Car auction and salvage leader Copart (NASDAQ:CPRT) reported first-quarter financial results on Nov. 24, and revenues declined slightly, as did total profits and earnings per share, as the company works through a challenging economic environment. Let's take a closer look at the company's results, what management had to say, and how things stand going forward.
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What happened in the quarter
There were a few challenges that affected the company's top- and bottom-line results:
- Average selling prices were pushed lower by falling scrap prices.
- Foreign exchange also played a role, both in the company's international business, and because a strong dollar is affecting international bidders, according to management.
- Revenue held steady despite these challenges, as total volume of cars increased almost 5% in the quarter.
- Earnings per share increased as a result of the ~5% of shares the company has repurchased over the past year.
- The company announced another share repurchase program, a "Dutch auction" tender offer, being held between Nov. 24 and Dec. 23, for as many as 7.3 million shares. That's roughly 6% of shares outstanding.
- Earnings held steady in the quarter partly as a result of falling oil prices. Fuel costs are a significant portion of the company's costs, so the fall in fuel prices, corresponding with a decline in selling prices and an increase in car volume helped maintain profitability. Profits would have been negatively affected had fuel costs remained steady or increased.
- General and administrative costs also declined, as the company utilizes more technology resources, and also saw costs fall overseas because of foreign exchange benefit.
- The company also announced a new CFO, Jeff Liaw, would be coming on board in January, while current CFO Will Franklin, will stay with the company in his capacity as executive vice president.
What management said
CEO Jay Adair, on why they're bringing in a new CFO, and having Will Franklin focus exclusively on operations:
At the same time, he's [Will Franklin] been carrying the CFO title but we've been having a lot of that work done by Vik Bhatia on our team. And that wasn't the intent for Vik to do that but we wanted to make sure that Will was focused on the G&A reductions and other G&A performance pieces that we have got, areas that we measure and areas that we focus on.
Adair again, on what's driving down the average selling prices of vehicles:
ASPs were driven lower by the continuing decline in scrap metal pricing, which we believe to be highly correlated to junk and dismantler buyer behavior. The index for crushed car bodies in North America declined by over 48% year-over-year. We believe the ASPs were also negatively affected by the stronger dollar as a significant portion of our North American sales are to international buyers and the stronger dollar continued to inhibit their auction participation.
More details on expenses, selling prices, and the impact of foreign exchange:
Yard operation expense increased by $5.4 million and was driven almost completely by volume as the average cost to process each car remained relatively flat. General and administrative cost declined by $5.6 million. The reduction came primarily from the rationalization of technology resources and the beneficial impact of FX. On an overall basis, the change in FX reduced revenues by $4.6 million and EBIT by approximately $0.9 million.
Copart continues to navigate a less-than-ideal economic environment relatively well. Not only did the company hold profits pretty steady in the face of falling prices and challenging foreign exchange, but the balance sheet also improved at the same time. Cash, short-term investments, and accounts receivable all increased, while total long-term debt actually decreased slightly. Total liabilities increased $4 million, but total assets shot up more than $55 million in the quarter.
Copart isn't likely to be a big growth story overnight, but an excellent management team continues to rationalize costs and navigate an imperfect market. The company does have solid growth prospects overseas, but the impact of foreign exchange will continue muting the benefits of that growth until the dollar weakens, or the euro gains ground.