Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K for the fiscal year ended July 31, 2020, or this Form 10-K, including the information incorporated by reference herein, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), including forward-looking statements concerning the potential impact of the COVID-19 pandemic on our business, operations, and operating results. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Form 10-K involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. These forward-looking statements are made in reliance upon the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These factors include those listed in Part I, Item 1A under the caption entitled “Risk Factors” in this Form 10-K and those discussed elsewhere in this Form 10-K. Unless the context otherwise requires, references in this Form 10-K to “Copart,” the “Company,” “we,” “us,” or “our” refer to Copart, Inc. We encourage investors to review these factors carefully together with the other matters referred to herein, as well as in the other documents we file with the Securities and Exchange Commission (“the SEC”). We may from time to time make additional written and oral forward-looking statements, including statements contained in our filings with the SEC. We do not undertake to update any forward-looking statement that may be made from time to time by or on behalf of us.

All references to numbered Notes are to specific Notes to our Consolidated Financial Statements included in this Annual Report on Form 10-K and which descriptions are incorporated into the applicable response by reference. Capitalized terms used, but not defined, in this Management’s Discussion and Analysis of Financial Condition and Results of Operation (“MD&A”) have the same meanings as in such Notes.

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 is an existing fact, with whatever fuel technology and efficiency it was designed and built to have, and the substantial carbon emissions associated with the vehicle’s manufacture are already sunk costs. 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, entered into emergency leases, and engaged with a multitude of service providers to timely retrieve, store, and remarket tens of thousands of flood-damaged vehicles in the Houston, Texas metropolitan area in the wake of Hurricane Harvey in the summer of 2017.

We provide vehicle sellers with a full range of services to process and sell vehicles primarily over the internet through our Virtual Bidding Third Generation internet auction-style sales technology, which we refer to as VB3. Vehicle sellers consist primarily of insurance companies, but also include banks, finance companies, charities, fleet operators, dealers and from individuals. We sell the vehicles principally to licensed vehicle dismantlers, rebuilders, repair licensees, used vehicle dealers, exporters, and in some jurisdictions, 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.

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, drivable 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 last several years, we believe there has been an increase in overall growth in the salvage market driven by an increase in total loss frequency. The increase in total loss frequency may have been driven by the change in used car values and repair costs, which we believe are generally trending upward. Changes in used car prices and repair costs, may impact total loss frequency and 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 continued to increase, growing from 9.6 years in 2002 to 11.9 years in 2020. 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. Accordingly, we cannot predict future trends in total loss frequency.

Beginning in March 2020, our business and operations began to experience the impact of the worldwide COVID-19 pandemic, first within our European operations and as the month progressed throughout the balance of our global operations. In materially all of our jurisdictions, we have been deemed by local authorities an essential business because our operations ensure the removal of vehicles from repair shops, impound yards, and streets and highways, enabling the critical function of road infrastructure. As a result, we have continued to operate our facilities as well as our online-only auctions, while following appropriate health and safety protocols to ensure safe working conditions for our employees as well as for our sellers, buyers, and other business partners with whom we come in contact.

From a financial perspective, our operating results were adversely affected by lower processed vehicle volume during the last five months of the year ended July 31, 2020. We saw substantial declines in vehicle assignments, which we attribute principally to reduced accident volume as miles driven dramatically declined in response to shelter-in-place orders across the globe. As we do not recognize the majority of our transactional revenues until the completion of our auctions, a substantial portion of the declines in assignments we experienced in the most recent quarter will be reflected in future quarters. We cannot predict how the pandemic will continue to develop, whether and to what extent new shelter-in-place orders will be issued, or to what extent the pandemic may have longer term unanticipated impacts on our markets, including, for example, the risk of long-term reductions in miles driven. To the extent that the pandemic results in temporary or longer-term declines in the number of vehicles we process, our business and operating results could be adversely affected.

Although we have been deemed an “essential business” in the jurisdictions in which we operate and have largely been able to continue our yard operations, we have been required to make adjustments in our business processes that may reduce efficiency or increase operating expenses, particularly if the pandemic continues over a long period of time. We adjusted, but did not make material modifications to, our operating expenses to be able to continue providing employment for our employees, service to our sellers, and process incoming vehicles for sale in future quarters. We expect the pandemic to have an adverse effect on our quarterly revenues in future quarters, with the magnitude and timing of these effects dependent upon the extent and duration of suspended economic activity across our markets. The longer-term impact on our business will depend on potential adverse operational impacts from outbreaks of COVID-19 at any of our locations; “second wave” outbreaks of COVID-19 in one or more of our geographic markets; a reduction in miles driven due to one or more factors relating to the COVID-19 pandemic; any further government actions in response to COVID-19 outbreaks that restrict business activity or travel; disruptions of governmental administrative operations due to COVID-19 outbreaks that adversely impact our core business activities, such as vehicle title processing; and deteriorating economic conditions generally, and the potential availability, among other things, of vaccines or treatments, none of which we can predict. For a further discussion of risks to our business and operating results arising from the pandemic, please see the section of this Annual Report on Form 10-K captioned “Risk Factors.”

On March 20, 2020, we filed a Current Report on Form 8-K to announce our draw down of funds under our available credit facilities in order to ensure financial flexibility given current uncertainties; we subsequently repaid all outstanding borrowings under these facilities. As of July 31, 2020, we had cash, cash equivalents, and restricted cash of $477.7 million, an increase of $384.2 million over January 31, 2020, and had $1.5 billion of liquidity. These incremental available cash equivalents may be used for investments in land, technology, acquisitions, working capital, share repurchases, or general corporate purposes as permitted by the applicable credit agreements.

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 Income and Expense: Other income primarily includes foreign exchange rate gains and losses, and gains and losses from the disposal of assets, which will fluctuate based on the nature of these activities each period. Other expense consists primarily of interest expense on long-term debt. See Notes to Consolidated Financial Statements, Note 8 — Long-Term Debt.

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 other macroeconomic factors such as COVID-19. These factors are further discussed in the Results of Operations and Risk Factors sections of this Annual Report on Form 10-K.

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 and liquidity is the issuance of additional debt with new lenders and 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. All of these acquisitions have been accounted for using the purchase method of accounting.

The following tables set forth operational facilities that we have opened and began operations from August 1, 2017 through July 31, 2020:

United States Locations						Date
Andrews, Texas (Midland)						August 2017
Exeter, Rhode Island						October 2017
Lumberton, North Carolina						June 2018
Spartanburg, South Carolina						August 2018
Madison, Wisconsin						September 2018
Harleyville, South Carolina						January 2019
Macon, Georgia						January 2019
Mocksville, North Carolina						January 2019
Antelope, California						January 2019
Sacramento, California						March 2019
Fredericksburg, Virginia						April 2019
West Mifflin, Pennsylvania						May 2019
Hartford, Connecticut						July 2019
Buffalo, New York						July 2019
Fort Wayne, Indiana						February 2020
Concord, North Carolina						March 2020
Salt Lake City, Utah						May 2020

International Locations						Geographic Service Area						Date
Nobitz, Thuringia (Leipzig)						Germany						April 2018
Belfast, Northern Ireland						United Kingdom						April 2018
Curitiba, Paraná						Brazil						September 2018
Mannheim, Rhineland-Palatinate						Germany						October 2018
Stuttgart, Baden-Württemberg						Germany						November 2018
Frankfurt, Hessen						Germany						November 2018
Itzehoe, Schleswig-Holstein (Hamburg)						Germany						November 2018
Furth, Bavaria (Nuremberg)						Germany						November 2018
Massen, Brandenburg (Berlin)						Germany						November 2018
Friesack, Brandenburg (Berlin)						Germany						December 2018
Niederlehme, Brandenburg (Berlin)						Germany						November 2019
Pilsting, Bavaria (Munich)						Germany						December 2019
São Paulo, São Paulo						Brazil						May 2020

The following table sets forth operational facilities obtained through business acquisitions from August 1, 2017 through July 31, 2020:

Locations						Geographic Service Area						Date
Greenville, Kentucky						United States						March 2019
Espoo, Finland						Finland						March 2018
Pirkkala, Finland						Finland						March 2018
Oulu, Finland						Finland						March 2018
Turku, Finland						Finland						March 2018

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.

Results of Operations

The following table shows certain data from our consolidated statements of income expressed as a percentage of total service revenues and vehicle sales for fiscal 2020, 2019 and 2018:

						Year Ended July 31,
(In percentages)						2020						2019						2018
Service revenues and vehicle sales:
Service revenues						88		%				86		%				87		%
Vehicle sales						12		%				14		%				13		%
Total service revenues and vehicle sales						100		%				100		%				100		%
Operating expenses:
Yard operations						44		%				43		%				47		%
Cost of vehicle sales						10		%				13		%				11		%
General and administrative						9		%				9		%				10		%
Impairment of long-lived assets						—		%				—		%				—		%
Total operating expenses						63		%				65		%				68		%
Operating income						37		%				35		%				32		%
Total other expense						(1)		%				(1)		%				(1)		%
Income before income taxes						36		%				34		%				31		%
Income tax expense						4		%				5		%				8		%
Net income						32		%				29		%				23		%

Comparison of Fiscal Years ended July 31, 2020 and 2019 and 2018

The following table presents a comparison of service revenues for fiscal 2020, 2019 and 2018:

									Year Ended July 31,																														2020 vs. 2019																		2019 vs. 2018
(In thousands)												2020						2019						2018						Change						% Change						Change						% Change
Service revenues
			United States						$	1,714,724					$	1,537,431					$	1,385,238					$	177,293					11.5		%				$	152,193					11.0		%
			International						232,416						218,263						193,264						14,153						6.5		%				24,999						12.9		%
Total service revenues												$	1,947,140					$	1,755,694					$	1,578,502					$	191,446					10.9		%				$	177,192					11.2		%

Service Revenues. The increase in service revenues for fiscal 2020 of $191.4 million, or 10.9% as compared to fiscal 2019 came from (i) an increase in the U.S. of $177.3 million and (ii) an increase in International of $14.2 million. The increase in the U.S. was driven primarily by (i) increased volume and (ii) an increase in revenue per car due to higher average auction selling prices. The increase in volume in the U.S. was derived from (i) growth in the number of units sold from new and expanded contracts with insurance companies and (ii) growth from existing suppliers, driven by what we believe was an increase in total loss frequency. Excluding the detrimental impact of $6.9 million due to changes in foreign currency exchange rates, primarily from the change in the British pound and Brazilian real to U.S. dollar exchange rates, the increase in International of $21.1 million was driven primarily by increased revenue per car.

The following table presents a comparison of vehicle sales for fiscal 2020, 2019 and 2018:

									Year Ended July 31,																														2020 vs. 2019																		2019 vs. 2018
(In thousands)												2020						2019						2018						Change						% Change						Change						% Change
Vehicle sales
			United States						$	145,962					$	119,138					$	105,784					$	26,824					22.5		%				$	13,354					12.6		%
			International						112,481						167,125						121,409						(54,644)						(32.7)		%				45,716						37.7		%
Total vehicle sales												$	258,443					$	286,263					$	227,193					$	(27,820)					(9.7)		%				$	59,070					26.0		%

Vehicle Sales. The decrease in vehicle sales for fiscal 2020 of $27.8 million, or 9.7% as compared to fiscal 2019 came from (i) a decrease in International of $54.6 million partially offset by (ii) an increase in the U.S. of $26.8 million. Excluding a detrimental impact of $2.4 million due to changes in foreign currency exchange rates, primarily from the change in the British pound and European Union euro to U.S. dollar exchange rates, the decline in International of $52.2 million was primarily the result of decreased volume driven by contractual shift from purchase contracts to fee based service contracts and a change in mix of vehicles sold. The increase in the U.S. was primarily the result of increased volume and higher average auction selling prices, which we believe was due to a change in the mix of vehicles sold and increased demand.

The following table presents a comparison of yard operations expense for fiscal 2020, 2019 and 2018:

									Year Ended July 31,																														2020 vs. 2019																		2019 vs. 2018
(In thousands)												2020						2019						2018						Change						% Change						Change						% Change
Yard operations expenses
			United States						$	827,802					$	751,653					$	730,865					$	76,149					10.1		%				$	20,788					2.8		%
			International						144,685						136,458						116,003						8,227						6.0		%				20,455						17.6		%
Total yard operations expenses												$	972,487					$	888,111					$	846,868					$	84,376					9.5		%				$	41,243					4.9		%
Yard operations expenses, excluding depreciation and amortization
			United States						$	759,779					$	697,115					$	683,079					$	62,664					9.0		%				$	14,036					2.1		%
			International						135,709						127,829						106,559						7,880						6.2		%				21,270						20.0		%
Yard depreciation and amortization
			United States						$	68,023					$	54,538					$	47,786					$	13,485					24.7		%				$	6,752					14.1		%
			International						8,976						8,629						9,444						347						4.0		%				(815)						(8.6)		%

Yard Operations Expenses. The increase in yard operations expenses for fiscal 2020 of $84.4 million, or 9.5% as compared to fiscal 2019 resulted from (i) an increase in the U.S. of $76.1 million, primarily from growth in volume, an increase in the cost to process each car, and a $13.5 million increase in depreciation; and (ii) an increase in International of $8.2 million related primarily from an increase in the cost to process each car partially offset by the beneficial impact of $4.1 million due to changes in foreign currency exchange rates, primarily from changes in the British pound, Brazilian real and European Union euro to U.S. dollar exchange rate. The increase in yard operations depreciation and amortization expenses resulted primarily from depreciating new and expanded facilities placed into service in the U.S.

The following table presents a comparison of cost of vehicle sales for fiscal 2020, 2019 and 2018:

									Year Ended July 31,																														2020 vs. 2019																		2019 vs. 2018
(In thousands)												2020						2019						2018						Change						% Change						Change						% Change
Cost of vehicle sales
			United States						$	135,095					$	112,268					$	101,130					$	22,827					20.3		%				$	11,138					11.0		%
			International						90,199						143,236						95,331						(53,037)						(37.0)		%				47,905						50.3		%
Total cost of vehicle sales												$	225,294					$	255,504					$	196,461					$	(30,210)					(11.8)		%				$	59,043					30.1		%

Cost of Vehicle Sales. The decrease in cost of vehicle sales for fiscal 2020 of $30.2 million, or 11.8% as compared to fiscal 2019 was the result of (i) a decrease in International of $53.0 million and (ii) an increase in the U.S. of $22.8 million. Excluding the beneficial impact of $1.9 million due to changes in foreign currency exchange rates, primarily from changes in the British pound and European euro to U.S. dollar exchange rate, the decrease in International of $54.9 million was primarily the result of decreased volume driven by contractual shifts from purchase contracts to fee based service contracts and a change in the mix of vehicles sold. The increase in the U.S. was primarily the result of increased volume and higher average purchase prices, which we believe is due to a change in the mix of vehicles sold and increased demand.

The following table presents a comparison of general and administrative expenses for fiscal 2020, 2019 and 2018:

									Year Ended July 31,																														2020 vs. 2019																		2019 vs. 2018
(In thousands)												2020						2019						2018						Change						% Change						Change						% Change
General and administrative expenses
			United States						$	149,012					$	151,854					$	144,140					$	(2,842)					(1.9)		%				$	7,714					5.4		%
			International						42,691						30,013						32,750						12,678						42.2		%				(2,737)						(8.4)		%
Total general and administrative expenses												$	191,703					$	181,867					$	176,890					$	9,836					5.4		%				$	4,977					2.8		%
General and administrative expenses, excluding depreciation and amortization
			United States						$	126,400					$	131,257					$	124,147					$	(4,857)					(3.7)		%				$	7,110					5.7		%
			International						40,912						28,882						31,375						12,030						41.7		%				(2,493)						(7.9)		%
General and administrative depreciation and amortization
			United States						$	22,612					$	20,597					$	19,993					$	2,015					9.8		%				$	604					3.0		%
			International						1,779						1,131						1,375						648						57.3		%				(244)						(17.7)		%

General and Administrative Expenses. The increase in general and administrative expenses for fiscal 2020 of $9.8 million, or 5.4% as compared to fiscal 2019 came primarily from an increase in International of $12.7 million, partially offset by a decrease in the U.S. of $2.8 million. Excluding depreciation and amortization, the increase in International of $12.0 million resulted primarily from our international growth strategy through the expansion of our European businesses partially offset by the beneficial impact of $1.7 million due to changes in foreign currency exchange rates, primarily from the change in the British pound, Brazilian real and European Union euro to U.S. dollar exchange rate. Excluding depreciation and amortization, the decrease in the U.S. of $4.9 million resulted primarily from decreases in legal and travel costs and higher capitalizable software development, partially offset by increases in payroll taxes from the exercise of employee stock options and by supporting our continued growth initiatives.

The following table summarizes impairment, total other expenses and income taxes for fiscal 2020, 2019 and 2018:

						Year Ended July 31,																														2020 vs. 2019																		2019 vs. 2018
(In thousands)						2020						2019						2018						Change						% Change						Change						% Change
Impairment						$	—					$	—					$	1,131					$	—					—		%				$	(1,131)					(100.0)		%
Total other expenses						(15,260)						(11,524)						(21,834)						(3,736)						(32.4)		%				10,310						47.2		%
Income taxes						100,932						113,258						144,504						(12,326)						(10.9)		%				(31,246)						(21.6)		%

Other Expenses. The increase in total other expenses for fiscal 2020 of $3.7 million, or 32.4% as compared to fiscal 2019 was primarily due to lower gains on the disposal of certain non-operating assets in the current year and losses of unconsolidated affiliates, partially offset by an increase in currency gains, primarily due to the change in the British pound to U.S. dollar exchange rate.

Income Taxes. Our effective income tax rates were 12.6%, 16.1%, and 25.7% for fiscal 2020, 2019 and 2018, respectively. The current year’s effective tax rate was computed based on the U.S. federal statutory tax rate of 21.0% for the fiscal year ending July 31, 2020 and was negatively impacted by $1.7 million of discrete tax items related to amending previously filed income tax returns. The prior year’s effective tax rate was computed based on the U.S. federal statutory tax rate of 21.0% for the fiscal year ending July 31, 2019 and was favorably impacted by $10.2 million of discrete tax items related to amending previously filed income tax returns. The effective tax rates in the current and prior years were also impacted from the result of recognizing excess tax benefits from the exercise of employee stock options of $92.5 million, $46.1 million, and $21.3 million for fiscal years 2020, 2019 and 2018, respectively.

Discussion of Fiscal Year ended July 31, 2019 compared to Fiscal Year ended July 31, 2018

For a discussion of fiscal 2019 as compared to fiscal 2018, please refer to Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended July 31, 2019, filed with the SEC on September 30, 2019.

Liquidity and Capital Resources

The following table presents a comparison of key components of our liquidity and capital resources for fiscal 2020, 2019 and 2018, excluding additional funds available to us through our Revolving Loan Facility:

						July 31,																														2020 vs. 2019																		2019 vs. 2018
(In thousands)						2020						2019						2018						Change						% Change						Change						% Change
Cash, cash equivalents, and restricted cash						$	477,718					$	186,319					$	274,520					$	291,399					156.4		%				$	(88,201)					(32.1)		%
Working capital						607,715						405,163						431,860						202,552						50.0		%				(26,697)						(6.2)		%

						Year Ended July 31,																														2020 vs. 2019																		2019 vs. 2018
(In thousands)						2020						2019						2018						Change						% Change						Change						% Change
Operating cash flows						$	917,885					$	646,646					$	535,069					$	271,239					41.9		%				$	111,577					20.9		%
Investing cash flows						(601,208)						(356,267)						(288,476)						(244,941)						(68.8)		%				(67,791)						(23.5)		%
Financing cash flows						(27,414)						(370,304)						(182,038)						342,890						92.6		%				(188,266)						(103.4)		%
Capital expenditures, excluding acquisitions						$	(591,972)					$	(373,883)					$	(287,910)					$	(218,089)					(58.3)		%				$	(85,973)					(29.9)		%
Acquisitions, net of cash acquired						(11,702)						(745)						(8,787)						(10,957)						(1,470.7)		%				8,042						91.5		%
Net repayments on revolving loan facility						—						—						(231,000)						—						—		%				231,000						100.0		%

Cash, cash equivalents, and restricted cash and working capital increased $291.4 million and $202.6 million at July 31, 2020, respectively, as compared July 31, 2019. Cash and cash equivalents increased primarily due to cash generated from operations and proceeds from stock option exercises, partially offset by payments for employee stock-based tax withholdings and capital expenditures. Working capital increased primarily from cash generated from operations and timing of cash receipts and payments partially offset by capital expenditures, our operating lease liabilities, certain income tax benefits related to stock option exercises and timing of cash payments. Cash equivalents consisted of bank deposits, domestic certificates of deposit, and funds invested in money market accounts, which bear interest at variable rates.

Historically, we have financed our growth through cash generated from operations, public offerings of common stock, equity issued in conjunction with certain acquisitions and debt financing. Our primary source of cash generated by operations is from the collection of service fees and reimbursable advances from the proceeds of vehicle sales. We expect to continue to use cash flows from operations to finance our working capital needs and to develop and grow our business. In addition to our stock repurchase program, we are considering a variety of alternative potential uses for our remaining cash balances and our cash flows from operations. These alternative potential uses include additional stock repurchases, repayments of long-term debt, the payment of dividends, and acquisitions. For further detail, see Notes to Consolidated Financial Statements, Note 8 — Long-Term Debt and Note 11 — Stockholders’ Equity and under the subheadings “Credit Agreement” and “Note Purchase Agreement” below.

Our business is seasonal as inclement weather during the winter months increases the frequency of accidents and consequently, the number of cars involved in accidents which the insurance companies salvage rather than repair. During the winter months, most of our facilities process 5% to 20% more vehicles than at other times of the year. This increased volume requires the increased use of our cash to pay out advances and handling costs of the additional business.

We believe that our currently available cash and cash equivalents and cash generated from operations will be sufficient to satisfy our operating and working capital requirements for at least the next 12 months. We expect to acquire or develop additional locations and expand some of our current facilities in the foreseeable future. We may be required to raise additional cash through drawdowns on our Revolving Loan Facility or issuance of additional equity to fund this expansion. Although the timing and magnitude of growth through expansion and acquisitions are not predictable, the opening of new greenfield yards is contingent upon our ability to locate property that (i) is in an area in which we have a need for more capacity; (ii) has adequate size given the capacity needs; (iii) has the appropriate shape and topography for our operations; (iv) is reasonably close to a major road or highway; and (v) most importantly, has the appropriate zoning for our business. Costs to develop a new yard can range from $3.0 to $50.0 million, depending on size, location and developmental infrastructure requirements.

As of July 31, 2020, $124.8 million of the $477.7 million of cash and cash equivalents was held by our foreign subsidiaries. If these funds are needed for our operations in the U.S., the repatriation of these funds could still be subject to the foreign withholding tax following the U.S. Tax Reform. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not require repatriation to fund our U.S. operations.

Net cash used in operating activities increased for fiscal 2020 as compared to fiscal 2019 due to improved cash operating results from an increase in service revenues, partially offset by an increase in yard operations and general and administrative expenses, and changes in operating assets and liabilities. The change in operating assets and liabilities was primarily the result of an increase of funds received on accounts receivables of $76.8 million, decreases in funds used to pay accounts payable of $30.5 million, cash generated from the sale of inventory of $25.1 million, decreases in funds primarily used to pay land acquisition deposits of of $12.4 million, and partially offset by net income taxes receivable of $3.6 million primarily related to excess tax benefits from stock option exercises.

Net cash used in investing activities increased for fiscal 2020 as compared to fiscal 2019 due primarily to increases in capital expenditures and acquisitions, partially offset by proceeds from the sale of assets. Our capital expenditures are primarily related to lease buyouts of certain facilities, acquiring land, opening and improving facilities, capitalized software development costs for new software for internal use and major software enhancements, and acquiring yard equipment. We continue to develop, expand, and invest in new and existing facilities and standardize the appearance of existing locations. As of July 31, 2020, we have no material non-cancelable commitments for future capital expenditures. Capitalized software development costs were $13.2 million, $8.4 million and $7.4 million for fiscal 2020, 2019 and 2018, 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. See Notes to Consolidated Financial Statements, Capitalized Software Costs in Note 1 — Summary of Significant Accounting Policies.

Net cash used in financing activities decreased in fiscal 2020 as compared to fiscal 2019 due primarily to lower repurchases of our common stock as part of our stock repurchase program as discussed in further detail under the subheading “Stock Repurchases”, and an increase in proceeds from the exercise of stock options, partially offset by payments for employee stock-based tax withholdings as discussed in further detail under the subheading “Stock Repurchases”and the Notes to Consolidated Financial Statements, Note 11 — Stockholders’ Equity, debt issuance costs for the restructuring of our revolving loan facility as discussed in further detail under the subheading Credit Agreement, and payments on .

For a discussion of fiscal 2019 as compared to fiscal 2018, please refer to Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended July 31, 2019, filed with the SEC on September 30, 2019.

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 us 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, 2020:

						Payments Due by Fiscal Year
(In thousands)						Less than 1 year						1–3 Years						3–5 Years						More than 5 Years						Other						Total
Contractual Obligations
Long-term debt, revolving loan facility, including current portion (1)						$	—					$	—					$	100,000					$	300,000					$	—					$	400,000
Interest payments on long-term debt, revolving loan facility, including current portion (1)						19,426						38,788						31,007						34,354						—						123,575
Operating leases (2)						27,718						41,974						25,136						45,807						—						140,635
Finance leases (2)						768						558						13						—						—						1,339
Tax liabilities (3)						—						—						—						—						44,965						44,965
Total contractual obligations						$	47,912					$	81,320					$	156,156					$	380,161					$	44,965					$	710,514

						Amount of Commitment Expiration Per Period
Commercial Commitments (4)						Less than 1 year						1–3 Years						3–5 Years						More than 5 Years						Other						Total
Letters of Credit						$	24,590					$	—					$	—					$	—					$	—					$	24,590

(1)Revolving loan facility payments of zero and related interest payments reflect management’s intent for the use of the Revolving Loan Facility, which may change on a quarter by quarter basis.

(2)Contractual obligations consist of future non-cancelable minimum lease payments under finance and operating leases, used in the normal course of business.

(3)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.

(4)Commercial commitments consist primarily of letters of credit provided for insurance programs and certain business transactions including cash collateralized bank guarantees.

Stock Repurchases

On September 22, 2011, our Board of Directors approved an 80 million share increase in the stock repurchase program, bringing the total current authorization to 196 million shares. The repurchases may be effected through solicited or unsolicited transactions in the open market or in privately negotiated transactions. No time limit has been placed on the duration of the stock repurchase program. Subject to applicable securities laws, such repurchases will be made at such times and in such amounts as we deem appropriate and may be discontinued at any time. For fiscal 2020 and 2018, we did not repurchase any shares of our common stock under the program. For fiscal 2019, we repurchased 7,635,596 shares of our common stock under the program at a weighted average price of $47.81 per share totaling $365.0 million. As of July 31, 2020, the total number of shares repurchased under the program was 114,549,198 and 81,450,802 shares were available for repurchase under our program.

In fiscal 2018, certain members of our Board of Directors exercised stock options through cashless exercises. During fiscal 2019, our former President exercised all of his vested stock options through a cashless exercise. In fiscal 2020, our Chief Executive Officer exercised all of his vested stock options through a cashless exercise. A portion of the options exercised were net settled in satisfaction of the exercise price. We remitted $101.3 million, $45.6 million and no amounts for the years ended July 31, 2020, 2019 and 2018, respectively, to the proper taxing authorities in satisfaction of the employees’ statutory withholding requirements.

The exercised stock options, utilizing a cashless exercise, are summarized in the following table:

Period						Options Exercised						Weighted Average Exercise Price						Shares Net Settled for Exercise						Shares Withheld for Taxes (1)						Net Shares to Employees						Weighted Average Share Price for Withholding						Employee Stock Based Tax Withholding (in 000s)
FY 2018—Q2						80,000						$	6.54					11,996						—						68,004						$	43.60					$	—
FY 2019—Q3						3,000,000						17.81						945,162						806,039						1,248,799						56.53						45,565
FY 2020—Q1						4,000,000						17.81						865,719						1,231,595						1,902,686						82.29						101,348

(1)Shares withheld for taxes are treated as a repurchase of shares for accounting purposes but do not count against our stock repurchase program.

Credit Agreement

On December 3, 2014, we entered into a Credit Agreement (as amended from time to time, the “Credit Amendment”) with Wells Fargo Bank, National Association, as administrative agent, and Bank of America, N.A., as syndication agent. The Credit Agreement provided for (a) a secured revolving loan facility in an aggregate principal amount of up to $300.0 million (the “Revolving Loan Facility”), and (b) a secured term loan facility in an aggregate principal amount of $300.0 million (the “Term Loan”), which was fully drawn at closing. The Term Loan amortized $18.8 million per quarter.

On March 15, 2016, we entered into a First Amendment to Credit Agreement (the “Amendment to Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent and Bank of America, N.A. The Amendment to Credit Agreement amended certain terms of the Credit Agreement, dated as of December 3, 2014. The Amendment to Credit Agreement provided for (a) an increase in the secured revolving credit commitments by $50.0 million, bringing the aggregate principal amount of the revolving credit commitments under the Credit Agreement to $350.0 million, (b) a new secured term loan (the “Incremental Term Loan”) in the aggregate principal amount of $93.8 million having a maturity date of March 15, 2021, and (c) an extension of the termination date of the Revolving Loan Facility and the maturity date of the Term Loan from December 3, 2019 to March 15, 2021. The Amendment to Credit Agreement extended the amortization period for the Term Loan and decreased the quarterly amortization payments for that loan to $7.5 million per quarter. The Amendment to Credit Agreement additionally reduced the pricing levels under the Credit Agreement to a range of 0.15% to 0.30% in the case of the commitment fee, 1.125% to 2.0% in the case of the applicable margin for LIBOR loans, and 0.125% to 1.0% in the case of the applicable margin for base rate loans, based on our consolidated total net leverage ratio during the preceding fiscal quarter. We borrowed the entire $93.8 million principal amount of the Incremental Term Loan concurrent with the closing of the Amendment to Credit Agreement.

On July 21, 2016, we entered into a Second Amendment to Credit Agreement (the “Second Amendment to Credit Agreement”) with Wells Fargo Bank, National Association, SunTrust Bank, and Bank of America, N.A., as administrative agent (as successor in interest to Wells Fargo Bank). The Second Amendment to Credit Agreement amends certain terms of the Credit Agreement, dated as of December 3, 2014 as amended by the Amendment to Credit Agreement, dated as of March 15, 2016. The Second Amendment to Credit Agreement provides for, among other things, (a) an increase in the secured revolving credit commitments by $500.0 million, bringing the aggregate principal amount of the revolving credit commitments under the Credit Agreement to $850.0 million, (b) the repayment of existing term loans outstanding under the Credit Agreement, (c) an extension of the termination date of the revolving credit facility under the Credit Agreement from March 15, 2021 to July 21, 2021, and (d) increased covenant flexibility.

Concurrent with the closing of the Second Amendment to Credit Agreement, we prepaid in full the outstanding $242.5 million principal amount of the Term Loan and Incremental Term Loan under the Credit Agreement without premium or penalty. The Second Amendment to Credit Agreement reduced the pricing levels under the Credit Agreement to a range of 0.125% to 0.20% in the case of the commitment fee, 1.00% to 1.75% in the case of the applicable margin for LIBOR loans, and 0.0% to 0.75% in the case of the applicable margin for base rate loans, in each case depending on our consolidated total net leverage ratio during the preceding fiscal quarter.

On July 21, 2020, we entered into a First Amended and Restated Credit Agreement with Wells Fargo Bank, National Association, Truist Bank (as successor by merger to Suntrust Bank), BMO Harris Bank N.A., Santander Bank, N.A., and Bank of America, N.A., as administrative agent. The First Amended and Restated Credit Agreement amends certain terms of the Credit Agreement, dated as of December 3, 2014 as amended by the Amendment to Credit Agreement, dated as of March 15, 2016, as amended by the Second Amendment to Credit Agreement, dated as July 21, 2016. The First Amended and Restated Credit Agreement provides for, among other things, (a) an increase in the secured revolving credit commitments by $200.0 million, bringing the aggregate principal amount of the revolving credit commitments under the Credit Agreement to $1,050.0 million, and (b) an extension of the termination date of the revolving credit facility under the Credit Agreement from July 21, 2021 to July 21, 2023. The First Amended and Restated Credit Agreement additionally increased the pricing levels under the Credit Agreement to a range of 0.25% to 0.35% in the case of the commitment fee, 1.50% to 2.25% in the case of the applicable margin for Eurodollar Rate Loans, and 0.50% to 1.25% in the case of the applicable margin for base rate loans, in each case depending on our consolidated total net leverage ratio during the preceding fiscal quarter. The principal purposes of these financing transactions were to increase the size and availability under our Revolving Loan Facility and to provide additional long-term financing. The proceeds may be used for general corporate purposes, including working capital and capital expenditures, potential share repurchases, acquisitions, or other investments relating to our expansion strategies in domestic and international markets.

The Revolving Loan Facility under the Credit Agreement bears interest, at our election, at either (a) the Base Rate, which is defined as a fluctuating rate per annum equal to the greatest of (i) the Prime Rate in effect on such day; (ii) the Federal Funds Rate in effect on such date plus 0.50%; or (iii) the Eurodollar Rate plus 1.0%, subject to an interest rate floor of 0.75%, in each case plus an applicable margin ranging from 0.50% to 1.25% based on our consolidated total net leverage ratio during the preceding fiscal quarter; or (b) the Eurodollar Rate plus an applicable margin ranging from 1.50% to 2.25% depending on our consolidated total net leverage ratio during the preceding fiscal quarter. Interest is due and payable in arrears, at the end of each calendar quarter for loans bearing interest at the Base Rate, and at the end of an interest period (or at each three month interval in the case of loans with interest periods greater than three months) in the case of Eurodollar Rate Loans. The interest rate as of July 31, 2020 on our Revolving Loan Facility was the Eurodollar Rate of 0.75% plus an applicable margin of 1.50%. The carrying amount of the Credit Agreement is comprised of borrowings under which interest accrues under a fluctuating interest rate structure. Accordingly, the carrying value approximated fair value at July 31, 2020, and was classified within Level II of the fair value hierarchy.

Amounts borrowed under the Revolving Loan Facility may be repaid and reborrowed until the maturity date of July 21, 2023. We are obligated to pay a commitment fee on the unused portion of the Revolving Loan Facility. The commitment fee rate ranges from 0.25% to 0.35%, depending on our consolidated total net leverage ratio during the preceding fiscal quarter, on the average daily unused portion of the revolving credit commitment under the Credit Agreement. We had no outstanding borrowings under the Revolving Loan Facility as of July 31, 2020 and 2019.

Our obligations under the Credit Agreement are guaranteed by certain of our domestic subsidiaries meeting materiality thresholds set forth in the Credit Agreement. Such obligations, including the guaranties, are secured by substantially all of our assets and the assets of the subsidiary guarantors pursuant to a Security Agreement as part of the First Amended and Restated Credit Agreement, dated July 21, 2020, among us, the subsidiary guarantors from time to time party thereto, and Bank of America, N.A., as collateral agent.

The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict us and our subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into transactions with affiliates, pay dividends, or make distributions on and repurchase stock, in each case subject to certain exceptions. We are also required to maintain compliance, measured at the end of each fiscal quarter, with a consolidated total net leverage ratio and a consolidated interest coverage ratio. The Credit Agreement contains no restrictions on the payment of dividends and other restricted payments, as defined, as long as (1) the consolidated total net leverage ratio, as defined, both before and after giving effect to any such dividend or restricted payment on a pro forma basis, is less than 3.25:1, in an unlimited amount, (2) if clause (1) is not available, so long as the consolidated total net leverage ratio both before and after giving effect to any such dividend on a pro forma basis is less than 3.50:1, in an aggregate amount not to exceed the available amount, as defined, and (3) if clauses (1) and (2) are not available, in an aggregate amount not to exceed $50.0 million; provided, that, minimum liquidity, as defined, shall be not less than $75.0 million both before and after giving effect to any such dividend or restricted payment. As of July 31, 2020, the consolidated total net leverage ratio was (0.03):1. Minimum liquidity as of July 31, 2020 was $1.5 billion. Accordingly, we do not believe that the provisions of the Credit Agreement represent a significant restriction to our ability to pay dividends or to the successful future operations of the business. We have not paid a cash dividend since becoming a public company in 1994. We were in compliance with all covenants related to the Credit Agreement as of July 31, 2020.

Related to the execution of the First Amended and Restated Credit Agreement, we incurred $2.8 million in costs, which was capitalized as debt issuance fees. The debt discount is amortized to interest expense over the term of the respective debt instruments and are classified as reductions of the outstanding liability.

Note Purchase Agreement

On December 3, 2014, we entered into a Note Purchase Agreement and sold to certain purchasers (collectively, the “Purchasers”) $400.0 million in aggregate principal amount of senior secured notes (the “Senior Notes”) consisting of (i) $100.0 million aggregate principal amount of 4.07% Senior Notes, Series A, due December 3, 2024; (ii) $100.0 million aggregate principal amount of 4.19% Senior Notes, Series B, due December 3, 2026; (iii) $100.0 million aggregate principal amount of 4.25% Senior Notes, Series C, due December 3, 2027; and (iv) $100.0 million aggregate principal amount of 4.35% Senior Notes, Series D, due December 3, 2029. Interest is due and payable quarterly, in arrears, on each of the Senior Notes. Proceeds from the Note Purchase Agreement are being used for general corporate purposes.

On July 21, 2016, we entered into Amendment No. 1 to Note Purchase Agreement (the “First Amendment to Note Purchase Agreement”) which amended certain terms of the Note Purchase Agreement, including providing for increased flexibility substantially consistent with the changes included in the Second Amendment to Credit Agreement, including among other things increased covenant flexibility.

We may prepay the Senior Notes, in whole or in part, at any time, subject to certain conditions, including minimum amounts and payment of a make-whole amount equal to the discounted value of the remaining scheduled interest payments under the Senior Notes.

Our obligations under the Note Purchase Agreement are guaranteed by certain of our domestic subsidiaries meeting materiality thresholds set forth in the Note Purchase Agreement. Such obligations, including the guaranties, are secured by substantially all of our assets and the assets of the subsidiary guarantors. Our obligations and our subsidiary guarantors under the Note Purchase Agreement will be treated on a pari passu basis with the obligations of those entities under the Credit Agreement as well as any additional debt that we may obtain.

The Note Purchase Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict us and our subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into transactions with affiliates, pay dividends, or make distributions and repurchase stock, in each case subject to certain exceptions. We are also required to maintain compliance, measured at the end of each fiscal quarter, with a consolidated total net leverage ratio and a consolidated interest coverage ratio. The Note Purchase Agreement contains no restrictions on the payment of dividends and other restricted payments, as defined, as long as (1) the consolidated total net leverage ratio, as defined, both before and after giving effect to any such dividend or restricted payment on a pro forma basis, is less than 3.25:1, in an unlimited amount, (2) if clause (1) is not available, so long as the consolidated total net leverage ratio both before and after giving effect to any such dividend on a pro forma basis is less than 3.50:1, in an aggregate amount not to exceed the available amount, as defined, and (3) if clauses (1) and (2) are not available, in an aggregate amount not to exceed $50.0 million; provided, that, minimum liquidity, as defined, shall be not less than $75.0 million both before and after giving effect to any such dividend or restricted payment on a pro forma basis. As of July 31, 2020, the consolidated total net leverage ratio was (0.03):1. Minimum liquidity as of July 31, 2020 was $1.5 billion. Accordingly, we do not believe that the provisions of the Note Purchase Agreement represent a significant restriction to our ability to pay dividends or to the successful future operations of the business. We have not paid a cash dividend since becoming a public company in 1994. We are in compliance with all covenants related to the Note Purchase Agreement as of July 31, 2020.

Off-Balance Sheet Arrangements

As of July 31, 2020, we had no off-balance sheet arrangements pursuant to Item 303(a)(4) of Regulation S-K promulgated under the Securities Exchange Act of 1934, as amended.

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 and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates include, but are not limited to, vehicle pooling costs; income taxes; stock-based compensation; purchase price allocations; and contingencies. We base our estimates on historical experience and on various other judgments 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.

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 — Summary of Significant Accounting Policies. The following is a summary of the more significant judgments and estimates included in our critical accounting policies used in the preparation of our consolidated financial statements. We discuss, where appropriate, sensitivity to change based on other outcomes reasonably likely to occur.

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related Notes in Part I., Item I., “Financial Statements.”

Revenue Recognition

Our primary performance obligation is the auctioning of consigned vehicles through an online auction process. Service revenue and vehicle sales revenue are recognized at the date the vehicles are sold at auction, excluding annual registration fees. Costs to prepare the vehicles for auction, including inbound transportation costs and titling fees, are deferred and recognized at the time of revenue recognition at auction.

There were no contract liabilities on the consolidated balance sheets at July 31, 2020. Our disaggregation between service revenues and vehicle sales at the segment level reflects how the nature, timing, amount and uncertainty of our revenues and cash flows are impacted by economic factors. We report sales taxes on relevant transactions on a net basis in our consolidated results of operations, and therefore do not include sales taxes in revenues or costs.

Service revenues

Our service revenue consists of auction and auction related sales transaction fees charged for vehicle remarketing services. Within this revenue category, our primary performance obligation is the auctioning of consigned vehicles through an online auction process. 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 services are not distinct within the context of the contract. Accordingly, revenue for these services is recognized when the single performance obligation is satisfied at the completion of the auction process. We do not take ownership of these consigned vehicles, which are stored at our facilities located throughout the U.S. and at its international locations. These fees are recognized as net revenue (not gross vehicle selling price) at the time of auction in the amount of such fees charged.

We have a separate performance obligation related to providing access to our online auction platform. We charge members an annual registration fee for the right to participate in our online auctions and access our bidding platform. This fee is recognized ratably over the term of the arrangement, generally one year, as each day of access to the online auction platform represents the best depiction of the transfer of the service.

No provision for returns has been established, as all sales are final with no right of return or warranty, although we provide for bad debt expense in the case of non-performance by our buyers or sellers.

									Year Ended July 31,
(In thousands)												2020						2019						2018
Service revenues
			United States						$	1,714,724					$	1,537,431					$	1,385,238
			International						232,416						218,263						193,264
Total service revenues												$	1,947,140					$	1,755,694					$	1,578,502

Vehicle sales

Certain vehicles are purchased and remarketed on our own behalf. We have a single performance obligation related to the sale of these vehicles, which is the completion of the online auction process. Vehicle sales revenue is recognized on the auction date. As we act as a principal in vehicle sales transactions, the gross sales price at auction is recorded as revenue.

									Year Ended July 31,
(In thousands)												2020						2019						2018
Vehicle sales
			United States						$	145,962					$	119,138					$	105,784
			International						112,481						167,125						121,409
Total vehicle sales												$	258,443					$	286,263					$	227,193

Contract assets

We capitalize certain contract assets related to obtaining a contract, where the amortization period for the related asset is greater than one year. These assets are amortized over the expected life of the customer relationship. Contract assets are classified as current or long-term other assets, based on the timing of when we expect to recognize the related revenues and are amortized as an offset to the associated revenues on a straight-line basis. We assess these costs for impairment at least quarterly and as “triggering” events occur that indicate it is more likely than not that an impairment exists. The contract asset costs where the amortization period for the related asset is one year or less are expensed as incurred and recorded within general and administrative expenses in the accompanying statements of income.

Vehicle Pooling Costs

We defer costs that relate directly to the fulfillment of our contracts associated with vehicles consigned to and received by us, but not sold as of the end of the period. 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 costs of the period. The primary expenses allocated and deferred are inbound transportation costs, titling fees, 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 into yard operations expenses as vehicles are sold in subsequent periods on an average cost basis.

Fair Value of Financial Instruments

We record our financial assets and liabilities at fair value in accordance with the framework for measuring fair value in U.S. GAAP. In accordance with Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, as amended by Accounting Standards Update (“ASU”) 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.

Level III Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate.

The amounts recorded for financial instruments in our consolidated financial statements, which included cash, accounts receivable, accounts payable, accrued liabilities and Revolving Loan Facility approximated their fair values for fiscal 2020 and 2019 due to the short-term nature of those instruments and are classified within Level II of the fair value hierarchy. Cash equivalents are classified within Level II of the fair value hierarchy because they are valued using quoted market prices of the underlying investments. See Notes to Consolidated Financial Statements, Note 8 — Long-Term Debt and Note 9 – Fair Value Measures.

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 to seven 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 impact the recoverability of these assets. Total gross capitalized software as of July 31, 2020 and 2019 was $52.6 million and $39.4 million, respectively. Accumulated amortization expense related to software as of July 31, 2020 and 2019 totaled $33.5 million and $23.6 million, respectively. During the year ended July 31, 2018, we retired fully amortized capitalized software of $15.5 million, which were no longer being utilized.

Valuation of Goodwill

We evaluate the impairment of goodwill for our reporting units annually or on an interim basis if certain indicators are present, either through a quantitative or qualitative analysis. The annual goodwill impairment analysis, which was performed qualitatively during the fourth quarter of fiscal 2020, considered all relevant factors specific to our reporting units, including macroeconomic conditions; industry and market considerations; overall financial performance; the impact of the COVID-19 pandemic; and relevant entity-specific events. Management considered the above factors noting none involved significant uncertainty. In addition, the industry in which we operate improved over the observable period, and our calculated fair value exceeded carrying value for each reporting unit by a substantial amount in our prior year quantitative analysis, indicating no material risk as of July 31, 2020, with respect to potential goodwill impairments.

Income Taxes and Deferred Tax Assets

We account for income tax exposures as required under ASC 740, Income Taxes (“ASC 740”). We are subject to income taxes in the U.S., Canada, the U.K., Brazil, Spain, Finland, Germany, and other emerging markets around the world. In arriving at a provision of income taxes, we first calculate taxes payable in accordance with the prevailing tax laws in the jurisdictions in which we operate. Then we analyze the timing differences between the financial reporting and tax basis of our assets and liabilities, such as various accruals, depreciation and amortization. The tax effects of the timing difference are presented as deferred tax assets and liabilities in the consolidated balance sheets. We consider the need to maintain a valuation allowance on deferred tax assets based on management’s assessment of whether it is more likely than not that we would realize those deferred tax assets based on future reversals of existing taxable temporary differences and the ability to generate sufficient taxable income within the carryforward period available under the applicable tax law. As of July 31, 2020, we have $15.4 million of valuation allowance arising from both our U.S. and International operations. To the extent we establish a valuation allowance or change the amount of valuation allowance in a period, we reflect the change with a corresponding increase or decrease in our income tax provision in the consolidated statements of income.

Historically, our income tax provision has been sufficient to cover our actual income tax liabilities among the jurisdictions in which we operate. Nonetheless, our future effective tax rate could still be adversely affected by several factors, including (i) the geographical allocation of our future earnings; (ii) the change in tax laws or our interpretation of tax laws; (iii) the changes in governing regulations and accounting principles; (iv) the changes in the valuation of our deferred tax assets and liabilities; and (v) the outcome of the income tax examinations. We routinely assess the possibilities of material changes resulting from the aforementioned factors to determine the adequacy of our income tax provision. The repatriation of our accumulated foreign earnings could also affect our effective tax rate, nevertheless, we intend to indefinitely reinvest these earnings in our foreign operations and do not anticipate the need for any of our foreign subsidiaries’ cash in the U.S. operations. Accordingly, we do not provide for U.S. federal income and foreign withholding tax on these earnings.

We file annual income tax returns in multiple taxing jurisdictions. A number of years may elapse before an uncertain tax position is audited by the relevant tax authorities and finally resolved. We recognize and measure uncertain tax positions in accordance with ASC 740*,* pursuant to which we only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest

benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. ASC 740 further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the quarter in which such change occurs. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

We believe that our reserves for income taxes reflect the most likely outcome. We adjust these reserves, as well as the related interest, where appropriate in light of changing facts and circumstances. Settlement of any particular position could require the use of cash.

Stock-based Compensation

We account for stock-based awards to employees and non-employees using the fair value method as required by ASC 718, Compensation—Stock Compensation (“ASC 718”), which requires the measurement and recognition of compensation expense for all stock-based awards made to employees, consultants and directors based on estimated fair value. ASC 718 requires companies to estimate the fair value of stock-based 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.

The fair value of each option, without a market-based condition, was estimated on the measurement date using the Black-Scholes Merton (“BSM”) option-pricing model. For options that included a market-based condition, the Monte Carlo simulation model was used. The BSM option pricing model utilizes assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated fair value on the measurement date. If actual results are not consistent with our assumptions and judgments used in estimating the key assumptions, we may be required to record additional compensation or income tax expense, which could have a material impact on our consolidated results of operations and financial position.

Foreign Currency Translation

We record foreign currency translation adjustments from the process of translating the functional currency of the financial statements of our foreign subsidiaries into the U.S. dollar reporting currency. The British pound, Canadian dollar, Brazilian real, European Union euro, U.A.E. dirham, Omani rial, and Bahraini dinar are the functional currencies of our foreign subsidiaries, as they are the primary currencies within the economic environment in which each subsidiary operates. The original equity investment in the respective subsidiaries is translated at historical rates. Assets and liabilities of the respective subsidiary’s operations are translated into U.S. dollars at period-end exchange rates, and revenues and expenses are translated into U.S. dollars at average exchange rates in effect during each reporting period. Adjustments resulting from the translation of each subsidiary’s financial statements are reported in other comprehensive income.

Accounting for Acquisitions

We recognize and measure identifiable assets acquired and liabilities assumed in acquired entities in accordance with ASC 805, Business Combinations. The allocation of the purchase consideration for acquisitions can require extensive use of accounting estimates and judgments to allocate the purchase consideration to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values. The excess of the fair value of purchase consideration over the values of the identifiable assets and liabilities is recorded as goodwill. Critical estimates in valuing certain identifiable assets include but are not limited to expected long-term revenues; future expected operating expenses; cost of capital; appropriate attrition; and discount rates.

Segment Reporting

Our U.S. and International regions are considered two separate operating segments and are disclosed as two reportable segments. The segments represent geographic areas and reflect how the chief operating decision maker allocates resources and measures results, including total revenues and operating income. Our revenues for the year ended July 31, 2020 were distributed as follows: U.S. 84.4% and International 15.6%. Geographic information as well as comparative segment revenues and related financial information pertaining to the U.S. and International segments for the years ended July 31, 2020, 2019 and 2018 are presented in the tables in Note 13 — Segments and Other Geographic Reporting, to the Notes to Consolidated Financial Statements, which are included in Part II, Item 8 of this Form 10-K.

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 — Summary of Significant Accounting Policies.