets and liabilities in connection with acquisitions, net of cash acquired | | | | (2,564 | ) | | | (34,912 | ) | | | (21,362 | ) |
Net cash used in investing activities | | | (84,480 | ) | | | (96,025 | ) | | | (59,904 | ) | | | (48,087 | ) | | | (84,480 | ) | | | (96,025 | ) |
Cash flows from financing activities:
| | | | | | | | | | | | |
Proceeds from the exercise of stock options | | | 7,082 | | | | 6,285 | | | | 3,119 | | | | 13,651 | | | | 7,082 | | | | 6,285 | |
Excess tax benefit from stock-based payment compensation | | | | 4,367 | | | | 3,547 | | | | 5,643 | |
Proceeds from the issuance of Employee Stock Purchase Plan shares | | | 1,957 | | | | 2,044 | | | | 1,942 | | | | 1,957 | | | | 1,957 | | | | 2,044 | |
Repurchases of common stock | | | (739,638 | ) | | | (12,706 | ) | | | (9,769 | ) | | | (203,285 | ) | | | (739,638 | ) | | | (12,706 | ) |
Excess tax benefit from share-based payment compensation | | | 3,547 | | | | 5,643 | | | | 4,570 | | |
Proceeds from issuance of long-term debt | | | 400,000 | | | | — | | | | — | | | | 125,000 | | | | 400,000 | | | | — | |
Debt offering costs | | | | (313 | ) | | | (2,023 | ) | | | — | |
Principal payments on long-term debt | | | (25,000 | ) | | | — | | | | — | | | | (56,250 | ) | | | (25,000 | ) | | | — | |
Debt offering costs | | | (2,023 | ) | | | — | | | | — | | |
Change in book overdraft | | | — | | | | — | | | | (17,502 | ) | |
Net cash provided by (used in) financing activities | | | (354,075 | ) | | | 1,266 | | | | (17,640 | ) | |
Net cash (used in) provided by financing activities | | | | (114,873 | ) | | | (354,075 | ) | | | 1,266 | |
Effect of foreign currency translation | | | 1,444 | | | | 849 | | | | (2,058 | ) | | | (610 | ) | | | 1,444 | | �� | | 849 | |
Net increase (decrease) in cash and cash equivalents | | | (194,179 | ) | | | 105,497 | | | | 123,737 | | | | 66,103 | | | | (194,179 | ) | | | 105,497 | |
Cash and cash equivalents at beginning of period | | | 268,188 | | | | 162,691 | | | | 38,954 | | | | 74,009 | | | | 268,188 | | | | 162,691 | |
Cash and cash equivalents at end of period | | $ | 74,009 | | | $ | 268,188 | | | $ | 162,691 | | | $ | 140,112 | | | $ | 74,009 | | | $ | 268,188 | |
Supplemental disclosure of cash flow information:
| | | | | | | | | | | | |
Interest paid | | $ | 3,894 | | | $ | 216 | | | $ | 353 | | | $ | 11,333 | | | $ | 3,894 | | | $ | 216 | |
Cash paid for income taxes | | $ | 85,145 | | | $ | 93,989 | | | $ | 71,908 | | |
Income taxes paid | | | $ | 106,581 | | | $ | 85,145 | | | $ | 93,989 | |
SeeThe accompanying notes toare an integral part of these consolidated financial statements.
6264
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2012, 2011 2010 AND 20092010
(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. As a result of the Reincorporation, for the year ended July 31, 2012, the Company reclassified $12,000 to common stock, par value to reflect the change in par value from no par to $.0001 per share.
On March 8, 2012, the Company’s board of directors approved a two-for-one stock split effected in the form of a stock dividend. The additional shares resulting from the stock split were distributed after the closing of trading on March 28, 2012 to stockholders of record on March 23, 2012. The stock dividend increased the number of shares of common stock outstanding and all per share amounts have been adjusted for the stock dividend.
The consolidated financial statements of Copart, Inc. (the Company)the Company include the accounts of the parent company and its wholly owned subsidiaries, including its foreign wholly owned subsidiaries Copart Canada, Inc. (Copart Canada) and Copart Europe Limited (Copart Europe). which currently operates solely in the U.K. Significant intercompany transactions and balances have been eliminated in consolidation. Copart Canada was incorporated in January 2003 and Copart Europe was incorporated in June 2007.
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 Second Generation (VB2) Internet auction-style sales technology. Sellers are primarily insurance companies but also include banks and financial institutions, charities, car dealerships, fleet operators, and vehicle rental companies. The Company sells principally to licensed vehicle dismantlers, rebuilders, repair licensees, used vehicle dealers and exporters; however at certain locations, the Company sells directly to the general public. The majority of vehicles sold on behalf of insurance companies are either damaged vehicles deemed a total loss or not economically repairable by the insurance companies or are recovered stolen vehicles for which an insurance settlement with the vehicle owner has already been made. The Company offers vehicle sellers a full range of services that expedite each stage of the vehicle sales process, minimize administrative and processing costs and maximize the ultimate sales price. In the United States and Canada, or North America, 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, or UK,U.K., the Company operates both on a principal basis, purchasing the salvage vehicle outright from the insurance company and reselling the vehicle for its own account, and as an agent.
Use of Estimates
The preparation of financial statements in conformity with USU.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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 are used for, but not limited to, vehicle pooling costs, self-insured reserves, allowance for doubtful accounts, income taxes, revenue recognition, share-basedstock-based compensation, purchase price allocations, long-lived asset and goodwill impairment calculations and contingencies. Actual results could differ from those estimates.
Foreign Currency Translation
The functional currency of the Company is the US dollar. The Canadian dollar and the British pound are the functional currencies of the Company’s foreign subsidiaries, Copart Canada and Copart Europe, respectively, 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 US dollars at period-end exchange rates, and revenues and expenses are translated into US 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.
Fair Value of Financial Instruments
The amounts recorded for financial instruments in the Company’s consolidated financial statements, which include cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values as of July 31, 2011 and 2010 due to the short-term nature of those instruments.
63
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2011, 2010 AND 2009
The carrying value of the Company’s long term debt approximates its fair value at July 31, 2011, due to the variable rate nature of the debt.
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 vehicle services include the ability to use itsthe Company’s Internet sales
65
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010
technology and vehicle delivery, loading, title processing, preparation and storage. The Company evaluates multiple elementmultiple-element arrangements relative to the Company’sits member and seller agreements.
The services provided to the seller of a vehicle involve disposing of a vehicle on the seller’s behalf and, under most of the Company’s current North American contracts, collecting the proceeds from the member. On August 1, 2010, the Company prospectively adopted Accounting Standard Update 2009-13,Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (ASU 2009-13). Upon adoption of the new accountingthis standard, for evaluating multiple-element arrangements in fiscal 2011 as described below, pre-sale services, including towing, title processing, preparation and storage, sale fees and other enhancement services meet the criteria for separate units of accounting. The revenue associated with each service is recognized upon completion of the respective service, net of applicable rebates or allowances. For certain sellers who are charged a proportionate fee based on high bid of the vehicle, the revenue associated with the pre-sale services is recognized upon completion of the sale when the total arrangement is fixed and determinable. The estimated selling price of each service is determined based on management’s best estimate and allotted based on the relative selling price method.
For certain sellers who are charged As a proportionate fee basedresult of this adoption, for the year ended July 31, 2011, the Company accelerated recognition of $14.4 million in service revenue and $13.5 million in related yard operation expenses. The impact on the selling price of the vehicle, the revenue associated with these pre-sale services is recognized upon completion of the sale when the total arrangement fee is considered fixednet income and determinable.earnings per share was not material.
Vehicle sales, where vehicles are purchased and remarketed on the Company’s own behalf, are recognized on the sale date, which is typically the point of high bid acceptance. Upon high bid acceptance, a legal binding contract is formed with the member, and the gross sales price is recorded as revenue.
The Company also provides a number of services to the buyer of the vehicle, charging a separate fee for each service. Each of these services has been assessed to determine whether the requirements have been met to separate them into units of accounting within a multiple-element arrangement. The Company has concluded that the sale and the post-sale services are separate units of accounting. The fees for sale services are recognized upon completion of the sale, and the fees for the post-sale services are recognized upon successful completion of those services using the relative selling price method.
The Company also charges members an annual registration fee for the right to participate in its vehicle sales program, which is recognized ratably over the term of the arrangement, and relist and late-payment fees, which are recognized upon receipt of payment by the member. No provision for returns has been established, as all sales are final with no right of return, although the Company provides for bad debt expense in the case of non-performance by its members or sellers.
In October 2009, the Financial Accounting Standards Board (FASB) amended the accounting standards for multiple deliverable revenue arrangements to:
(i) | | provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the arrangement consideration should be allocated; |
(ii) | | require an entity to allocate consideration in an arrangement using its best estimate of selling prices (BSP) of deliverables if a vendor does not have vendor-specific objective evidence of selling price (VSOE) or third-party evidence of selling price (TPE); and |
(iii) | | eliminate the use of the residual method and require an entity to allocate arrangement consideration using the relative selling price method. |
64
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2011, 2010 AND 2009
On August 1, 2010, the Company prospectively adopted Accounting Standard Update 2009-13,Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (ASU 2009-13). Consequently, the Company recognizes in the period earned certain revenues, primarily towing fees, titling fees and other enhancement service fees, which were previously deferred until the period the car associated with those revenues was sold. As a result of this adoption, for the year ended July 31, 2011, the Company accelerated recognition of $14.4 million in service revenue and $13.5 million in related yard operation expenses. The impact on net income and earnings per share was not material.
The Company allocates arrangement consideration based upon management’s best estimate of the selling price of the separate units of accounting contained within an arrangement containing multiple deliverables. Estimated selling prices are determined using management’s best estimate. 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. Prior
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 the subsequent periods on an average cost basis.
Foreign Currency Translation
The functional currency of the Company is the U.S. dollar. The Canadian dollar and the British pound are the functional currencies of the Company’s foreign subsidiaries, Copart Canada and Copart Europe,
66
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010
respectively, 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 are as follows (in thousands):
Cumulative loss on foreign currency translation as of July 31, 2010 | | | | $ | (32,741 | ) |
Gain on foreign currency translation | | | | | 9,516 | |
Cumulative loss on foreign currency translation as of July 31, 2011 | | | | $ | (23,225 | ) |
Loss on foreign currency translation | | | | | (11,708 | ) |
Cumulative loss on foreign currency translation as of July 31, 2012 | | | | $ | (34,933 | ) |
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 generally accepted accounting principles. In accordance with ASC 820, Fair Value Measurements and Disclosures (ASC 820), as amended by Accounting Standards Update 2011-04, the Company considers fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants under current market conditions. This framework establishes a fair value hierarchy that prioritizes the inputs used to measure fair value:
Level I | | | | Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets. |
Level II | | | | Inputs other than quoted prices included within Level I that are observable for the asset or liability, either directly or indirectly. Interest rate hedges are valued at exit prices obtained from the counter-party. |
Level III | | | | Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate |
The amounts recorded for financial instruments in the Company’s consolidated financial statements, which included cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values as of July 31, 2012 and July 31, 2011, due to the adoptionshort-term nature of ASU 2009-13, the Company used the residual method to allocate the arrangement consideration whenthose instruments, and are classified within level II of the fair value of delivered items had not been established and deferred all arrangement consideration whenhierarchy. SeeNote 9. Long-Term Debt for fair value was not available for undelivered items.disclosures related to the Company’s long-term debt.
Derivatives and Hedging
The Company has entered into interest rate swaps to eliminate interest rate risk on the Company’s variable rate Term Loan, and the swaps are designated as effective cash flow hedges under ASC 815, Derivatives and Hedging (seeNote 10. Derivatives and Hedging). Each quarter, the Company measures hedge effectiveness using the “hypothetical derivative method” and records in earnings any hedge ineffectiveness with the effective portion of the hedges change in fair value recorded in other comprehensive income or loss.
Cost of Vehicle Sales
Cost of vehicle sales includes the purchase price of vehicles sold for the Company’s own account.
67
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010
Yard Operations
Yard operations consist primarily of operating personnel (which includes yard management, clerical and yard employees), rent, contract vehicle towing, insurance, fuel and equipment maintenance and repair. On August 1, 2010, the Company adopted ASU 2009-13. As a result of this adoption, for the twelve months ended July 31, 2011, the Company accelerated recognition of $13.5 million in yard operation expenses.
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 $6.5 million, $8.8 million $12.7 million and $2.6$12.7 million in fiscal 2012, 2011 2010 and 2009,2010, respectively.
Other (Expense) Income (Expense)
Other (expense) income (expense) consists primarily of interest income,expense, interest expense,income, gains and losses from the disposal of fixed assets and rental income.
Income Taxes
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 and their respective tax basis and operating loss and tax credit carry forwards. 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.
65
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2011, 2010 AND 2009
In accordance with the provisions of ASC 740,Income Taxes (ASC 740), a two-step approach is applied to the recognition and measurement of uncertain tax positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company recognizes interest and penalties related to uncertain tax positions in its provision for income taxes line of 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, Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments purchased with original maturities of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents include cash held in checking and money market accounts. The Company periodically invests its excess cash in money market funds and USU.S. Treasury Bills. The Company’s cash and cash equivalents are placed with high credit quality financial institutions. The Company generally classifies its investment portfolio not otherwise qualifying as cash and cash equivalents as available-for-sale securities. Available-for-sale securities are reported at fair value, with unrealized gains and losses reported as a component of shareholders’stockholders’ equity and comprehensive income. Unrealized losses are charged against income when a decline in the fair market value of an individual security is determined to be other than temporary. Realized gains and losses on investments are included in interest income.
In accordance with ASC 820,Fair Value Measurements and Disclosures (ASC 820), 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. As such, fair value is a market based measurement determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level I) observable inputs such as quoted prices in active markets; (Level II) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level III) unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company measures its investments, cash equivalents or marketable securities at fair value. Cash and cash equivalents are classified within Level I of the fair value hierarchy because they are valued using quoted market prices.
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.
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
6668
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 2010 AND 20092010
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, 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 the subsequent periods on an average cost 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.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts in order to provide for estimated losses resulting from disputed amounts billed to sellers or members and the inability of sellers or members to make required payments. If billing disputes exceed expectations and/or if the financial condition of sellers or members were to deteriorate, additional allowances may be required. The allowance is calculated by considering both seller and member accounts receivables written off during the previous 12 month period as a percentage of the total accounts receivable balance.
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 expense 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 performs ongoing credit evaluations of its customers, and 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 amount 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 our revenues in fiscal 2012, 2011 2010 and 2009.2010. At July 31, 20112012 and 20102011 no single customer accounted for more than 10% of the Company’s accounts receivables.
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 5 and 10 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 is computed on a straight-line basis over the
67
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2011, 2010 AND 2009
estimated useful lives of: 3 to 5 years for internally developed or purchased software; 3 to 7 years for transportation and other equipment; 3 to 10 years for office furniture and equipment; and 15 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.
69
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010
Impairment of Long-Lived AssetsAsset Valuation
The Company evaluates long-lived assets, including property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In accordance with ASC 360,Property, Plant, and Equipment, a long-lived asset is initially measured at the lower of its carrying amount or fair value. An impairment loss is recognized when the estimated undiscounted future cash flows expected to be generated from the use of the asset are less than the carrying amount of the asset. The impairment loss is then calculated by comparing the carrying amount with its fair value, which is usually estimated using discounted cash flows expected to be generated from the use of the asset.
Goodwill and Other Identifiable Intangible Assets
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 performed its annual impairment test for goodwill during the fourth quarter of its 20112012 fiscal year utilizing a market value and discounted cash flow approach. The impairment test for identifiable intangible assets not subject to amortization is also performed annually or when impairment indicators exist, and consists of a comparison of the fair value of the intangible asset with its carrying amount. Identifiable intangible assets that are subject to amortization are evaluated for impairment using a process similar to that used to evaluate other long-lived assets.
Assets Held for Sale
The Company has removed certain assets from operations and offered them for sale. These assets, which include its fleet of private jets and certain real estate, are reflected at their fair market value in the financial statements and are a level II fair value measurement based on sales transactions of similar assets. During the year ended July 31, 2012, the Company recorded an impairment of $8.8 million associated with the write down to fair market value of these assets held for sale.
Retained Insurance Liabilities
The Company is partially self-insured for certain losses related to medical, general liability, workers’ compensation and auto liability. The Company’s insurance policies are subject to a $250,000 deductible per claim, with the exception of its medical policy which is $225,000 per claim. In addition, each of the Company’s policies contains an aggregate stop loss which limits its ultimate exposure. The Company’s liability represents an estimate of the ultimate cost of claims incurred as of the balance sheet date. The estimated liability is not discounted and is established based upon analysis of historical data and actuarial estimates. The primary estimates used in the actuarial analysis include total payroll and revenue. The Company’s estimates have not materially fluctuated from actual results. While the Company believes these estimates are reasonable based on the information currently available, if actual trends, including the severity of claims and medical cost inflation, differ from the Company’s estimates, the Company’s consolidated financial position, results of operations, financial position or cash flows could be impacted. The process of determining the Company’s insurance reserves requires estimates with various assumptions, each of which can positively or negatively impact those balances. As of July 31, 20112012 and 20102011 the total amount reserved for related self-insured claims is $5.5$5.7 million and $4.8$5.5 million, respectively.
Share-BasedStock-Based Compensation
The Company accounts for our share-basedstock-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 share-basedstock-based payment awards made to employees, consultants and directors based on estimated fair value. The Company adopted ASC 718 using the modified-prospective transition method. Under this transition method, share-basedstock-based compensation cost
70
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010
recognized in the fiscal years ended July 31, 2012, 2011 and 2010 and 2009 includes share-basedstock-based compensation expense for all share-basedstock-based payment awards granted prior to, but not yet vested as of August 1, 2005, based on the measurement date (generally the grant date) fair value estimated in accordance with the original provisions of
68
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2011, 2010 AND 2009
ASC 718, and share-basedstock-based compensation expense for all share-basedstock-based payment awards granted subsequent to August 1, 2005, based on the measurement date fair value estimated in accordance with the provisions of ASC 718. ASC 718 requires companies to estimate the fair value of share-basedstock-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 highly 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, 2011
| | July 31, 2010
| | July 31, 2009
| | | July 31, 2012
| | July 31, 2011
| | July 31, 2010
|
---|
Expected life (in years) | | | 5.3 – 6.8 | | | | 5.2 – 7.1 | | | | 5.2 – 7.1 | | | | 5.2 – 6.8 | | | | 5.3 – 6.8 | | | | 5.2 – 7.1 | |
Risk-free interest rate | | | 1.7 – 2.9 | % | | | 2.1 – 3.3 | % | | | 1.4 – 3.1 | % | | | .68 – 1.7 | % | | | 1.7 – 2.9 | % | | | 2.1 – 3.3 | % |
Estimated volatility | | | 26 – 31 | % | | | 28 – 36 | % | | | 33 – 37 | % | | | 24 – 26 | % | | | 26 – 31 | % | | | 28 – 36 | % |
Expected dividends | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % |
Weighted-average fair value at measurement date | | $ | 13.40 | | | $ | 13.21 | | | $ | 13.09 | | | $ | 6.01 | | | $ | 6.59 | | | $ | 6.60 | |
Expected life—The Company’s expected life represents the period that the Company’s share-basedstock-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 share-basedstock-based payment awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its share-basedstock-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 USU.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.
Net cash proceeds from the exercise of stock options were $13.7 million, $7.1 million $6.3 million and $3.1$6.3 million for the years ended July 31, 2012, 2011 2010 and 20092010 respectively. The Company realized an income tax benefit of $4.4 million, $3.5 million $5.6 million and $4.6$5.6 million from stock option exercises during the years ended July 31, 2012, 2011 2010 and 20092010 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.
6971
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 2010 AND 20092010
Comprehensive Income
Comprehensive income includes all changes in shareholders’stockholders’ equity during a period from non-shareholdernon-stockholder sources. For the year ended July 31, 2012 accumulated other comprehensive loss was the effect of foreign currency translation adjustments and the effective portion of the interest rate swaps’ change in fair value. For the years ended July 31, 2011 2010 and 20092010 the only item in accumulated other comprehensive loss was the effect of foreign currency translation adjustments. Deferred taxes are not provided on cumulative translation adjustments where the Company expects earnings of a foreign subsidiary to be indefinitely reinvested.
Segment Reporting
The Company’s North American and UKU.K. regions are considered two separate operating segments, which have been aggregated into one reportable segment because they share similar economic characteristics.
Recently Issued Accounting Standards
As discussed above, in August 2010 the Company adopted ASU 2009-13, addresses the accounting for multiple-deliverable arrangements to enable accounting for products or services separately rather than as a combined unit and modifies the manner in which the transaction consideration is allocated across the separately identified deliverables. The Company prospectively adopted the standard and applied it to its revenue arrangements containing multiple deliverables. See “Revenue Recognition”, above.
In June 2011,December 2010, the FASBFinancial Accounting Standards Board (FASB) issued ASU 2011-05,2010-28,Comprehensive IncomeIntangibles-Goodwill and Other (Topic 220)350): PresentationWhen to Perform Step 2 of Comprehensive Incomethe Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (ASU 2011-05). This standard eliminatesASU 2010-28 amends the current option to report other comprehensive incomecriteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and its components in the statement of changes in equity. The new US GAAP requirements arerequires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. ASU 2010-28 was effective for public entities as of thefiscal years, and interim periods beginning of a fiscal year that begins after December 15, 2011 and interim and annual periods thereafter. Each component of net income and each component of other comprehensive income, together with totals for comprehensive income and its two parts — net income and other comprehensive income, will be disclosed.2010. The Company’s adoption of ASU 2011-05 is2010-28 did not expected to have a material impact on the Company’s consolidated results of operations or financial position.
In May 2011, the FASB issued ASU 2011-04,Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (ASU 2011-04), to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. ASU 2011-04 is effective during interim and annual periods beginning after December 15, 2011 and should be applied prospectively. The adoption of ASU 2011-04 is not expected to have a material impact on the Company’s consolidated results of operations or financial position.
In December 2010, the FASB issued ASU 2010-29,Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations (ASU 2010-29), to improve consistency in how the pro forma disclosures are calculated. Additionally, ASU 2010-29 enhances the disclosure requirements and requires description of the nature and amount of any material, nonrecurring pro forma adjustments directly attributable to a business combination. ASU 2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010 and should be applied prospectively to business combinations for which the acquisition date is after the effective date. The Company’s adoption of ASU 2010-29 did not have a material impact on the Company’s consolidated results of operations and financial statements.position.
In December 2010,May 2011, the FASB issued ASU 2010-28,2011-04,Intangibles-GoodwillFair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Other (Topic 350): WhenDisclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). Under ASU 2011-04 the guidance amends certain accounting and disclosure requirements to Perform Step 2 ofensure that fair value has the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (ASU 2010-28).same meaning in U.S. GAAP and in IFRS and that the respective fair value measurement and disclosure requirements are the same. ASU 2010-28 amends the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it2011-04 is more likely than not that a goodwill impairment exists. ASU 2010-28 will be effective for fiscal years,public entities during interim and interimannual periods beginning after December 15, 2010.2011. The Company’s adoption of ASU 2010-282011-04 did not have a material impact on the Company’s consolidated results of operations and financial statements.position.
As discussed above,In June 2011, the FASB issued ASU 2011-05,Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead comprehensive income must be reported in August 2010 the Company adopted ASU 2009-13, addresses the accounting for multiple-deliverable arrangements to enable accounting for products or services separately rather than aseither a single continuous statement
7072
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 2010 AND 20092010
combinedof comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. ASU 2011-05 is effective for public entities during the interim and annual periods beginning after December 15, 2011 with early adoption permitted. The Company’s adoption of ASU 2011-05 did not have a material impact on the Company’s consolidated results of operations and financial position.
In September 2011, the FASB issued ASU 2011-08,Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which simplifies how entities test goodwill for impairment. ASU 2011-08 gives entities the option, under certain circumstances, to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether further impairment testing is necessary. ASU 2011-08 is effective for fiscal years beginning after December 15, 2011, and modifiesearly adoption is permitted. The Company’s adoption of ASU 2011-08 did not have a material impact on the mannerCompany’s consolidated results of operations and financial position.
In July 2012, the FASB issued ASU 2012-02,Testing Indefinite-Lived Intangible Assets for Impairment, which amended the guidance in whichASU 2011-08 to simplify the transaction considerationtesting of indefinite-lived intangible assets other than goodwill for impairment. ASU 2012-02 becomes effective for annual and interim impairment tests performed for fiscal years beginning September 15, 2012 and earlier adoption is allocated acrosspermitted. The Company’s adoption of ASU 2012-02 will not have a material impact on the separately identified deliverables. The Company prospectively adopted the standardCompany’s consolidated results of operations and applied it to its revenue arrangements containing multiple deliverables. See “Revenue Recognition”, above.financial position.
Reclassifications
Certain reclassifications have been made to prior years’ consolidated financial statements to conform to the classifications used in fiscal 2011.2012.
Fiscal 2012 Transactions
The Company had no significant acquisitions during the year ended July 31, 2012. In August 2012, we acquired Ride Safely Middle East Auction, LLC located in Dubai, United Arab Emirates (UAE) for an immaterial amount.
Fiscal 2011 Transactions
In March 2011, the Company completed the cash acquisition of John Hewitt and Sons, Limited (Hewitt) in the United Kingdom through a stock purchase and the acquisition of Barodge Auto Pool (Barodge) in the USU.S. through an asset purchase. The consideration paid for these acquisitions consisted of $34.9 million in cash, net of cash acquired. The acquired assets consisted principally of accounts receivables, inventories, property and equipment, goodwill, accounts payable, deferred tax liabilities, taxes payable and covenants not to compete. The acquisitions were accounted for using the purchase method of accounting, and the operating results subsequent to the acquisition dates are included in the Company’s consolidated statements of income. These acquisitions were undertaken because of their strategic fit and have been accounted for using the purchase method in accordance with ASC 805,Business Combinations (ASC 805), which has resulted in the recognition of $19.3 million of goodwill in the Company’s consolidated financial statements. This goodwill arises because the purchase price for Hewitt and Barodge reflects a number of factors including:
its future earnings and cash flow potential;
the multiple to earnings, cash flow and other factors at which similar businesses have been purchased by other acquirers;
the competitive nature of the process by which the Company acquired the business; and
73
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010
because of the complementary strategic fit and resulting synergies it brings to existing operations.
In accordance with ASC 805, the assets acquired and liabilities assumed have been recorded at their estimated fair values.
Pro-forma Financial Information
Pro forma financial information for the fiscal 2011 acquisitions does not result in a significant change from actual results.
Fiscal 2010 Transactions
In January 2010, the Company completed the acquisition of D Hales Limited (D Hales) which operated five locations in the United Kingdom through a stock purchase. This acquisition was undertaken because of its strategic fit with the United Kingdom business and was accounted for using the purchase method, which has resulted in the recognition of goodwill in the Company’s consolidated financial statements. This goodwill arises because the purchase price for D Hales reflects a number of factors including:
its future earnings and cash flow potential;
the multiple to earnings, cash flow and other factors at which similar businesses have been purchased by other acquirers;
the competitive nature of the process by which the Company acquired the business; and
71
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2011, 2010 AND 2009
because of the complementary strategic fit and resulting synergies it brings to existing operations.
In accordance with ASC 805, the D Hales assets acquired and liabilities assumed were recorded at their estimated fair values.
Pro-forma Financial Information
Pro forma financial information for the fiscal 2010 acquisition does not result in a significant change from actual results.
Fiscal 2009 Transactions
None.
(3) | | Discontinued Operations |
During fiscal 2006, the Company discontinued the operations of Motors Auction Group (MAG) and sold or converted the related assets, which included real estate. A note receivable issued in 2006 was the sole consideration for the sale of certain MAG business assets and related real estate. During the third quarter of fiscal 2009, the Company received $12 million from the early payment of the note receivable. The deferred gain was recognized during the fiscal year ended July 31, 2009 upon payment of the note.
(4)
| | Cash, Cash Equivalents and Marketable Securities |
As of July 31, 2012, cash and cash equivalents include the following (in thousands):
| | | | Cost
| | Unrealized Gains
| | Unrealized Losses Less Than 12 Months
| | Unrealized Losses 12 Months or Longer
| | Estimated Fair Value
|
---|
Cash | | | | $ | 96,779 | | | $ | — | | | $ | — | | | $ | — | | | $ | 96,779 | |
Money market funds | | | | | 43,333 | | | | — | | | | — | | | | — | | | | 43,333 | |
Total | | | | $ | 140,112 | | | $ | — | | | $ | — | | | $ | — | | | $ | 140,112 | |
As of July 31, 2011, cash and cash equivalents include the following (in thousands):
| | | | Cost
| | Unrealized Gains
| | Unrealized Losses Less Than 12 Months
| | Unrealized Losses 12 Months or Longer
| | Estimated Fair Value
|
---|
Cash | | | | $ | 42,664 | | | $ | — | | | $ | — | | | $ | — | | | $ | 42,664 | |
Money market funds | | | | | 31,345 | | | | — | | | | — | | | | — | | | | 31,345 | |
Total | | | | $ | 74,009 | | | $ | — | | | $ | — | | | $ | — | | | $ | 74,009 | |
As of July 31, 2010, cash and cash equivalents include the following (in thousands):
| | | | Cost
| | Unrealized Gains
| | Unrealized Losses Less Than 12 Months
| | Unrealized Losses 12 Months or Longer
| | Estimated Fair Value
|
---|
Cash | | | | $ | 131,070 | | | $ | — | | | $ | — | | | $ | — | | | $ | 131,070 | |
Money market funds | | | | | 107,118 | | | | — | | | | — | | | | — | | | | 107,118 | |
Cash equivalents—US Treasury Bills | | | | | 30,000 | | | | — | | | | — | | | | — | | | | 30,000 | |
Total | | | | $ | 268,188 | | | $ | — | | | $ | — | | | $ | — | | | $ | 268,188 | |
The Company invests its excess cash in money market funds and USU.S. Treasury Bills. The Company’s cash and cash equivalents are placed with high credit quality financial institutions.
7274
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 2010 AND 20092010
(5)(4)
| | Accounts Receivable, Net |
Accounts receivable consists of the following (in thousands):
| | | July 31,
| | | | July 31,
| |
---|
| | | 2011
| | 2010
| | | 2012
| | 2011
|
---|
Advance charges receivable | | $ | 71,961 | | | $ | 72,841 | | | $ | 85,237 | | | $ | 71,961 | |
Trade accounts receivable | | | 53,569 | | | | 37,904 | | | | 54,229 | | | | 53,569 | |
Other receivables | | | 451 | | | | 1,157 | | | | 2,420 | | | | 451 | |
| | | 125,981 | | | | 111,902 | | | | 141,886 | | | | 125,981 | |
Less allowance for doubtful accounts | | | (3,122 | ) | | | (2,841 | ) | | | (2,920 | ) | | | (3,122 | ) |
| | $ | 122,859 | | | $ | 109,061 | | | $ | 138,966 | | | $ | 122,859 | |
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 proceeds to be collected from insurance companies and members.
The movements in the allowance for doubtful accounts are as follows (in thousands):
Description and Fiscal Year
| | | Balance at Beginning of Year
| | Charged to Costs And Expenses
| | Deductions to Bad Debt
| | Balance at End of Year
| | | Balance at Beginning of Year
| | Charged to Costs And Expenses
| | Deductions to Bad Debt
| | Balance at End of Year
|
---|
Allowance for doubtful accounts:
| | | |
July 31, 2012 | | | $ | 3,122 | | | $ | 1,626 | | | $ | (1,828 | ) | | $ | 2,920 | |
July 31, 2011 | | $ | 2,841 | | | $ | 478 | | | $ | (197 | ) | | $ | 3,122 | | | | 2,841 | | | | 478 | | | | (197 | ) | | | 3,122 | |
July 31, 2010 | | | 2,405 | | | | 1,591 | | | | (1,155 | ) | | | 2,841 | | | | 2,405 | | | | 1,591 | | | | (1,155 | ) | | | 2,841 | |
July 31, 2009 | | | 2,600 | | | | 783 | | | | (978 | ) | | | 2,405 | | |
(6)(5)
| | Property and Equipment, Net |
Property and equipment consists of the following (in thousands):
| | | July 31,
| | | | July 31,
| |
---|
| | | 2011
| | 2010
| | | 2012
| | 2011
|
---|
Transportation and other equipment | | $ | 65,009 | | | $ | 61,245 | | | $ | 52,066 | | | $ | 65,009 | |
Office furniture and equipment | | | 53,411 | | | | 43,307 | | | | 53,363 | | | | 53,411 | |
Software | | | 46,761 | | | | 22,915 | | | | 54,399 | | | | 46,761 | |
Land | | | 343,170 | | | | 306,251 | | | | 350,463 | | | | 343,170 | |
Buildings and leasehold improvements | | | 384,366 | | | | 399,350 | | | | 400,302 | | | | 384,366 | |
| | | 892,717 | | | | 833,068 | | | | 910,593 | | | | 892,717 | |
Less accumulated depreciation and amortization | | | (292,329 | ) | | | (259,554 | ) | | | (323,430 | ) | | | (292,329 | ) |
| | $ | 600,388 | | | $ | 573,514 | | | $ | 587,163 | | | $ | 600,388 | |
Depreciation expense on property and equipment was $34.8 million, $40.2 million $39.0 million and $37.3$39.0 million for the fiscal years ended July 31, 2012, 2011 2010 and 20092010 respectively. Amortization expense of software was $8.9 million, $0.8 million $0.3 million and $0.4$0.3 million for the fiscal years ended July 31, 2012, 2011 and 2010 and 2009 respectively.
75
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010
The change in carrying amount of goodwill is as follows (in thousands):
Balance as of July 31, 2009 | | | | $ | 166,327 | |
Goodwill recorded during the period | | | | | 12,599 | |
Effect of foreign currency translation | | | | | (3,056 | ) |
Balance as of July 31, 2010 | | | | $ | 175,870 | |
Goodwill recorded during the period | | | | | 19,309 | |
Effect of foreign currency translation | | | | | 3,441 | |
Balance as of July 31, 2011 | | | | $ | 198,620 | |
Goodwill recorded during the period | | | | | 1,420 | |
Effect of foreign currency translation | | | | | (3,602 | ) |
Balance as of July 31, 2012 | | | | $ | 196,438 | |
73
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2011, 2010 AND 2009
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 in the fourth quarter of fiscal 20112012 and 20102011 and goodwill was not impaired. As of July 31, 20112012 and 2010,2011, the cumulative amount of goodwill impairment losses recognized totaled $21.8 million.
Intangible assets consist of the following (in thousands, except remaining useful life):
| | | | July 31, 2011
| | | | | |
---|
| | | | Gross Carrying Amount
| | Accumulated Amortization
| | Net Book Value
| | Weighted Average Remaining Useful Life (in years)
|
---|
Amortized intangible assets:
| | | | | | | | | | | | | | | | | | |
Covenants not to compete | | | | $ | 10,896 | | | $ | (10,486 | ) | | $ | 410 | | | | 3 | |
Supply contracts | | | | | 27,238 | | | | (15,409 | ) | | | 11,829 | | | | 3 | |
Licenses and databases | | | | | 1,337 | | | | (828 | ) | | | 509 | | | | 3 | |
| | | | $ | 39,471 | | | $ | (26,723 | ) | | $ | 12,748 | | | | | |
| | | | July 31, 2012
| |
---|
| | | | Gross Carrying Amount
| | Accumulated Amortization
| | Net Book Value
| | Weighted Average Remaining Useful Life (in years)
|
---|
Amortized intangible assets:
| | | | | | | | | | | | | | | | | | |
Covenants not to compete | | | | $ | 11,087 | | | $ | (10,685 | ) | | $ | 402 | | | | 4 | |
Supply contracts | | | | | 26,041 | | | | (18,762 | ) | | | 7,279 | | | | 6 | |
Licenses and databases | | | | | 1,316 | | | | (1,012 | ) | | | 304 | | | | 1 | |
| | | | $ | 38,444 | | | $ | (30,459 | ) | | $ | 7,985 | | | | | |
| | | | July 31 , 2011
| |
---|
| | | | Gross Carrying Amount
| | Accumulated Amortization
| | Net Book Value
| | Weighted Average Remaining Useful Life (in years)
|
---|
Amortized intangible assets:
| | | | | | | | | | | | | | | | | | |
Covenants not to compete | | | | $ | 10,896 | | | $ | (10,486 | ) | | $ | 410 | | | | 3 | |
Supply contracts | | | | | 27,238 | | | | (15,409 | ) | | | 11,829 | | | | 3 | |
Licenses and databases | | | | | 1,337 | | | | (828 | ) | | | 509 | | | | 3 | |
| | | | $ | 39,471 | | | $ | (26,723 | ) | | $ | 12,748 | | | | | |
76
| | | | July 31 , 2010
| | | | | |
---|
| | | | Gross Carrying Amount
| | Accumulated Amortization
| | Net Book Value
| | Weighted Average Remaining Useful Life (in years)
|
---|
Amortized intangible assets:
| | | | | | | | | | | | | | | | | | |
Covenants not to compete | | | | $ | 10,697 | | | $ | (10,233 | ) | | $ | 464 | | | | 1 | |
Supply contracts | | | | | 22,365 | | | | (10,521 | ) | | | 11,844 | | | | 4 | |
Licenses and databases | | | | | 1,317 | | | | (609 | ) | | | 708 | | | | 4 | |
| | | | $ | 34,379 | | | $ | (21,363 | ) | | $ | 13,016 | | | | | |
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010
Aggregate amortization expense on intangible assets was $4.5 million, $4.7 million $3.9 million and $4.1$3.9 million for the fiscal years ended July 31, 2012, 2011 2010 and 2009,2010, respectively. Intangible amortization expense for the next five fiscal years based upon July 31, 20112012 intangible assets is expected to be as follows (in thousands):
2012 | | $ | 4,926 | | |
2013 | | | 4,124 | | | $ | 3,499 | |
2014 | | | 1,338 | | | | 1,186 | |
2015 | | | 1,090 | | | | 765 | |
2016 | | | 875 | | | | 543 | |
2017 | | | | 317 | |
Thereafter | | | 395 | | | | 1,675 | |
| | $ | 12,748 | | | $ | 7,985 | |
(9)(8)
| | Accounts Payable and Accrued Liabilities |
Accounts payable and accrued liabilities consist of the following (in thousands):
| | | July 31,
| | | | July 31,
| |
---|
| | | 2011
| | 2010
| | | 2012
| | 2011
|
---|
Trade accounts payable | | $ | 12,365 | | | $ | 14,923 | | | $ | 16,353 | | | $ | 12,365 | |
Accounts payable to sellers | | | 42,190 | | | | 40,370 | | | | 36,153 | | | | 42,190 | |
Accrued insurance | | | 5,494 | | | | 4,831 | | | | 5,686 | | | | 5,494 | |
Accrued compensation and benefits | | | 15,605 | | | | 14,298 | | | | 16,791 | | | | 15,605 | |
Buyer prepayments | | | 14,229 | | | | 9,105 | | |
Buyer deposits and prepayments | | | | 19,127 | | | | 14,229 | |
Other accrued liabilities | | | 11,825 | | | | 10,213 | | | | 8,848 | | | | 11,825 | |
| | $ | 101,708 | | | $ | 93,740 | | | $ | 102,958 | | | $ | 101,708 | |
74
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2011, 2010 AND 2009
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. The estimated liability is not discounted and is established based upon analysis of historical data, including the severity of our frequency of claims, actuarial estimates and is reviewed periodically by management to ensure that the liability is appropriate.
On December 14, 2010, the Company entered into an Amended and Restated Credit Facility Agreement (Credit Facility), which supersedes the Company’s previously disclosed credit agreement with Bank of America, N.A. (Bank of America). The Credit Facility is an unsecured credit agreement providing for (i) a $100.0 million Revolving Credit Facility,revolving credit facility, including a $100.0 million alternative currency borrowing sublimit and a $50.0 million letter of credit sublimit (Revolving Credit) and (ii) a term loan facility of $400.0 million (Term Loan).
On January 14, 2011 the full $400.0 million provided under the Term Loan was borrowed. On September, 29, 2011, the Company amended the credit agreement increasing the amount of the term loan facility from $400.0 million to $500.0 million.
The Term Loan, matures andwhich at July 31, 2012 had $443.8 million outstanding, amortizes $18.8 million each quarter beginning December 31, 2011 with all outstanding borrowings are due on December 14, 2015, with quarterly payments of $12.5 million in principal plus interest to be made beginning March 31, 2011 through the maturity date.2015. All amounts borrowed under the Term Loan may be prepaid without premium or penalty. During the twelve months ended July 31, 2011,2012, the Company made principal repayments of $25.0 million. At July 31, 2011, the outstanding Term Loan balance is $375.1$56.3 million. The Company has $1.8$1.6 million deferred financing costs in other assets as of July 31, 2011.2012.
Amounts borrowed under the Credit Facility bear interest, subject to certain restrictions, at a fluctuating rate based on (i) the Eurocurrency Rate,Rate; (ii) the Federal Funds RateRate; or (iii) the Prime Rate as described in the Credit Facility. The Company has entered into two interest rate swaps (seeNote 10. Derivatives and Hedging) to exchange its variable interest rate payments commitment for fixed interest rate payments on the Term Loan
77
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010
balance, which at July 31, 2012, totaled $443.8 million. A default interest rate applies on all obligations during an event of default under the credit facility, at a rate per annum equal to 2.0% above the otherwise applicable interest rate. At July 31, 2011,2012, the Company’s interest rate wasis the 0.25% Eurocurrency Rate plus 1.50%. At July 31, 2011, the Eurocurrency1.50% Applicable Rate. The Applicable Rate was 1.69%can fluctuate between 1.5% and 2.0% depending on the Company’s consolidated net leverage ratio (as defined in the Credit Facility). The Credit Facility is guaranteed by the Company’s material domestic subsidiaries. The carrying valueamount of the loan payableCredit Facility is comprised of borrowing under which the interest accrued under a fluctuating interest rate structure. Accordingly, the carrying value approximates its fair value at July 31, 2011 due to the variable rate nature2012 and is classified within level II of the loan.fair value hierarchy.
Amounts borrowed under the Revolving Credit may be repaid and reborrowed until the maturity date, which is December 14, 2015. The Credit Facility requires the Company to pay a commitment fee on the unused portion of the Revolving Credit. The commitment fee ranges from 0.075% to 0.125% per annum depending on the Company’s leverage ratio, as of the end on the previous quarter.ratio. The Company had no outstanding borrowings under the Revolving Credit at the end of the period.
The Amended and Restated Credit AgreementFacility contains customary representations and warranties and may place certain business operating restrictions on us relating to, among other things, indebtedness, liens and other encumbrances, investments, mergers and acquisitions, asset sales, dividends and distributions and redemptions of capital stock. In addition, the Amended and Restated Credit AgreementFacility provides for the following financial covenants: 1)(i) earnings before income tax, depreciation and amortization (EBITDA), 2); (ii) leverage ratio, 3)ratio; (iii) interest coverage ratio,ratio; and 4)(iv) limitations on capital expenditures. The Amended and Restated Credit AgreementFacility contains events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, cross-defaults to certain other indebtedness, bankruptcy and insolvency defaults, material judgments, invalidity of the loan documents and events constituting a change of control. The Company is in compliance with all covenants as of July 31, 2011. Please refer to the commercial commitment table in the Lease, Purchase, and Other Contractual Obligations section for the payment schedule.
75
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2011, 2010 AND 2009
2012.
The Company’s Term Loan requires quarterly payments of $12.5$18.8 million, and the Term Loan matures and all outstanding borrowings are due on December 14, 2015. At July 31, 2011,2012, future annual payments are as follows (in thousands):
Years Ending July 31,
| | | | Term Loan
|
---|
2013 | | | | $ | 75,000 | |
2014 | | | | | 75,000 | |
2015 | | | | | 75,000 | |
2016 | | | | | 218,750 | |
| | | | $ | 443,750 | |
(10) | | Derivatives and Hedging |
The Company has entered into two interest rate swaps to exchange its variable interest rate payments commitment for fixed interest rate payments on the Term Loan balance which, at July 31, 2012 totaled $443.8 million. The first swap fixed the Company’s interest rate at 85 basis points plus the one month LIBOR rate on the first $337.5 million of its term debt. The second swap fixed the Company’s interest rate at 69 basis points plus the one month LIBOR rate on the next $106.3 million of its term debt.
Years Ending July 31,
| | | | Term Loan
|
---|
2012 | | | | $ | 50,139 | |
2013 | | | | | 50,000 | |
2014 | | | | | 50,000 | |
2015 | | | | | 50,000 | |
2016 | | | | | 175,000 | |
| | | | $ | 375,139 | |
The swap is a designated effective cash flow hedge under ASC 815,Derivatives and Hedging, and is recorded in other liabilities at its fair value, which at July 31, 2012 is $4.9 million. Each quarter, the Company measures hedge effectiveness using the “hypothetical derivative method” and records in earnings any hedge ineffectiveness with the effective portion of the hedge’s change in fair value recorded in other comprehensive income or loss.
The notional amount of the swap amortizes until all outstanding borrowings are due on the Term Loan on December 14, 2015 (seeNote 9. Long-Term Debt). At July 31, 2012, the notional amount of the interest rate
78
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010
swaps was equal to the Term Loan balance, $443.8 million. The notional amount of the two derivative transactions amortizes $18.8 million per quarter through September 30, 2015 and $200.0 million on December 14, 2015.
The hedge provided by the swap could prove to be ineffective for a number of reasons, including early retirement of the Term Loan, as allowed under the Credit Facility, or in the event the counterparty to the interest rate swap is determined in the future to not be creditworthy. The Company has no plans for early retirement of the Term Loan.
The interest rate swaps are classified within Level II of the fair value hierarchy as the derivatives are valued using observable inputs. The Company determines fair value of the derivative utilizing observable market data of swap rates and basis rates. These inputs are placed into a pricing model using a discounted cash flow methodology in order to calculate the mark-to-market value of the interest rate swap.
The fair value of the interest rate swaps, a level II financial instrument, are (in thousands):
As of
| | | | Asset or (Liability)
| | Gain or (loss) in Comprehensive Income
| | Amount Reclassified into Earnings
|
---|
July 31, 2012 | | | | $ | (4,872 | ) | | $ | (3,110 | ) | | $ | — | |
July 31, 2011 | | | | $ | — | | | $ | — | | | $ | — | |
(11) | | Shareholders’Stockholders’ Equity |
General
The Company has authorized the issuance of 180 million shares of common stock, nowith a par value of $0.0001, of which 66,005,517124,393,700 shares were issued and outstanding at July 31, 2011.2012. As of July 31, 20112012 and 2010,2011, the Company has reserved 9,825,92418,170,575 and 10,630,90419,651,848 shares of common stock, respectively, for the issuance of options granted under the Company’s stock option plans and 711,7101,325,651 and 775,3061,423,420 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 5 million shares of preferred stock, nowith a par value of $0.0001, none of which were issued or outstanding at July 31, 2011.2012 or 2011, which have the rights and preferences as the Company’s Board of Directors shall determine, from time to time.
On March 8, 2012, the Company’s board of directors approved a two-for-one stock split effected in the form of a stock dividend. The additional shares resulting from the stock split were distributed after the closing of trading on March 28, 2012 to stockholders of record on March 23, 2012.
Stock Repurchase
TheOn September 22, 2011, the Company’s Boardboard of Directors has authorizeddirectors approved a 2940 million share increase in the Company’s stock repurchase program.program, bringing the total current authorization to 98 million shares. The repurchases may be effected through solicited or unsolicited transactions in the open market or in privately negotiated transactions. No time limit has been placed on the duration of the stock repurchase program. Subject to applicable securities laws, such repurchases will be made at such times and in such amounts as the Company deems appropriate and may be discontinued at any time. For the year ended July 31, 2011,2012, the Company repurchased 6,682,3178,880,708 shares of our common stock at ana weighted average price of $40.83.$22.51. For the year ended July 31, 2011, the Company repurchased 13,364,634 shares of our common stock at a weighted average price of $20.42. For the year ended July 31, 2010, the Company repurchased 121,251242,502 shares of our common stock at a weighted average price of $36.76. For the year ended July 31, 2009 the Company did not repurchase any shares under our stock repurchase program.$18.38. As of July 31, 2011,2012, the total number of shares repurchased under the program was 20,453,03749,786,782 and 8,546,96348,213,218 shares were available for repurchase under the program. SeeNote 17. Related Party Transactions, for discussion of related party stock repurchases.
79
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010
Additionally, on January 14, 2011, the Company completed a tender offer to purchase up to 10,526,31521,052,630 shares of its common stock at a price of $38.00$19.00 per share. Directors and executive officers of Copart were expressly prohibited from participating in the tender offer by our board of directors under the Company’s Securities Trading Policy. In connection with the tender offer, the Company accepted for purchase 12,172,08824,344,176 shares of its common stock. The shares accepted for purchase are comprised of the 10,526,31521,052,630 shares the Company offered to purchase and an additional 1,645,7733,291,546 shares purchased pursuant to the Company’s right to purchase additional shares up to 2% of its outstanding shares. The shares purchased as a result of the tender offer are not part of the Company’s repurchase program. The purchase of the shares of common stock was funded by the proceeds relating to the issuance of $400.0 million of long term debt. The impact dilutive earnings per share impact of all repurchased shares on the weighted average number of common shares outstanding for the year ended July 31, 20112012 is $0.23.$0.04.
In the secondfirst and fourth quarters of fiscal year 2009 and the first quarter of fiscal year 2010, Mr. Adair, Chief Executive Officer (and then President),certain executive officers exercised stock options through cashless exercises. In the fourth quarter of fiscal year 2010, Mr. Johnson, Chairman of the Board, exercised stock options through a cashless exercise. In the second, third and fourth quarters of fiscal year 2011, certain executive officers exercised stock
76
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2011, 2010 AND 2009
options through cashless exercises. In the first, second and third quarters of fiscal year 2012, certain executive officers exercised stock options through cashless exercises. A portion of the options exercised were net settled in satisfaction of the exercise price and federal and state minimum statutory tax withholding requirements. The Company remitted $2.6 million, $4.2 million $7.4 million and $9.8$7.4 million, in fiscal 2012, 2011 2010 and 2009,2010, respectively, to the proper taxing authorities in satisfaction of the employees’ minimum statutory withholding requirements. The exercises are summarized in the following table:
Period
| | | Options Exercised
| | Exercise Price
| | Shares Net Settled for Exercise
| | Shares Withheld for Taxes(1)
| | Net Shares to Employee
| | Share Price for Withholding
| | Tax Withholding (in 000’s)
| | | Options Exercised
| | Exercise Price
| | Shares Net Settled for Exercise
| | Shares Withheld for Taxes(1)
| | Net Shares to Employee
| | Share Price for Withholding
| | Tax Withholding (in 000’s)
|
---|
FY 2009—Q2 | | | 600,000 | | | $ | 4.47 | | | | 96,929 | | | | 222,817 | | | | 280,254 | | | $ | 26.93 | | | $ | 6,000 | | |
FY 2009—Q4 | | | 361,035 | | | $ | 11.12 | | | | 116,741 | | | | 109,595 | | | | 134,699 | | | $ | 34.39 | | | $ | 3,769 | | |
FY 2010—Q1 | | | 323,631 | | | $ | 13.03 | | | | 114,354 | | | | 95,746 | | | | 113,531 | | | $ | 36.89 | | | $ | 3,532 | | | | 647,262 | | | $ | 6.52 | | | | 228,708 | | | | 191,492 | | | | 227,062 | | | $ | 18.45 | | | $ | 3,533 | |
FY 2010—Q4 | | | 350,000 | | | $ | 12.91 | | | | 122,922 | | | | 105,827 | | | | 121,251 | | | $ | 36.76 | | | $ | 3,890 | | | | 700,000 | | | $ | 6.46 | | | | 245,844 | | | | 211,654 | | | | 242,502 | | | $ | 18.38 | | | $ | 3,890 | |
FY 2011—Q2 | | | 88,750 | | | $ | 16.93 | | | | 38,025 | | | | 18,917 | | | | 31,808 | | | $ | 39.51 | | | $ | 748 | | | | 177,500 | | | $ | 8.47 | | | | 76,050 | | | | 37,834 | | | | 63,616 | | | $ | 19.76 | | | $ | 748 | |
FY 2011—Q3 | | | 274,167 | | | $ | 22.03 | | | | 147,748 | | | | 59,016 | | | | 67,403 | | | $ | 40.80 | | | $ | 2,408 | | | | 548,334 | | | $ | 11.02 | | | | 295,496 | | | | 118,032 | | | | 134,806 | | | $ | 20.40 | | | $ | 2,408 | |
FY 2011—Q4 | | | 90,000 | | | $ | 18.95 | | | | 38,198 | | | | 24,183 | | | | 27,619 | | | $ | 44.65 | | | $ | 1,080 | | | | 180,000 | | | $ | 9.48 | | | | 76,396 | | | | 48,366 | | | | 55,238 | | | $ | 22.33 | | | $ | 1,080 | |
FY 2012—Q1 | | | | 40,000 | | | $ | 9.00 | | | | 16,082 | | | | 8,974 | | | | 14,944 | | | $ | 22.39 | | | $ | 201 | |
FY 2012—Q2 | | | | 20,000 | | | $ | 9.00 | | | | 7,506 | | | | 4,584 | | | | 7,910 | | | $ | 23.98 | | | $ | 110 | |
FY 2012—Q3 | | | | 322,520 | | | $ | 10.74 | | | | 131,298 | | | | 85,684 | | | | 105,538 | | | $ | 26.38 | | | $ | 2,260 | |
(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 2.55 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 shareholdersstockholders in 1994. The ESPP was amended and restated in 2003 and again approved by the shareholders.stockholders. Under the ESPP, employees of the Company who elect to participate have the right to purchase common stock at a 15 percent 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 percent 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 each of fiscal 2012, 2011 and 2010 was 97,769, 127,192 and 2009 was 63,596, 68,035 and 82,834,136,070, respectively. As of July 31, 2011, 1,788,2902012, 3,674,349 shares of common stock have been issued pursuant to the ESPP and 711,7101,325,651 shares remain available for purchase under the ESPP.
80
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010
Stock Options
In December 2007, the Company adopted the Copart, Inc. 2007 Equity Incentive Plan (Plan), presently covering an aggregate of 4.08.0 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. At July 31, 2011, 1,473,3272012, 1,991,539 shares were available for future grant under the Plan.
In April 2009, the Compensation Committee of the Company’s Board of Directors, following shareholderstockholder approval of proposed grants at a special meeting of shareholders,stockholders, approved the grant to each of Willis J. Johnson, the Company’s Chairman (and then Chief Executive Officer), and A. Jayson Adair, the Company’s Chief Executive Office (and then President), of nonqualified stock options to purchase 2,000,0004,000,000 shares of the Company’s common stock at an exercise price of $30.21$15.11 per share, which equaled the closing price of the
77
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2011, 2010 AND 2009
Company’s common stock on April 14, 2009, 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 the executive, with twenty percent (20%) vesting on April 14, 2010, and the balance vesting ratably over the subsequent four years. Each option will become fully vested, assuming continued service, on April 14, 2014, the fifth anniversary of the date of grant. If, prior to a change in control, either executive’s employment is terminated without cause, then one hundred percent (100%) of the shares subject to that executive’s stock option will immediately vest. If, upon or following a change in control, either the Company or a successor entity terminates the executive’s service without cause, or the executive resigns for good reason, then one hundred percent (100%) of the shares subject to his stock option will immediately vest. The total compensation expense to be recognized by the Company over the five year service period is $26.1 million dollars per grant. The Company recognized $10.2 million, $10.1$10.2 million, and $3.0$10.1 million in compensation expense in fiscal 2012, 2011 2010 and 2009,2010, respectively relating to these grants.
The following table sets forth share-basedstock-based compensation expense included in the company’s consolidated statements of income (in thousands):
| | | Years Ended July 31,
| | | | Years Ended July 31,
| |
---|
| | | 2011
| | 2010
| | 2009
| | | 2012
| | 2011
| | 2010
|
---|
General and administrative | | | $ | 18,802 | | | $ | 17,976 | | | $ | 16,846 | |
Yard operations | | $ | 1,031 | | | $ | 1,109 | | | $ | 1,220 | | | | 2,989 | | | | 1,031 | | | | 1,109 | |
General and administrative | | | 17,976 | | | | 16,846 | | | | 8,193 | | |
Total | | $ | 19,007 | | | $ | 17,955 | | | $ | 9,413 | | | $ | 21,791 | | | $ | 19,007 | | | $ | 17,955 | |
There were no material compensation costs capitalized as part of the cost of an asset as of July 31, 2012 and 2011.
81
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 and 2010.AND 2010
A summary of the status of the Company’s non-vested shares as of July 31, 20112012 and changes during fiscal 20112012 is as follows:
| | | Number of Shares (in 000’s)
| | Weighted Average Grant- date Fair Value
| | | Number of Shares (in 000’s)
| | Weighted Average Grant- date Fair Value
|
---|
Non-vested shares at July 31, 2010 | | | 4,633 | | | $ | 13.23 | | |
Non-vested shares at July 31, 2011 | | | | 8,328 | | | $ | 6.66 | |
Grants of options | | | 1,117 | | | | 13.40 | | | | 880 | | | | 6.01 | |
Vested | | | (1,496 | ) | | | 13.10 | | | | (3,156 | ) | | | 6.63 | |
Forfeitures or expirations | | | (90 | ) | | | 12.50 | | | | (39 | ) | | | 5.33 | |
Non-vested shares at July 31, 2011 | | | 4,164 | | | $ | 13.32 | | |
Non-vested shares at July 31, 2012 | | | | 6,013 | | | $ | 6.59 | |
Option activity for the year ended July 31, 20112012 is summarized as follows:
| | | Shares (in 000’s)
| | Weighted- Average Exercise Price
| | Weighted-Average Remaining Contractual Term
| | Aggregate Intrinsic Value (in 000’s)
| | | Shares (in 000’s)
| | Weighted- Average Exercise Price
| | Weighted-Average Remaining Contractual Term
| | Aggregate Intrinsic Value (in 000’s)
|
---|
Outstanding at July 31, 2010 | | | 8,052 | | | $ | 29.07 | | | | 7.49 | | | $ | 60,151 | | |
Outstanding at July 31, 2011 | | | | 16,705 | | | $ | 15.50 | | | | 7.18 | | | $ | 103,979 | |
Grants of options | | | 1,117 | | | | 38.46 | | | | — | | | | — | | | | 880 | | | | 22.54 | | | | — | | | | — | |
Exercises | | | (726 | ) | | | 21.11 | | | | — | | | | — | | | | (1,367 | ) | | | 11.58 | | | | — | | | | — | |
Forfeitures or expirations | | | (90 | ) | | | 33.71 | | | | — | | | | — | | | | (39 | ) | | | 16.43 | | | | — | | | | — | |
Outstanding at July 31, 2011 | | | 8,353 | | | $ | 31.00 | | | | 7.18 | | | $ | 103,979 | | |
Exercisable at July 31, 2011 | | | 4,189 | | | $ | 28.67 | | | | 6.21 | | | $ | 61,935 | | |
Vested and expected to vest at July 31, 2011 | | | 8,031 | | | $ | 31.01 | | | | 7.19 | | | $ | 99,933 | | |
Outstanding at July 31, 2012 | | | | 16,179 | | | $ | 16.24 | | | | 6.60 | | | $ | 121,977 | |
Exercisable at July 31, 2012 | | | | 10,166 | | | $ | 15.38 | | | | 6.02 | | | $ | 85,146 | |
Vested and expected to vest at July 31, 2012 | | | | 15,533 | | | $ | 16.21 | | | | 6.61 | | | $ | 117,326 | |
As required by ASC 718, the Company made an estimate of expected forfeitures and is recognizing compensation cost only for those equity awards expected to vest.
78
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2011, 2010 AND 2009
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, 20112012 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, 2011.2012. The aggregate intrinsic value of options exercised was $16.6 million, $16.2 million $19.0 million and $29.8$19.0 million in the fiscal years ended July 31, 2012, 2011 2010 and 2009,2010, 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, 2011,2012, the total compensation cost related to non-vested share-basedstock-based payment awards granted to employees under the Company’s stock option plans but not yet recognized was $50.6$35.4 million, net of estimated forfeitures. This cost will be amortized on a straight-line basis over a weighted average remaining term of 3.062.44 years and will be adjusted for subsequent changes in estimated forfeitures. The fair value of options vested in fiscal 2012, 2011 and 2010 and 2009 is $19.6$20.9 million, $19.6 million and $7.8$19.6 million, respectively.
82
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010
A summary of stock options outstanding and exercisable at July 31, 20112012 follows:
| | | | Options Outstanding
| | Options Exercisable
| |
---|
Range of Exercise Prices
| | | | Number Outstanding at July 31, 2011 (in 000’s)
| | Weighted- Average Remaining Contractual Life
| | Weighted- Average Exercise Price
| | Number Exercisable at July 31, 2011 (in 000’s)
| | Weighted- Average Exercise Price
|
---|
$7.75–$23.73 | | | | | 517 | | | | 2.17 | | | $ | 15.43 | | | | 517 | | | $ | 15.43 | |
$24.03–$29.89 | | | | | 803 | | | | 4.60 | | | $ | 25.22 | | | | 795 | | | $ | 25.18 | |
$30.21–$30.21 | | | | | 4,000 | | | | 7.71 | | | $ | 30.21 | | | | 1,800 | | | $ | 30.21 | |
$32.76–$44.12 | | | | | 3,033 | | | | 8.01 | | | $ | 36.20 | | | | 1,077 | | | $ | 34.95 | |
| | | | | 8,353 | | | | 7.18 | | | $ | 31.00 | | | | 4,189 | | | $ | 28.67 | |
| | | | Options Outstanding
| | Options Exercisable
| |
---|
Range of Exercise Prices
| | | | Number Outstanding at July 31, 2012 (in 000’s)
| | Weighted- Average Remaining Contractual Life
| | Weighted- Average Exercise Price
| | Number Exercisable at July 31, 2012 (in 000’s)
| | Weighted- Average Exercise Price
|
---|
$3.87–$11.87 | | | | | 479 | | | | 1.25 | | | $ | 7.49 | | | | 479 | | | $ | 7.49 | |
$12.01–$14.95 | | | | | 1,090 | | | | 3.90 | | | $ | 12.72 | | | | 1,089 | | | $ | 12.72 | |
$15.11–$15.11 | | | | | 8,000 | | | | 6.71 | | | $ | 15.11 | | | | 5,200 | | | $ | 15.11 | |
$16.38–$26.08 | | | | | 6,610 | | | | 7.30 | | | $ | 18.82 | | | | 3,398 | | | $ | 17.78 | |
| | | | | 16,179 | | | | 6.60 | | | $ | 16.24 | | | | 10,166 | | | $ | 15.38 | |
On March 6, 2003, the Company’s Board of Directors declared a dividend of one right (Right) to purchase one-thousandth share of the Company’s Series A Participating Preferred Stock for each outstanding share of Common Stock of the Company. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Preferred Stock at an exercise price of $120.48.
In general, subjectOn January 10, 2012, the Company entered into an amendment to certain limited exceptions, the Preferred Stock Rights become exercisable when a person or group acquires 15% or moreAgreement, dated as of March 6, 2003, as amended on March 15, 2006, between the Company and Computershare Trust Company, N.A. (formerly Equiserve Trust Company, N.A.), as Rights Agent (collectively the “Rights Agreement”). The Amendment accelerated the Final Expiration Date of the Company’s common stock orSeries A Participating Preferred Stock purchase rights (the “Rights”) from March 21, 2013 to January 10, 2012, and resulted in a tender offer or exchange offer for 15% or moretermination of the Company’s common stock is announced or commenced. After any such event,Rights Agreement and the Company’s other shareholders may purchase an additional $120.48 worthexpiration of additional sharesall outstanding Rights effective as of the Company’s common stock at 50% of the then-current market price. The Rights will cause substantial dilution to a person or group that attempts to acquire us on terms not approved by the Company’s Board of Directors. The Rights may be redeemed by the Company at $0.001 per Right at any time before any person or group acquires 15% or more of our outstanding common stock.January 10, 2012.
Income from continuing operations before taxes consists of the following (in thousands):
| | | | Years Ended July 31,
| |
---|
| | | | 2011
| | 2010
| | 2009
|
---|
US | | | | $ | 234,035 | | | $ | 217,947 | | | $ | 220,005 | |
Non US | | | | | 29,842 | | | | 21,548 | | | | 7,727 | |
Total income before taxes | | | | $ | 263,877 | | | $ | 239,495 | | | $ | 227,732 | |
| | | | Years Ended July 31,
| |
---|
| | | | 2012
| | 2011
| | 2010
|
---|
U.S. | | | | $ | 237,596 | | | $ | 234,035 | | | $ | 217,947 | |
Non-U.S. | | | | | 40,460 | | | | 29,842 | | | | 21,548 | |
Total income before taxes | | | | $ | 278,056 | | | $ | 263,877 | | | $ | 239,495 | |
79The Company’s income tax expense (benefit) from continuing operations consists of (in thousands):
| | | | Years Ended July 31,
| |
---|
| | | | 2012
| | 2011
| | 2010
|
---|
Federal:
| | | | | | | | | | | | | | |
Current | | | | $ | 102,152 | | | $ | 84,119 | | | $ | 83,791 | |
Deferred | | | | | (14,557 | ) | | | 278 | | | | (3,714 | ) |
| | | | | 87,595 | | | | 84,397 | | | | 80,077 | |
State:
| | | | | | | | | | | | | | |
Current | | | | | 3,332 | | | | 7,186 | | | | 6,664 | |
Deferred | | | | | (461 | ) | | | (128 | ) | | | 473 | |
| | | | | 2,871 | | | | 7,058 | | | | 7,137 | |
Foreign:
| | | | | | | | | | | | | | |
Current | | | | | 8,460 | | | | 5,818 | | | | 1,916 | |
Deferred | | | | | (2,989 | ) | | | 229 | | | | (1,262 | ) |
| | | | | 5,471 | | | | 6,047 | | | | 654 | |
| | | | $ | 95,937 | | | $ | 97,502 | | | $ | 87,868 | |
83
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 2010 AND 20092010
The Company’s income tax expense (benefit) from continuing operations consists of (in thousands):
| | | | Years Ended July 31,
| |
---|
| | | | 2011
| | 2010
| | 2009
|
---|
Federal:
| | | | | | | | | | | | | | |
Current | | | | $ | 84,119 | | | $ | 83,791 | | | $ | 78,817 | |
Deferred | | | | | 278 | | | | (3,714 | ) | | | 168 | |
| | | | | 84,397 | | | | 80,077 | | | | 78,985 | |
State:
| | | | | | | | | | | | | | |
Current | | | | | 7,186 | | | | 6,664 | | | | 8,151 | |
Deferred | | | | | (128 | ) | | | 473 | | | | (2 | ) |
| | | | | 7,058 | | | | 7,137 | | | | 8,149 | |
Foreign:
| | | | | | | | | | | | | | |
Current | | | | | 5,818 | | | | 1,916 | | | | 1,651 | |
Deferred | | | | | 229 | | | | (1,262 | ) | | | (599 | ) |
| | | | | 6,047 | | | | 654 | | | | 1,052 | |
| | | | $ | 97,502 | | | $ | 87,868 | | | $ | 88,186 | |
A reconciliation by year of the expected USU.S. statutory tax rate (35% of income before income taxes) to the actual effective income tax rate is as follows:
| | | Years Ended July 31,
| | | | Years Ended July 31,
| |
---|
| | | 2011
| | 2010
| | 2009
| | | 2012
| | 2011
| | 2010
|
---|
Federal statutory rate | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % |
State income taxes, net of federal income tax benefit | | | 1.7 | | | | 2.0 | | | | 3.5 | | | | 1.2 | | | | 1.7 | | | | 2.0 | |
Foreign | | | (0.4 | ) | | | (1.7 | ) | | | (0.8 | ) | | | (1.9 | ) | | | (0.4 | ) | | | (1.7 | ) |
Compensation and fringe benefits | | | 0.2 | | | | 0.2 | | | | 0.3 | | | | — | | | | 0.2 | | | | 0.2 | |
Other differences | | | 0.4 | | | | 1.2 | | | | 0.7 | | | | 0.2 | | | | 0.4 | | | | 1.2 | |
Effective tax rate | | | 36.9 | % | | | 36.7 | % | | | 38.7 | % | | | 34.5 | % | | | 36.9 | % | | | 36.7 | % |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below, (in thousands):
| | | | July 31,
| |
---|
| | | | 2011
| | 2010
|
---|
Deferred tax assets:
| | | | | | | | | | |
Allowance for doubtful accounts | | | | $ | 1,063 | | | $ | 982 | |
Accrued compensation and benefits | | | | | 18,249 | | | | 13,898 | |
State taxes | | | | | 1,488 | | | | 1,358 | |
Accrued other | | | | | 3,006 | | | | 1,884 | |
Deferred revenue | | | | | — | | | | 1,910 | |
Property and equipment | | | | | 3,378 | | | | 8,693 | |
State net operating losses | | | | | 398 | | | | 327 | |
Long-term note write off | | | | | — | | | | 423 | |
Federal tax benefit | | | | | 5,758 | | | | 4,348 | |
Total gross deferred tax assets | | | | | 33,340 | | | | 33,823 | |
Less valuation allowance | | | | | (948 | ) | | | (787 | ) |
Net deferred tax assets | | | | | 32,392 | | | | 33,036 | |
80
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2011, 2010 AND 2009
| | | July 31,
| | | | July 31,
| |
---|
| | | 2011
| | 2010
| | | 2012
| | 2011
|
---|
Deferred tax assets:
| | | |
Allowance for doubtful accounts | | | $ | 1,013 | | | $ | 1,063 | |
Accrued compensation and benefits | | | | 23,902 | | | | 18,249 | |
State taxes | | | | 625 | | | | 1,488 | |
Accrued other | | | | 2,634 | | | | 3,006 | |
Deferred revenue | | | | 2,056 | | | | — | |
Property and equipment | | | | 10,969 | | | | 3,378 | |
Losses carried forward | | | | 1,028 | | | | 398 | |
Federal tax benefit | | | | 7,989 | | | | 5,758 | |
Total gross deferred tax assets | | | | 50,216 | | | | 33,340 | |
Less valuation allowance | | | | (1,211 | ) | | | (948 | ) |
Net deferred tax assets | | | | 49,005 | | | | 32,392 | |
Deferred tax liabilities:
| | | | |
Vehicle pooling costs | | | (4,956 | ) | | | (9,414 | ) | | | (4,537 | ) | | | (4,956 | ) |
Prepaid insurance | | | (1,397 | ) | | | (671 | ) | | | (792 | ) | | | (1,397 | ) |
Deferred revenue | | | (1,721 | ) | | | — | | | | — | | | | (1,721 | ) |
Intangibles and goodwill | | | (25,031 | ) | | | (23,640 | ) | | | (24,758 | ) | | | (25,031 | ) |
Workers compensation | | | (359 | ) | | | — | | | | (224 | ) | | | (359 | ) |
Total gross deferred tax liabilities | | | (33,464 | ) | | | (33,725 | ) | | | (30,311 | ) | | | (33,464 | ) |
Net deferred tax liability | | $ | (1,072 | ) | | $ | (689 | ) | |
Net deferred tax asset (liability) | | | $ | 18,694 | | | $ | (1,072 | ) |
The above net deferred tax asset and liability has been reflected in the accompanying consolidated balance sheets as follows (in thousands):
| | | July 31,
| | | | July 31,
| |
---|
| | | 2010
| | 2010
| | | 2012
| | 2011
|
---|
North America current liabilities | | $ | 440 | | | $ | 1,154 | | | $ | 3,601 | | | $ | (440 | ) |
North America non-current assets | | | (9,425 | ) | | | (10,213 | ) | | | 22,279 | | | | 9,425 | |
UK non-current liabilities | | | 10,057 | | | | 9,748 | | |
Net deferred tax liability | | $ | 1,072 | | | $ | 689 | | |
U.K. non-current liabilities | | | | (7,186 | ) | | | (10,057 | ) |
Net deferred tax asset (liability) | | | $ | 18,694 | | | $ | (1,072 | ) |
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
84
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010
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, 2012 and 2011 and 2010 was $0.9$1.2 million and $0.8$0.9 million, respectively.
At July 31, 20112012 and 2010,2011, if recognized, the portion of liabilities for unrecognized tax benefits that would favorably affect the Company’s effective tax rate is $13.2$14.1 million and $9.9$13.2 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 (in thousands):
| | | Years Ended July 31,
| | | | Years Ended July 31,
| |
---|
| | | 2011
| | 2010
| | | 2012
| | 2011
| | 2010
|
---|
Balance as of August 1 | | $ | 18,144 | | | $ | 15,965 | | | $ | 18,794 | | | $ | 18,144 | | | $ | 15,965 | |
Increases related to current year tax positions | | | 1,592 | | | | 4,514 | | | | 2,036 | | | | 1,592 | | | | 4,514 | |
Prior year tax positions: | | | | |
Prior year increase | | | 519 | | | | 74 | | | | 618 | | | | 519 | | | | 74 | |
Prior year decrease | | | (531 | ) | | | (532 | ) | | | (952 | ) | | | (531 | ) | | | (532 | ) |
Cash settlement | | | — | | | | (302 | ) | | | (452 | ) | | | — | | | | (302 | ) |
Lapse of statute of limitations | | | (930 | ) | | | (1,575 | ) | | | (3,098 | ) | | | (930 | ) | | | (1,575 | ) |
Balance at July 31 | | $ | 18,794 | | | $ | 18,144 | | | $ | 16,946 | | | $ | 18,794 | | | $ | 18,144 | |
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, 2012, 2011 and 2010, the Company had accrued interest and penalties related to the unrecognized tax benefits of $5.6 million, $6.0 million and $5.2 million, respectively.
81
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2011, 2010 AND 2009
The Company is currently under audit by the statesstate of Florida and ConnecticutNew York for fiscal years 2007, 2008, 2009 and 2009.2010. The Company is no longer subject to USU.S. federal and state income tax examination for fiscal years prior to 2008,2009, with the exception of Florida and Connecticut.New York.
In fiscal years 2012, 2011 2010 and 2009,2010, the Company recognized a tax benefit of $4.3 million, $3.6 million $6.2 million and $4.6$6.2 million, respectively, upon the exercise of certain stock options which is reflected in shareholders’stockholders’ equity.
The Company has not provided for USU.S. federal income and foreign withholding taxes on its $42$58.8 million foreign subsidiaries’ undistributed earnings as of July 31, 2011,2012, because the Company intends to reinvest such earnings indefinitely in the operations and potential acquisitions related to its foreign operations. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to USU.S. income taxes (subject to an adjustment for foreign tax credits). It is not practical to determine the income tax liability that might be incurred if these earnings were to be distributed.
85
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010
(13) | | Net Income Per Share |
The table below reconciles weighted average shares outstanding to weighted average shares and dilutive potential share outstanding (in thousands):
| | | Years Ended July 31,
| | | | Years Ended July 31,
| |
---|
| | | 2011
| | 2010
| | 2009
| | | 2012
| | 2011
| | 2010
|
---|
Weighted average common shares outstanding | | | 75,649 | | | | 84,165 | | | | 83,537 | | | | 128,120 | | | | 151,298 | | | | 168,330 | |
Effect of dilutive securities-stock options | | | 1,027 | | | | 862 | | | | 1,393 | | | | 3,308 | | | | 2,054 | | | | 1,724 | |
Diluted weighted average common shares outstanding | | | 76,676 | | | | 85,027 | | | | 84,930 | | | | 131,428 | | | | 153,352 | | | | 170,054 | |
There were no adjustments to net income required in calculating diluted net income per share. Excluded from the dilutive earnings per share calculation were 2,553,989, 5,892,6412,208,047, 5,107,978 and 1,225,00011,785,282 options to purchase ourthe Company’s common stock that were outstanding at July 31, 2012, 2011 2010 and 2009,2010, respectively, because their effect would have been anti-dilutive.
(14) | | Segments and Other Geographic Information |
The Company’s North American region and its UKU.K. region are considered two separate operating segments, which have been aggregated into one reportable segment because they share similar economic characteristics.
The following geographic data is provided in accordance with ASC 280,Segment Reporting. Revenues are based upon the geographic location of the selling facility and are summarized in the following table (in thousands):
| | | Years Ended July 31,
| | | | Years Ended July 31,
| |
---|
| | | 2011
| | 2010
| | 2009
| | | 2012
| | 2011
| | 2010
|
---|
United States | | $ | 674,742 | | | $ | 602,794 | | | $ | 591,284 | | | $ | 724,869 | | | $ | 674,742 | | | $ | 602,794 | |
Canada | | | 6,532 | | | | 5,635 | | | | 4,733 | | | | 6,626 | | | | 6,532 | | | | 5,635 | |
North America | | | 681,274 | | | | 608,429 | | | | 596,017 | | | | 731,495 | | | | 681,274 | | | | 608,429 | |
United Kingdom | | | 190,972 | | | | 164,450 | | | | 147,065 | | | | 192,696 | | | | 190,972 | | | | 164,450 | |
| | $ | 872,246 | | | $ | 772,879 | | | $ | 743,082 | | | $ | 924,191 | | | $ | 872,246 | | | $ | 772,879 | |
82
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2011, 2010 AND 2009
Long-lived assets based upon geographic location are summarized in the following table (in thousands):
| | | July 31,
| | | | July 31,
| |
---|
| | | 2011
| | 2010
| | | 2012
| | 2011
|
---|
United States | | $ | 521,558 | | | $ | 511,362 | | | $ | 510,366 | | | $ | 521,558 | |
Canada | | | 4,579 | | | | 4,925 | | | | 4,161 | | | | 4,579 | |
North America | | | 526,137 | | | | 516,287 | | | | 514,527 | | | | 526,137 | |
United Kingdom | | | 95,638 | | | | 76,011 | | | | 91,543 | | | | 95,638 | |
| | $ | 621,775 | | | $ | 592,298 | | | $ | 606,070 | | | $ | 621,775 | |
(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 costs 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
86
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010
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.
At July 31, 2011,2012, future minimum lease commitments under non-cancelable capital and operating leases with initial or remaining lease terms in excess of one year are as follows (in thousands):
Years Ending July 31,
| | | Capital Leases
| | Operating Leases
| | | Capital Leases
| | Operating Leases
|
---|
2012 | | $ | 231 | | | $ | 18,984 | | |
2013 | | | 204 | | | | 15,147 | | | $ | 198 | | | $ | 17,208 | |
2014 | | | 182 | | | | 10,470 | | | | 126 | | | | 13,684 | |
2015 | | | — | | | | 8,067 | | | | — | | | | 11,156 | |
2016 | | | — | | | | 6,175 | | | | — | | | | 9,184 | |
2017 | | | | — | | | | 7,655 | |
Thereafter | | | — | | | | 37,029 | | | | — | | | | 46,396 | |
| | | 617 | | | $ | 95,872 | | | | 324 | | | $ | 105,283 | |
Less amount representing interest | | | (36 | ) | | | | | (17 | ) | | |
| | $ | 581 | | | | | $ | 307 | | | |
Facilities rental expense for the fiscal years ended July 31, 2012, 2011 and 2010 and 2009 aggregated $17.4$16.2 million, $16.8$17.4 million and $16.8 million, respectively. Yard operations equipment rental expense for the fiscal years ended July 31, 2012, 2011 and 2010 and 2009 aggregated $2.7 million, $3.3 million $4.1 million and $3.8$4.1 million, respectively.
Commitments
Letters of Credit
The Company had outstanding letters of credit of $6.7 million at July 31, 20112012 which are primarily used to secure certain insurance obligations.
83
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2011, 2010 AND 2009
Purchase Commitments
The Company has obligations under certain UK seller contracts for the purchase of vehicles at pre-determined prices, which typically are based upon a percentage of the pre-accident value, as defined in the contracts.
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, and handling or disposal of vehicles. TheseThe material pending legal proceedings to which the Company is a party to, or of which any of the Company’s property is subject to, include the following matters:
On November 20, 2007, Car Auction & Reinsurance Solutions, Inc. (CARS) filed suit against the Company in the Superior Court in the County of New Castle, Delaware. CARS was seeking in excess of $2.0 million in damages, punitive damages, and prejudgment interest related to allegations involving breach of contract and misrepresentation. On September 15, 2011, the parties reached a settlement amount that was not material to our consolidated financial condition or results of operations.
On August 21, 2008, a former employee filed a Charge of Discrimination with the Equal Employment Opportunity Commission, or EEOC, claiming, in part, that he was denied employment based on his race and subjected to unlawful retaliation. The Company responded to the Charge of Discrimination explaining that it has a policy prohibiting the employment of individuals with certain criminal offenses and that the former employee was terminated after it was belatedly discovered that he had been convicted of a felony and other crimes prior to being hired by us.the Company. The Charge of Discrimination lay dormant at the EEOC for over two years. In January, 2011, however, the EEOC began actively investigating the allegations and challenging the Company’s policy of conducting criminal background checks and denying employment based on certain criminal convictions. It is the EEOC’s position that such a practice is unlawful because it has a disparate impact on minorities. It is the Company’s position that its policy is required by one of its largest auto insurance company customers. Because the Company’s customer is in the insurance and financial services industry, its operations are heavily regulated. The Federal Deposit Insurance Act (12 U.S.C. §1829) prohibits savings and loan holding companies, such as the Company’s customer, from employing “any person who has
87
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010
been convicted of any criminal offense involving dishonesty or a breach of trust or money laundering, or has agreed to enter into a pretrial diversion or similar program in connection with a prosecution for such offense.” In turn, it is the Company’s understanding that the Company’sits customer is obligated to make sure its vendors, such as the Company, comply with similar hiring restrictions. The EEOC is still investigating the Charge of Discrimination. The Company anticipates that if the Charge of Discrimination is not dismissed or settled,By letter dated March 16, 2012, the EEOC will file a lawsuit in Federal Court on behalf of all former employees and applicants ofnotified the Company who were denied employment becausethat it had concluded its investigation and was closing its file on this matter. Moreover, the EEOC made a determination of no reasonable cause, meaning that the Company’s policy. The Company believesEEOC had no reasonable cause to believe that its practices are not unlawful and intendsdiscrimination occurred based upon evidence obtained in the investigation, but that the charging party may exercise the right to continue to vigorously defend thisbring private court action.
On April 23, 2010, Deborah Hill filed suit against the Company in the Twentieth Judicial Circuit of Collier County, Florida, alleging negligent destruction of evidence in connection with a stored vehicle that suffered damage due to a fire at ourits facility in Florida where the vehicle was being stored. Relief sought is for compensatory damages, costs and interest allowed by law. The Company believes the claim is without merit and intends to continue to vigorously defend the lawsuit.
On September 21, 2010, Robert Ortiz and Carlos Torres filed suit against the Company in Superior Court of San Bernardino County, San Bernardino District, which purported to be a class action on behalf of persons employed by the Company in the positions of facilities managers and assistant general managers in California at any time since the date four years prior to September 21, 2010. The complaint alleges failure to pay wages and overtime wages, failure to provide meal breaks and rest breaks, in violation of various California Labor and Business and Professional Code sections, due to alleged misclassification of facilities managers and
84
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2011, 2010 AND 2009
assistant general managers as exempt employees. Relief sought includes class certification, injunctive relief, damages according to proof, restitution for unpaid wages, disgorgement of ill-gotten gains, civil penalties, attorney’s fees and costs, interest, and punitive damages. The Company believes the claim is without merit and intends to continue to vigorously defend the lawsuit.
On February 12, 2011, Jose E. Brizuela filed suit against the Company in Superior Court, San Bernardino County, San Bernardino District, which purports to be class action on behalf of persons employed by the Company paid on a hourly basis in California at any time since the date four years prior to February 14, 2011. The complaint alleges failure to pay all earned wages due to an alleged practice of rounding of hours worked to the detriment of the employees. Relief sought includes class certification, injunctive relief, unpaid wages, waiting time penalty-wages, interest, and attorney’s fees and costs of suit. The Company believes the claim is without merit and intends to continue to vigorously defend the lawsuit.
On August 10, 2011, Glenn A. Mangis and Lynn Brown-Mangis, husband and wife, filed suit againstMarch 26, 2012, the Company participated in mediation of the case with plaintiffs, which resulted in the Superior Court of Washington for Pierce County, alleging exposureparties agreeing to asbestos duringsettle this matter. The settlement, in which the course of his employment asCompany admits no liability and agrees to pay a carpenter, electrician and laborer; and as a direct result of said exposure, Plaintiff developed mesothelioma. Plaintiff’s wifenon-material cash payment, is alleging loss of spousal relationship as a result. Relief sought is for general and special damages, medical and related expenses, costs and disbursements in case, prejudgment interest and all other reliefsubject to approval by the Court deems just. No specific amount was given. The Company believes the claim is without merit and intends to continue to vigorously defend the lawsuit.Court.
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 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 itsour consolidated financial position, 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 it.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 insurance is purchased.
Governmental Proceedings
The Georgia Department of Revenue, or DOR, recently conducted a sales and use tax audit of the Company’s operations in Georgia for the period from January 1, 2007 through June 30, 2011. As a result of the audit, the DOR issued a notice of proposed assessment for uncollected sales taxes in which it asserted that the Company failed to remit sales taxes totaling $73.8 million, including penalties and interest. In issuing the notice of
88
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010
proposed assessment, the DOR stated its policy position that sales for resale to non-U.S. registered resellers are subject to Georgia sales and use tax.
The Company has engaged a Georgia law firm and outside tax advisors to review the conduct of its business operations in Georgia, the notice of assessment, and the DOR’s policy position. In particular, the Company’s outside legal counsel has provided the Company an opinion that its sales for resale to non-U.S. registered resellers should not be subject to Georgia sales and use tax. In rendering its opinion, the Company’s counsel noted that non-U.S. registered resellers are unable to comply strictly with technical requirements for a Georgia certificate of exemption but concluded that its sales for resale to non-U.S. registered resellers should not be subject to Georgia sales and use tax notwithstanding this technical inability to comply.
Based on the opinion from the Company’s outside law firm and advice from outside tax advisors, the Company has not provided for the payment of this assessment in its consolidated financial statements. The Company believes it has strong defenses to the DOR’s notice of proposed assessment and intends to defend this matter. The Company has filed a request for protest or administrative appeal with the State of Georgia. There can be no assurance, however, that this matter will be resolved in the Company’s favor or that the
85
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2011, 2010 AND 2009
Company will not ultimately be required to make a substantial payment to the Georgia DOR. The Company understands that Georgia law and DOR regulations are ambiguous on many of the points at issue in the audit, and litigating and defending the matter in Georgia could be expensive and time-consuming and result in substantial management distraction. If the matter were to be resolved in a manner adverse to the Company, it could have a material adverse effect on the Company’s consolidated results of operations and consolidated financial statements.position.
Environmental Matters
In connection with the acquisition of the Dallas, Texas facility in 1994, the Company set aside $3.0 million to cover the costs of environmental remediation, stabilization and related consulting expenses for a six-acre portion of the facility that contained elevated levels of lead due to the activities of the former operators. The Company began the stabilization process in 1996 and completed it in 1999. The Company paid all remediation and related costs from the $3.0 million fund and, in accordance with the acquisition agreement, distributed the remainder of the fund to the seller of the Dallas facility, less $0.2 million which was held back to cover the costs of obtaining the no-further-action letter. In September 2002, the Company’s environmental engineering consultant issued a report, which concludes that the soil stabilization has effectively stabilized the lead-impacted soil, and that the concrete cap should prevent impact to storm water and subsequent surface water impact. The Company’s consultant thereafter submitted an Operations and Maintenance Plan (Plan) to the Texas Commission on Environmental Quality (TCEQ) providing for a two-year inspection and maintenance plan for the concrete cap, and a two-year ground and surface water monitoring plan. In January of 2003, the TCEQ approved the Plan, subject to the additions of upstream (background) surface water samples from the intermittent stream adjacent to the facility and documentation of any repairs to the concrete cap during the post closure-monitoring period. The first semi-annual water sampling was conducted in April 2003, which reflected that the lead-impacted, stabilized soil is not impacting the ground and/or surface water. The second round of semi-annual water samples collected in October and November 2003 reported concentration of lead in one storm water and one surface water sample in excess of the established upstream criteria for lead. In correspondence, which the Company received in July 2004, the TCEQ approved with comment the Company’s water monitoring report dated February 24, 2004. The TCEQ instructed the Company to continue with post-closure monitoring and maintenance activities and submit the next report in accordance with the approved schedules. In February 2005, a report from the Company’s environmental engineering consultant was transmitted to the TCEQ containing the results of annual monitoring activities consisting of two (2) semi-annual sampling events which occurred in April/June 2004 and October/November 2004. Laboratory analytical results indicated no lead concentrations exceeding the target concentration level set in the Corrective Measures Study for the site, but some results were in excess of Texas surface water quality standards. The Company’s environmental engineering consultant concluded in the
89
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010
February 2005 report to the TCEQ that it is unlikely that lead concentrations detected in the storm water runoff samples are attributable to the lead impacted soils. Based on the results of the 2004 samplings, the Company requested that no further action be taken and that a closure letter be issued by the TCEQ. In September 2007, the TCEQ notified the Company that they did not concur with their consultant’s conclusions and recommendations. The TCEQ said it would not provide a closure letter until additional sampling of surface water is performed which reflects concentrations of lead below Texas surface water quality standards. In February 2008, the TCEQ provided comments to the Company’s proposal for surface water sampling. In March 2008, the Company’s environmental engineer submitted to the TCEQ an addendum to the surface water sampling plan, which was approved by the TCEQ in June 2008. Sampling was performed in November 2008. In December 2008 a report was submitted to the TCEQ indicating that lead levels were below Texas surface water quality standards. In May of 2009, the TCEQ approved the Surface Water Sampling Report, as well as the Concrete Cap Inspection Report submitted in December 2008. The Company made the necessary repairs to the concrete cap and provided a survey map of the cap. Annual inspections of the cap are required to ensure its maintenance. There is no assurance that the Company may not incur future liabilities if the
86
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2011, 2010 AND 2009
stabilization process proves ineffective, or if future testing of surface or ground water reflects concentrations of lead which exceed Texas surface or ground water quality standards.
The Company does not believe that the above environmental matter will, either individually or in the aggregate, have a material adverse effect on the Company’s consolidated financial position, results of operations, financial position or cash flows.
(16) | | Guarantees—Indemnifications to Officers and Directors |
The Company has entered into indemnification agreements, aan updated form of indemnification agreement, which is incorporated by referencewas approved in the exhibitsJanuary 2012. The indemnification agreement to our directors and certain of the Company’s fiscal 2010 annual report on Form 10-K, with the members of its Board of Directorsour officers is 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. The form was intended to update the current form for our reincorporation into Delaware and general developments in corporate law since the adoption of our original form of indemnification agreement and was done as part of our ordinary course of corporate governance matters.
(17) | | Related Party Transactions |
The Company leases certain of its facilities from officers and/or directors of the Company under various lease agreements. Rental payments under these leases aggregated $0.05$0.0 million, $0.2$0.05 million, and $0.2 million for the fiscal years ended July 31, 2012, 2011 and 2010, and 2009, respectively. The Company leases certain of its facilities from other employees of the Company under various lease agreements. Rental payments under these leases aggregated $0.3 million for the fiscal years ended July 31, 2011, 2010 and 2009.
On November 11, 2010, the Company exercised its option to purchase land that had been leased from Willis J. Johnson, the Company’s Chairman of the Board and a member of the Board of Directors. The purchase price was established through an independent appraisal and the transaction was approved by the Audit Committee of the Company’s Board of Directors.
On June 10, 2010, the Company entered into an agreement with Willis J. Johnson, the Company’s Chairman of the Board and a member of the Board of Directors, pursuant to which the Company acquired 121,251242,502 shares of its common stock at a price of $36.76$18.38 per share, or an aggregate purchase price of $4.5 million. The settlement date for the acquisition of the common stock was on or about June 10, 2010, and the purchase was made pursuant to the Company’s existing stock repurchase program. The per share purchase price for the common stock to be acquired was based on the closing price of the Company’s common stock on June 10, 2010 (as reported by The NASDAQ Stock Market). The repurchase was approved by the independent members of the Board of Directors and the Audit Committee of the Board of Directors.
During the year ended July 31, 2011, the Company purchased twothree houses from executives who are relocatingrelocated to the corporate headquarters toin Dallas (seeNote 19. Restructuring) The. During the year ended July 31,
90
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010
2012, the Company purchased three houses arefrom executives who relocated to the corporate headquarters in Dallas. As of July 31, 2012, one home remains unsold and is reported in other assets with a value of $2.0 million. Also,held for sale.
During the year ended July 31, 2011, the Company purchased 10,620 shares of stock from the Willis Johnson Foundation for $0.5 million. In addition, the Company loaned $0.2 million to the Copart Private Foundation.
On June 28, 2012, the Company entered into an agreement with Willis J. Johnson, the Company’s Chairman of the Board and a member of the Board of Directors, pursuant to which the Company acquired 2.8 million shares of its common stock at a price of $23.22 per share, or an aggregate purchase price of $65.0 million. The settlement date for the acquisition of the common stock was on or about June 28, 2012, and the purchase was made pursuant to the Company’s existing stock repurchase program. The per share purchase price for the common stock to be acquired was based on the closing price of the Company’s common stock on June 28, 2012 (as reported by The NASDAQ Stock Market). The repurchase was approved by the independent members of the Board of Directors and the Audit Committee of the Board of Directors.
On September 27, 2012, the Company entered into an agreement with Thomas W. Smith, the Company’s former member of the Board of Directors, pursuant to which the Company acquired 0.5 million shares of its common stock at a price of $27.77 per share, or an aggregate purchase price of $13.9 million. The settlement date for the acquisition of the common stock was on or about September 27, 2012, and the purchase was made pursuant to the Company’s existing stock repurchase program. The per share purchase price for the common stock to be acquired was based on the closing price of the Company’s common stock on September 27, 2012 (as reported by The NASDAQ Stock Market). The repurchase was approved by the independent members of the Board of Directors and the Audit Committee of the Board of Directors.
There were no amounts due or fromto related parties at July 31, 20112012 and 2010.2011.
(18) | | Employee Benefit Plan |
The Company sponsors a 401(k) defined contribution plan covering its eligible employees. The plan is available to all USU.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 an expense of $0.4$0.5 million, $0.5$0.4 million and $0.5 million for the fiscal years ended July 31, 2012, 2011 2010 and 2009,2010, respectively, related to this plan.
87
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2011, 2010 AND 2009
The Company also sponsors an additional defined contribution plan for most of its UKU.K. employees, which is available to all UKU.K. employees who meet minimum service requirements. The Company matches up to 5% of employee contributions. The Company recognized an expense of $0.2 million, $0.3$0.2 million, and $0.7$0.3 million for the fiscal years ended July 31, 2012, 2011 2010 and 2009,2010, respectively, related to this plan.
The Company is relocatingrelocated its corporate headquarters to Dallas, TXTexas in 2012. The Company recognized restructuring-related costs of$2.2 million and $1.4 million for the year ended July 31, 2012 and 2011, respectively, in general and administrative expense. The Company also recognized restructuring-related costs of $1.1 million in impairment of long-lived assets and $0.8 million in yard operations expense for the year ended July 31, 2012. Restructuring-related costs for the year ended July 31, 2012 are $1.7 million for severance and $2.4 million for the costs of relocating employees to Texas. Restructuring-related costs for the year ended July 31, 2011 are $1.2 million for severance and $0.2 million for the costs of relocating employees to Texas.
| | | | Balance at July 31, 2011 (in 000’s)
| | Expense (in 000’s)
| | Payments (in 000’s)
| | Balance at July 31, 2012 (in 000’s)
|
---|
Severance | | | | $ | 1,051 | | | | 1,675 | | | | 926 | | | $ | 1,800 | |
91
COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010
On September 22, 2011, the Company’s board of directors approved a 20 million share increase in the Company’s stock repurchase program, bringing the total current authorization to 49 million shares. The Company has repurchased approximately 20,453,037 shares under the program since its inception in February 2003, leaving 28,546,963 shares available for repurchase under the program (including the 20 million share increase approved on September 22, 2011). Repurchases under the program 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 share repurchase program. The repurchases may be made at such times and in such amounts as Copart deems appropriate and may be discontinued at any time.
(21)
| | Quarterly Information (in thousands, except per share data) (Unaudited)(1)(3) |
| | | Fiscal Quarter
| | | | Fiscal Quarter
| |
---|
Fiscal Year 2011(2)
| | | First
| | Second
| | Third
| | Fourth
| |
---|
Fiscal Year 2012
| | | | First
| | Second
| | Third
| | Fourth
|
---|
Revenues | | $ | 212,667 | | | $ | 207,380 | | | $ | 236,755 | | | $ | 215,443 | | | $ | 225,626 | | | $ | 227,904 | | | $ | 244,105 | | | $ | 226,556 | |
Operating income | | $ | 59,594 | | | $ | 60,195 | | | $ | 82,044 | | | $ | 63,456 | | | $ | 65,376 | | | $ | 63,539 | | | $ | 87,944 | | | $ | 69,494 | |
Income from continuing operations | | $ | 60,163 | | | $ | 60,717 | | | $ | 80,350 | | | $ | 62,645 | | |
Income before income taxes | | | $ | 63,815 | | | $ | 62,216 | | | $ | 84,547 | | | $ | 67,478 | |
Net income | | $ | 37,823 | | | $ | 37,893 | | | $ | 50,136 | | | $ | 40,521 | | | $ | 41,149 | | | $ | 40,603 | | | $ | 55,471 | | | $ | 44,896 | |
Basic net income per share | | $ | 0.45 | | | $ | 0.47 | | | $ | 0.72 | | | $ | 0.60 | | | $ | 0.32 | | | $ | 0.32 | | | $ | 0.44 | | | $ | 0.36 | |
Diluted net income per share | | $ | 0.45 | | | $ | 0.46 | | | $ | 0.71 | | | $ | 0.59 | | | $ | 0.31 | | | $ | 0.31 | | | $ | 0.43 | | | $ | 0.35 | |
| | | Fiscal Quarter
| | | | Fiscal Quarter
| |
---|
Fiscal Year 2010
| | | First
| | Second
| | Third
| | Fourth
| |
---|
Fiscal Year 2011(2)
| | | | First
| | Second
| | Third
| | Fourth
|
---|
Revenues | | $ | 185,461 | | | $ | 176,601 | | | $ | 220,349 | | | $ | 190,468 | | | $ | 212,667 | | | $ | 207,380 | | | $ | 236,755 | | | $ | 215,443 | |
Operating income | | $ | 56,492 | | | $ | 53,232 | | | $ | 72,126 | | | $ | 57,220 | | | $ | 59,594 | | | $ | 60,195 | | | $ | 82,044 | | | $ | 63,456 | |
Income from continuing operations | | $ | 57,052 | | | $ | 53,172 | | | $ | 71,584 | | | $ | 57,687 | | |
Income before income taxes | | | $ | 60,163 | | | $ | 60,717 | | | $ | 80,350 | | | $ | 62,645 | |
Net income | | $ | 35,270 | | | $ | 35,733 | | | $ | 44,390 | | | $ | 36,234 | | | $ | 37,823 | | | $ | 37,893 | | | $ | 50,136 | | | $ | 40,521 | |
Basic net income per share | | $ | 0.42 | | | $ | 0.42 | | | $ | 0.53 | | | $ | 0.43 | | | $ | 0.23 | | | $ | 0.24 | | | $ | 0.36 | | | $ | 0.30 | |
Diluted net income per share | | $ | 0.42 | | | $ | 0.42 | | | $ | 0.52 | | | $ | 0.43 | | | $ | 0.23 | | | $ | 0.23 | | | $ | 0.35 | | | $ | 0.29 | |
(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. |
(2) | | Fiscal 2011 results are impacted from the adoption of ASU 2009-13. |
(3) | | All per share amounts have been revised to reflect the impact of the two-for-one stock split effected in the form of a stock dividend, which issued one additional share of common stock to each share of common stock outstanding on March 23, 2012. |
8892
EXHIBIT INDEX
| | | | | | Incorporated by reference herein
| |
---|
Exhibit Number
|
|
|
| Description
|
| Form
|
| Date
|
---|
10.17 * | | | | Form of Indemnification Agreement signed by executive officers and directors | | — | | Filed herewith |
10.18 | | | | Standard Industrial/Commercial single tenant lease-net dated February 3, 2012 between Garden Centura, L.P. and the Registrant | | — | | Filed herewith |
21.1 | | | | List of subsidiaries of Registrant | | — | | Filed herewith |
23.1 | | | | Consent of Independent Registered Public Accounting Firm | | — | | Filed herewith |
24.1 | | | | Power of Attorney (included on signature page) | | — | | Filed herewith |
31.1 | | | | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | — | | Filed herewith |
31.2 | | | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | — | | Filed herewith |
32.1(1) | | | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | — | | Filed herewith |
32.2(1) | | | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | — | | Filed herewith |
101.INS(2) | | | | XBRL Instance Document | | | | | | | | |
101.SCH(2) | | | | XBRL Taxonomy Extension Schema Document | | | | | | | | |
101.CAL(2) | | | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | |
101.DEF(2) | | | | XBRL Extension Definition | | | | | | | | |
101.LAB(2) | | | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | |
101.PRE(2) | | | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | |
(1) | | | | In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
(2) | | | | XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Exchange Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
* | | Management contract, plan or arrangement |