COPART INC MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

Unless the context otherwise requires, references in this Form 10-Q to “Copart,”
the “Company,” “we,” “us,” or “our” refer to Copart, Inc.

This Quarterly Report on Form 10-Q, including the information incorporated by
reference herein, contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the Securities Act), and
Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange
Act). All statements other than statements of historical facts are statements
that could be deemed forward-looking statements. In some cases, you can identify
forward-looking statements by terms such as “may,” “will,” “should,” “expect,”
“plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,”
“potential,” “continue” or the negative of these terms or other comparable
terminology. The forward-looking statements contained in this Form 10-Q involve
known and unknown risks, uncertainties and situations that may cause our or our
industry’s actual results, level of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by these statements. These forward-looking
statements are made in reliance upon the safe harbor provision of the Private
Securities Litigation Reform Act of 1995. These factors include those listed in
Part II, Item 1A. under the caption entitled “Risk Factors” in this Form 10-Q
and those discussed elsewhere in this Form 10-Q. We encourage investors to
review these factors carefully together with the other matters referred to
herein, as well as in the other documents we file with the Securities and
Exchange Commission (the “SEC”). We may from time to time make additional
written and oral forward-looking statements, including statements contained in
our filings with the SEC. We do not undertake to update any forward-looking
statement that may be made from time to time by or on behalf of us.

Although we believe that, based on information currently available to us and our
management, the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. You should not place undue reliance on these forward-looking
statements.

Overview

We are a leading provider of online auctions and vehicle remarketing services
with operations in the United States (“U.S.”), Canada, the United Kingdom
(“U.K.”), Brazil, the Republic of Ireland, Germany, Finland, the United Arab
Emirates (“U.A.E.”), Oman, Bahrain, and Spain.

Our goals are to generate sustainable profits for our stockholders, while also
providing environmental and social benefits for the world around us. With
respect to our environmental stewardship, we believe our business is a critical
enabler for the global re-use and recycling of vehicles, parts, and raw
materials. We are not responsible for the carbon emissions resulting from new
vehicle manufacturing, governmental fuel emissions standards or vehicle use by
consumers. Each vehicle that enters our business operations already exists, with
whatever fuel technology and efficiency it was designed and built to have, and
the substantial carbon emissions associated with the vehicle’s manufacture have
already occurred. However, upon our receipt of an existing vehicle, we help
decrease its total environmental impact by extending its useful life and thereby
avoiding the carbon emissions associated with the alternative of new vehicle and
auto parts manufacturing. For example, many of the cars we process and remarket
are subsequently restored to drivable condition, reducing the new vehicle
manufacturing burden the world would otherwise face. Many of our cars are
purchased by dismantlers, who recycle and refurbish parts for vehicle repairs,
again reducing new and aftermarket parts manufacturing. And finally, some of our
vehicles are returned to their raw material inputs through scrapping, reducing
the need for further new resource extraction. In each of these cases, our
business reduces the carbon and other environmental footprint of the global
transportation industry.

Beyond our environmental stewardship, we also support the world’s communities in
two important ways. First, we believe that we contribute to economic development
and well-being by enabling more affordable access to mobility around the world.
For example, many of the automobiles sold through our auction platform are
purchased for use in developing countries where affordable transportation is a
critical enabler of education, health care, and well-being more generally.
Secondly, because of the special role we play in responding to catastrophic
weather events, we believe we contribute to disaster recovery and resilience in
the communities we serve. For example, we mobilized our people, and engaged with
a multitude of service providers to timely retrieve, store, and remarket tens of
thousands of flood-damaged vehicles in South Florida in the wake of Hurricane
Ian in the fall of 2022.

We provide vehicle sellers with a full range of services to process and sell
vehicles primarily over the internet through our Virtual Bidding Third
Generation internet auction-style sales technology, which we refer to as VB3.
Vehicle sellers consist primarily of insurance companies, but also include
banks, finance companies, charities, fleet operators, dealers, vehicle rental
companies, and individuals. We sell the vehicles principally to licensed vehicle
dismantlers, rebuilders, repair licensees, used vehicle dealers, exporters, and
to the general public. The majority of the vehicles sold on behalf of insurance
companies are either damaged vehicles deemed a total loss; not economically
repairable by the insurance companies; or are recovered stolen vehicles for
which an insurance settlement with the vehicle owner has already been made. We
offer vehicle sellers a full range of services that help expedite each stage of
the vehicle sales process, minimize administrative and processing costs, and
maximize the ultimate sales price through the online auction process.

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In the U.S., Canada, Brazil, the Republic of Ireland, Finland, the U.A.E., Oman,
and Bahrain, we sell vehicles primarily as an agent and derive revenue primarily
from auction and auction related sales transaction fees charged for vehicle
remarketing services as well as fees for services subsequent to the auction,
such as delivery and storage. In the U.K., Germany, and Spain we operate both as
an agent and on a principal basis, in some cases purchasing salvage vehicles
outright and reselling the vehicles for our own account. In Germany and Spain,
we also derive revenue from listing vehicles on behalf of insurance companies
and insurance experts to determine the vehicle’s residual value and/or to
facilitate a sale for the insured.

We monitor and analyze a number of key financial performance indicators in order
to manage our business and evaluate our financial and operating performance.
Such indicators include:

Service and Vehicle Sales Revenue: Our service revenue consists of auction and
auction related sales transaction fees charged for vehicle remarketing services.
These auction and auction related services may include a combination of vehicle
purchasing fees, vehicle listing fees, and vehicle selling fees that can be
based on a predetermined percentage of the vehicle sales price, tiered vehicle
sales price driven fees, or at a fixed fee based on the sale of each vehicle
regardless of the selling price of the vehicle; transportation fees for the cost
of transporting the vehicle to or from our facility; title processing and
preparation fees; vehicle storage fees; bidding fees; and vehicle loading fees.
These fees are recognized as net revenue (not gross vehicle selling price) at
the time of auction in the amount of such fees charged. Purchased vehicle
revenue includes the gross sales price of the vehicles which we have purchased
or are otherwise considered to own. We have certain contracts with insurance
companies, primarily in the U.K., in which we act as a principal, purchasing
vehicles and reselling them for our own account. We also purchase vehicles in
the open market, primarily from individuals, and resell them for our own
account.

Our revenue is impacted by several factors, including total loss frequency and
the average vehicle auction selling price, as a significant amount of our
service revenue is associated in some manner with the ultimate selling price of
the vehicle. Vehicle auction selling prices are driven primarily by: (i) market
demand for rebuildable, driveable vehicles; (ii) used car pricing, which we also
believe has an impact on total loss frequency; (iii) end market demand for
recycled and refurbished parts as reflected in demand from dismantlers; (iv) the
mix of cars sold; (v) changes in the U.S. dollar exchange rate to foreign
currencies, which we believe has an impact on auction participation by
international buyers; and; (vi) changes in commodity prices, particularly the
per ton price for crushed car bodies, as we believe this has an impact on the
ultimate selling price of vehicles sold for scrap and vehicles sold for
dismantling. We cannot specifically quantify the financial impact that commodity
pricing, used car pricing, and product sales mix has on the selling price of
vehicles, our service revenues, or financial results. Total loss frequency is
the percentage of cars involved in accidents that insurance companies salvage
rather than repair and is driven by the relationship between repair costs, used
car values, and auction returns. Over the past 30 years we believe there has
been an increase in overall growth in the salvage market driven by an increase
in total loss frequency. This increase in total loss frequency may have been
driven by changes in used car values and repair costs over the same long-term
horizon, which we believe are generally trending upward. Recently we have noted
fluctuations in total loss frequency. Nonetheless, we believe the long-term
trend of increases in total loss frequency will continue. In the near term
changes in used car prices and repair cost, may tend to reduce total loss
frequency and thereby affect our growth rate. Used car values are determined by
many factors, including used car supply, which is tied directly to new car
sales, and the average age of cars on the road. The average age of cars on the
road has continued to increase, growing from 9.6 years in 2002 to 12.2 years in
2022. Repair costs are generally based on damage severity, vehicle complexity,
repair parts availability, repair parts costs, labor costs, and repair shop lead
times. The factors that can influence repair costs, used car pricing, and
auction returns are many and varied and we cannot predict their movements with
precision.

Operating Costs and Expenses: Yard operations expenses consist primarily of
operating personnel (which includes yard management, clerical, and yard
employees); rent; vehicle transportation; insurance; property related taxes;
fuel; equipment maintenance and repair; marketing costs directly related to the
auction process; and costs of vehicles sold under the purchase contracts.
General and administrative expenses consist primarily of executive management;
accounting; data processing; sales personnel; professional services; marketing
expenses; and system maintenance and enhancements.

Other (Expense) Income: Other (expense) income consists primarily of interest
expense on long-term debt, see Notes to Unaudited Consolidated Financial
Statements, Note 7 – Long-Term Debt; foreign exchange rate gains and losses;
gains and losses from the disposal of assets, which will fluctuate based on the
nature of these activities each period; and earnings from unconsolidated
affiliates.

Liquidity and Cash Flows: Our primary source of working capital is cash
operating results and debt financing. The primary source of our liquidity is our
cash and cash equivalents and Revolving Loan Facility. The primary factors
affecting cash operating results are: (i) seasonality; (ii) market wins and
losses; (iii) supplier mix; (iv) accident frequency; (v) total loss frequency;
(vi) volume from our existing suppliers; (vii) commodity pricing; (viii) used
car pricing; (ix) foreign currency exchange rates; (x) product mix; (xi)
contract mix to the extent applicable; (xii) our capital expenditures; and
(xiii) other macroeconomic factors. These factors are further discussed in the
Results of Operations and Risk Factors sections of this Quarterly Report on Form
10-Q.

Potential internal sources of additional working capital and liquidity are the
sale of assets or the issuance of shares through option exercises and shares
issued under our Employee Stock Purchase Plan. A potential external source of
additional working capital

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and liquidity is the issuance of additional debt or equity. However, we cannot
predict if these sources will be available in the future or on commercially
acceptable terms.

Acquisitions and New Operations

As part of our overall expansion strategy of offering integrated services to
vehicle sellers, we anticipate acquiring and developing facilities in new
regions, as well as the regions currently served by our facilities. We believe
that these acquisitions and openings will strengthen our coverage, as we have
facilities located in the U.S., Canada, the U.K., Brazil, the Republic of
Ireland, Germany, Finland, the U.A.E., Oman, Bahrain, and Spain with the
intention of providing global coverage for our sellers.

The following tables set forth operational facilities that we have opened and
are now operational from August 1, 2021 through October 31, 2022:

                      United States Locations             Date

                    Mobile South, Alabama           August 2021
                    Madison, Wisconsin              October 2021
                    Augusta, Georgia                April 2022
                    Milwaukee South, Wisconsin      May 2022
                    Punta Gorda, Florida            June 2022
                    Anchorage, Alaska               August 2022
                    Rapid City, South Dakota        August 2022
                    Kansas City, Missouri           September 2022


 International Locations       Geographic Service Area            Date

Barcelona, Spain              Spain                         September 2021
Halifax, Novia Scotia         Canada                        April 2022

The following table sets forth the operational facilities obtained through
business acquisitions from August 1, 2021 through October 31, 2022:

       Locations            Geographic Service Area          Date
Skelmersdale, England      United Kingdom                July 2022
Dumfries, England          United Kingdom                July 2022

The period-to-period comparability of our consolidated operating results and
financial position is affected by business acquisitions, new openings, weather
and product introductions during such periods.

In addition to growth through business acquisitions, we seek to increase
revenues and profitability by, among other things, (i) acquiring and developing
additional vehicle storage facilities in key markets, including foreign markets;
(ii) pursuing global, national, and regional vehicle seller agreements; (iii)
increasing our service offerings; and (iv) expanding the application of VB3 into
new markets. In addition, we implement our pricing structure and auction
procedures, and attempt to introduce cost efficiencies at each of our acquired
facilities by implementing our operational procedures, integrating our
management information systems, and redeploying personnel, when necessary.

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