Cover and table of contents

78K characters. Original on sec.gov · Markdown

Cover and table of contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-23255

COPART, INC.

(Exact name of registrant as specified in its charter)


Delaware		000-23255		94-2867490
(State or other jurisdiction of incorporation or organization)		(Commission File Number)		(I.R.S. Employer Identification No.)

14185 Dallas Parkway	Suite 300	Dallas	Texas	75254
(Address of principal executive offices) (zip code)

(972) 391-5000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)


Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001	CPRT	The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 18, 2021, 237,188,461 shares of the registrant’s common stock were outstanding.

Copart, Inc.

Index to the Quarterly Report

October 31, 2021


Table of Contents						Page Number
PART I - Financial Information
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets						3
Consolidated Statements of Income						4
Consolidated Statements of Comprehensive Income						5
Consolidated Statements of Stockholders’ Equity						6
Consolidated Statements of Cash Flows						7
Notes to Consolidated Financial Statements						8

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview						18
Acquisitions and New Operations						20
Results of Operations						21
Liquidity and Capital Resources						25
Critical Accounting Policies and Estimates						26
Recently Issued Accounting Standards						27
Contractual Obligations and Commitments						27
Off-Balance Sheet Arrangements						27

Item 3 - Quantitative and Qualitative Disclosures About Market Risk						27

Item 4 - Controls and Procedures
Evaluation of Disclosure Controls and Procedures						28
Changes in Internal Controls						28

PART II - Other Information
Item 1 - Legal Proceedings						29
Item 1A - Risk Factors						29
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds						42
Item 3 - Defaults Upon Senior Securities						42
Item 4 - Mine Safety Disclosures						42
Item 5 - Other Information						42
Item 6 - Exhibits						43
Signatures						44

Copart, Inc.

Consolidated Balance Sheets

(Unaudited)


(In thousands, except share amounts)	October 31, 2021		July 31, 2021
ASSETS
Current assets:
Cash, cash equivalents, and restricted cash	$	1,298,373	$	1,048,260

Accounts receivable, net	562,637		480,628
Vehicle pooling costs	115,994		94,449
Inventories	48,194		44,968
Income taxes receivable	537		20,012
Prepaid expenses and other assets	14,045		14,294
Total current assets	2,039,780		1,702,611
Property and equipment, net	2,318,701		2,296,624
Operating lease right-of-use assets	123,254		119,487
Intangibles, net	43,914		45,873
Goodwill	354,062		355,717
Other assets	39,141		41,831
Total assets	$	4,918,852	$	4,562,143
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	411,249	$	369,826
Deferred revenue	19,951		20,973
Income taxes payable	37,175		7,760
Current portion of operating and finance lease liabilities	23,536		22,472
Total current liabilities	491,911		421,031
Deferred income taxes	72,166		63,969
Income taxes payable	51,094		52,345
Operating and finance lease liabilities, net of current portion	100,920		97,961
Long-term debt and other liabilities, net of discount	408,940		397,636

Total liabilities	1,125,031		1,032,942
Commitments and contingencies
Stockholders’ equity:
Preferred stock: $0.0001 par value - 5,000,000 shares authorized; none issued	—		—
Common stock: $0.0001 par value - 400,000,000 shares authorized; 237,181,350 and 237,014,273 shares issued and outstanding, respectively.	24		24
Additional paid-in capital	776,858		761,834
Accumulated other comprehensive loss	(111,378)		(100,860)
Retained earnings	3,128,317		2,868,203
Total stockholders’ equity	3,793,821		3,529,201
Total liabilities and stockholders’ equity	$	4,918,852	$	4,562,143

The accompanying notes are an integral part of these consolidated financial statements.

Copart, Inc.

Consolidated Statements of Income

(Unaudited)


	Three Months Ended October 31,
(In thousands, except per share amounts)		2021		2020
Service revenues and vehicle sales:
Service revenues		$	667,818	$	515,372
Vehicle sales		142,314		77,568
Total service revenues and vehicle sales		810,132		592,940
Operating expenses:
Yard operations		298,694		231,811
Cost of vehicle sales		126,408		64,360
General and administrative		54,909		48,175

Total operating expenses		480,011		344,346
Operating income		330,121		248,594
Other expense:
Interest expense, net		(5,107)		(5,032)
Other income, net		812		3,253
Total other expense		(4,295)		(1,779)
Income before income taxes		325,826		246,815
Income tax expense		65,463		46,530
Net income		$	260,363	$	200,285

Basic net income per common share		$	1.10	$	0.85
Weighted average common shares outstanding		237,068		235,791

Diluted net income per common share		$	1.08	$	0.83
Diluted weighted average common shares outstanding		241,221		239,968

The accompanying notes are an integral part of these consolidated financial statements.

Copart, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)


	Three Months Ended October 31,
(In thousands)		2021		2020
Comprehensive income, net of tax:
Net income		$	260,363	$	200,285
Other comprehensive income:
Foreign currency translation adjustments		(10,518)		(7,406)
Comprehensive income		$	249,845	$	192,879

The accompanying notes are an integral part of these consolidated financial statements.

Copart, Inc.

Consolidated Statements of Stockholders’ Equity

(Unaudited)


	Common Stock						Accumulated Other Comprehensive Income (Loss)
		Additional Paid-in Capital
(In thousands, except share amounts)	Outstanding Shares		Amount				Retained Earnings		Stockholders’ Equity
Balances at July 31, 2021	237,014,273		$	24	$	761,834	$	(100,860)	$	2,868,203	$	3,529,201
Net income	—		—		—		—		260,363		260,363
Currency translation adjustment	—		—		—		(10,518)		—		(10,518)
Exercise of stock options, net of repurchased shares	145,986		—		5,572		—		(249)		5,323
Stock-based compensation	21,091		—		9,452		—		—		9,452

Balances at October 31, 2021	237,181,350		24		776,858		(111,378)		3,128,317		3,793,821


	Common Stock						Accumulated Other Comprehensive Income (Loss)
		Additional Paid-in Capital
(In thousands, except share amounts)	Outstanding Shares		Amount				Retained Earnings		Stockholders’ Equity
Balances at July 31, 2020	235,315,337		$	24	$	672,727	$	(121,088)	$	1,937,853	$	2,489,516
Net income	—		—		—		—		200,285		200,285
Currency translation adjustment	—		—		—		(7,406)		—		(7,406)
Exercise of stock options, net of repurchased shares	802,670		—		20,014		—		(489)		19,525
Stock-based compensation	—		—		8,913		—		—		8,913

Balances at October 31, 2020	236,118,007		24		701,654		(128,494)		2,137,649		2,710,833

The accompanying notes are an integral part of these consolidated financial statements.

Copart, Inc.

Consolidated Statements of Cash Flows

(Unaudited)


	Three Months Ended October 31,
(In thousands)	2021		2020
Cash flows from operating activities:
Net income	$	260,363	$	200,285
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, including debt cost	32,049		29,227
Allowance for credit loss	295		(157)

Equity in losses (earnings) of unconsolidated affiliates	168		(1,741)
Stock-based compensation	9,452		8,913
Gain on sale of property and equipment	(440)		(1,230)
Deferred income taxes	8,319		6,239
Changes in operating assets and liabilities:
Accounts receivable	(82,676)		(57,860)
Vehicle pooling costs	(21,697)		(10,600)
Inventories	(3,463)		(8,259)
Prepaid expenses and other current and non-current assets	3,071		15,236
Operating lease right-of-use assets and lease liabilities	382		153
Accounts payable and accrued liabilities	62,013		42,880
Deferred revenue	(979)		1,251
Income taxes receivable	19,479		25,825
Income taxes payable	26,204		8,371

Net cash provided by operating activities	312,540		258,533
Cash flows from investing activities:
Purchases of property and equipment	(64,696)		(147,093)

Proceeds from sale of property and equipment	813		271

Net cash used in investing activities	(63,883)		(146,822)
Cash flows from financing activities:
Proceeds from the exercise of stock options	5,572		20,014


Payments for employee stock-based tax withholdings	(249)		(489)




Payments of finance lease obligations	(157)		(327)


Net cash provided by financing activities	5,166		19,198
Effect of foreign currency translation	(3,710)		(2,895)
Net increase in cash, cash equivalents, and restricted cash	250,113		128,014
Cash, cash equivalents, and restricted cash at beginning of period	1,048,260		477,718
Cash, cash equivalents, and restricted cash at end of period	$	1,298,373	$	605,732
Supplemental disclosure of cash flow information:
Interest paid	$	5,080	$	4,762
Income taxes paid, net of refunds	$	10,089	$	6,157

The accompanying notes are an integral part of these consolidated financial statements.

Copart, Inc.

Notes to Consolidated Financial Statements

October 31, 2021

(Unaudited)

NOTE 1 – Summary of Significant Accounting Policies

Basis of Presentation and Description of Business

Copart, Inc. (“the Company”) provides vehicle sellers with a full range of services to process and sell vehicles over the internet through the Company’s Virtual Bidding Third Generation (“VB3”) internet auction-style sales technology. Vehicle sellers consist primarily of insurance companies, but also include banks, finance companies, charities, fleet operators, dealers, vehicle rental companies, and individuals. The Company sells principally to licensed vehicle dismantlers, rebuilders, repair licensees, used vehicle dealers, exporters, and directly to the general public. The majority of vehicles sold on behalf of insurance companies are either damaged vehicles deemed a total loss or not economically repairable by the insurance companies or are recovered stolen vehicles for which an insurance settlement with the vehicle owner has already been made. The Company offers vehicle sellers a full range of services that expedite each stage of the vehicle sales process, minimize administrative and processing costs and maximize the ultimate sales price through the online auction process. In the United States (“U.S.”), Canada, Brazil, the Republic of Ireland, Finland, the United Arab Emirates (“U.A.E.”), Oman, and Bahrain, the Company sells vehicles primarily as an agent and derives 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 United Kingdom (“U.K.”), Germany, and Spain, the Company operates both as an agent and on a principal basis, in some cases purchasing salvage vehicles outright and reselling the vehicles for its own account. In Germany and Spain, the Company also derives revenue from listing vehicles on behalf of insurance companies and insurance experts to determine the vehicle’s residual value and/or to facilitate a sale for the insured.

Principles of Consolidation

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments of a normal recurring nature considered necessary for fair presentation of its financial position as of October 31, 2021 and July 31, 2021, its consolidated statements of income, comprehensive income and stockholders’ equity for the three months ended October 31, 2021 and 2020, and its cash flows for the three months ended October 31, 2021 and 2020. Interim results for the three months ended October 31, 2021 are not necessarily indicative of the results that may be expected for any future period, or for the entire year ending July 31, 2022. These consolidated financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The interim consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2021. Certain prior year amounts have been reclassified to conform to current year presentation.

The consolidated financial statements of the Company include the accounts of the parent company and its wholly-owned subsidiaries. Significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management 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; and contingencies. Actual results may differ from these estimates.

Revenue Recognition

The Company’s 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.

The Company’s disaggregation between service revenues and vehicle sales at the segment level reflects how the nature, timing, amount and uncertainty of its revenues and cash flows are impacted by economic factors. The Company reports sales taxes on relevant transactions on a net basis in the Company’s consolidated results of operations, and therefore does not include sales taxes in revenues or costs.

Service revenues

The Company’s service revenue consists of auction and auction related sales transaction fees charged for vehicle remarketing services. Within this revenue category, the Company’s 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 the Company’s 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. The Company does not take ownership of these consigned vehicles, which are stored at the Company’s 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.

The Company has a separate performance obligation related to providing access to its online auction platform as the Company charges members an annual registration fee for the right to participate in its online auctions and access the Company’s 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 the Company provides for credit loss expense in the case of non-performance by its buyers or sellers.


		Three Months Ended October 31,
(In thousands)			2021		2020
Service revenues
	United States		$	590,758	$	450,235
	International		77,060		65,137
	Total service revenues		$	667,818	$	515,372

Vehicle sales

Certain vehicles are purchased and remarketed on the Company’s own behalf. The Company has 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 the Company acts as a principal in vehicle sales transactions, the gross sales price at auction is recorded as revenue.


		Three Months Ended October 31,
(In thousands)			2021		2020
Vehicle sales
	United States		$	87,703	$	47,020
	International		54,611		30,548
	Total vehicle sales		$	142,314	$	77,568

Contract assets

The Company capitalizes 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 the Company expects to recognize the related revenues and are amortized as an offset to the associated revenues on a straight-line basis. The Company assesses 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 consolidated statements of income.

The change in the carrying amount of contract assets was as follows (In thousands):


Balance as of July 31, 2021	$	7,485
Capitalized contract assets during the period	—
Costs amortized during the period	(1,030)
Effect of foreign currency exchange rates	(134)
Balance as of October 31, 2021	$	6,321

Vehicle Pooling Costs

The Company defers costs that relate directly to the fulfillment of its contracts associated with vehicles consigned to and received by the Company, but not sold as of the end of the period. The Company quantifies the deferred costs using a calculation that includes the number of vehicles at its facilities at the beginning and end of the period, the number of vehicles sold during the period, and an allocation of certain yard operation costs of the period. The primary expenses allocated and deferred are 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.

Foreign Currency Translation

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

The cumulative effects of foreign currency exchange rate fluctuations were as follows (In thousands):


Cumulative loss on foreign currency translation as of July 31, 2020	$	(121,088)
Gain on foreign currency translation	20,228
Cumulative loss on foreign currency translation as of July 31, 2021	$	(100,860)
Loss on foreign currency translation	(10,518)
Cumulative loss on foreign currency translation as of October 31, 2021	$	(111,378)

Fair Value of Financial Instruments

The Company records its financial assets and liabilities at fair value in accordance with the framework for measuring fair value in U.S. GAAP. In accordance with Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, the Company considers fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants under current market conditions. This framework establishes a fair value hierarchy that prioritizes the inputs used to measure fair value:

Level I Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets.

Level II Inputs other than quoted prices included within Level I that are observable for the asset or liability, either directly or indirectly.

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

The amounts recorded for financial instruments in the Company’s consolidated financial statements, which included cash, restricted cash, accounts receivable, accounts payable, accrued liabilities, and amounts outstanding under the Revolving Loan Facility approximated their fair values as of October 31, 2021 and July 31, 2021, due to the short-term nature of those instruments and are classified within Level II of the fair value hierarchy. Cash equivalents are classified within Level II of the fair value hierarchy because they are valued using quoted market prices of the underlying investments. See Note 6 – Long-Term Debt and Note 7 – Fair Value Measurements.

Cash, Cash Equivalents, and Restricted Cash

The Company considers all highly liquid investments purchased with original maturities of three months or less at the time of purchase to be cash equivalents. Cash, cash equivalents, and restricted cash include cash held in checking, domestic certificates of deposit, U.S. Treasury Bills, and money market accounts. The Company periodically invests its excess cash in money market funds and U.S. Treasury Bills. The Company’s cash, cash equivalents, and restricted cash are placed with high credit quality financial institutions.

Capitalized Software Costs

The Company capitalizes system development costs and website development costs related to the enterprise computing services during the application development stage. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life, generally three to seven years. The Company evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that impact the recoverability of these assets.

Total gross capitalized software as of October 31, 2021 and July 31, 2021 was $68.8 million and $66.2 million, respectively. Accumulated amortization expense related to software as of October 31, 2021 and July 31, 2021 totaled $46.0 million and $43.4 million, respectively.

NOTE 2 — Accounts Receivable, Net

Accounts receivable, net consisted of:


(In thousands)	October 31, 2021		July 31, 2021
Advance charges receivable	$	446,368	$	385,002
Trade accounts receivable	117,337		97,249
Other receivables	4,596		4,013
	568,301		486,264
Less: Allowance for credit loss	(5,664)		(5,636)
Accounts receivable, net	$	562,637	$	480,628

Advance charges receivable represents amounts paid to third parties on behalf of insurance companies for which the Company will be reimbursed when the vehicle is sold. As advance charges are recovered within one year, the Company has not adjusted the amount of consideration received from the customer for a significant financing component. Trade accounts receivable includes fees and gross auction proceeds to be collected from insurance companies and buyers.

NOTE 3 — Property and Equipment, Net

Property and equipment, net consisted of the following:


(In thousands)	October 31, 2021		July 31, 2021
Land	$	1,454,026	$	1,428,262
Buildings and improvements	1,128,552		1,126,414
Transportation and other equipment	342,868		326,622
Office furniture and equipment	81,735		79,928
Software	68,813		66,170
	3,075,994		3,027,396
Less: Accumulated depreciation and amortization	(757,293)		(730,772)
Property and equipment, net	$	2,318,701	$	2,296,624

Depreciation expense on property and equipment was $29.9 million and $27.1 million for the three months ended October 31, 2021 and 2020, respectively.

NOTE 4 – Leases

The Company has both lessee and lessor arrangements. The Company determines whether a contract is or contains a lease at the inception of the contract or at any subsequent modification. A contract will be deemed to be or contain a lease if the contract conveys the right to control and direct the use of identified property, plant, or equipment for a period of time in exchange for consideration. The Company generally must also have the right to obtain substantially all of the economic benefits from the use of the property, plant, and equipment. Depending on the terms, leases are classified as either operating or finance leases if the Company is the lessee, or as operating, sales-type, or direct financing leases if the Company is the lessor. Certain of the Company’s lessee and lessor leases have renewal options to extend the leases for additional periods at the Company’s discretion.

Leases - Lessee

The Company leases certain facilities and certain equipment under non-cancelable finance and operating leases, which are recorded as right-of-use assets and lease liabilities. Certain leases provide the Company with either a right of first refusal to acquire or an option to purchase a facility at fair value. Certain leases also contain escalation clauses and renewal option clauses calling for increased rents. Where a lease contains an escalation clause or a concession, such as a rent holiday or tenant improvement allowance, the Company includes these items in the determination of the right-of-use asset and the lease liabilities. The effects of these escalation clauses or concessions have been reflected in lease expense on a straight-line basis over the expected lease term and any variable lease payments subsequent to establishing the lease liability are expensed as incurred. The lease term commences on the date when the Company has the right to control the use of the leased property, which is typically before lease payments are due under the terms of the lease. Certain of the Company’s leases have renewal periods up to 40 years, exercisable at the Company’s option, and generally require the Company to pay property taxes, insurance and maintenance costs, in addition to the lease payments. At lease inception, the Company includes all renewals or option periods that are reasonably certain to exercise when determining the expected lease term, as failure to renew the lease would impose an economic penalty.

Operating lease assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the expected lease term. To determine the present value of lease payments not yet paid, the Company estimates incremental borrowing rates based on the information available at lease commencement date, as rates are not implicitly stated in the Company’s leases.

Components of lease expense were as follows:


		Three Months Ended October 31,
(In thousands)			2021		2020
Operating lease expense			$	7,067	$	7,257
Finance lease expense:
	Amortization of right-of-use assets		153		167
	Interest on finance lease liabilities		2		21
Short-term lease expense			1,768		1,245
Variable lease expense			224		539
Total lease expense			$	9,214	$	9,229

Supplemental cash flow information related to leases as of October 31, 2021 were as follows:


		Three Months Ended October 31,
(In thousands)		2021		2020
Cash paid for amounts included in the measurement of lease liabilities
	Operating cash flows related to operating leases	$	6,697	$	7,856
	Operating cash flows related to finance leases	2		21
	Financing cash flows related to finance leases	157		327
Right-of-use assets obtained in exchange for new operating lease liabilities		10,823		5,672
Right-of-use assets obtained in exchange for new finance lease liabilities		—		15,761

Leases - Lessor

The Company’s lessor arrangements include certain facilities and various land locations, of which each qualifies as an operating lease. Certain leases also contain escalation clauses and renewal option clauses calling for increased rents. Where a lease contains an escalation clause or a concession, such as a rent holiday or tenant improvement allowance, the Company includes these items in the determination of the straight-line rental income. The effects of these escalation clauses or concessions have been reflected in lease payments receivable on a straight-line basis over the expected lease term and any variable lease income subsequent to establishing the receivable will be recognized as earned.

The cost of the leased space as of October 31, 2021 and July 31, 2021 was $57.2 million and $55.5 million, respectively. The accumulated depreciation associated with the leased assets as of October 31, 2021 and July 31, 2021 was $2.3 million and $1.9 million, respectively. Both the leased assets and accumulated depreciation are included in Property and equipment, net on the consolidated balance sheet. Rental income from these operating leases was $3.5 million and $3.6 million for the three months ended October 31, 2021 and 2020, respectively and is included within Service revenues on the consolidated statements of income.

NOTE 5 – Goodwill and Intangible Assets

The following table sets forth amortizable intangible assets by major asset class:


(In thousands)	October 31, 2021		July 31, 2021
Amortized intangibles:
Supply contracts and customer relationships	$	55,438	$	55,598
Trade names	18,935		18,944
Licenses and databases	719		736

Accumulated amortization	(31,178)		(29,405)
Net intangibles	$	43,914	$	45,873

Aggregate amortization expense on amortizable intangible assets was $1.8 million and $1.8 million for the three months ended October 31, 2021 and 2020, respectively.

The change in the carrying amount of goodwill was as follows:


(In thousands)
Balance as of July 31, 2021	$	355,717

Effect of foreign currency exchange rates	(1,655)
Balance as of October 31, 2021	$	354,062

NOTE 6 – Long-Term Debt

Credit Agreement

On July 21, 2020, the Company 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 (as amended from time to time, the “Credit Amendment”), bringing the aggregate principal amount of the revolving credit commitments under the Credit Agreement (the “Revolving Loan Facility”), to $1,050.0 million.

The interest rate as of October 31, 2021 on the Company’s Revolving Loan Facility was the Eurodollar Rate of 0.75% plus an applicable margin of 1.50%. Amounts borrowed under the Revolving Loan Facility may be repaid and reborrowed until the maturity date of July 21, 2023. The Company had no outstanding borrowings under the Revolving Loan Facility as of October 31, 2021 or July 31, 2021. The Credit Agreement contains customary affirmative and negative covenants and the Company was in compliance with all covenants related to the Credit Agreement as of October 31, 2021.

Note Purchase Agreement

On December 3, 2014, the Company entered into a Note Purchase Agreement and sold to certain purchasers (collectively, the “Purchasers”) $400.0 million in aggregate principal amount of senior secured notes (the “Senior Notes”) consisting of (i) $100.0 million aggregate principal amount of 4.07% Senior Notes, Series A, due December 3, 2024; (ii) $100.0 million aggregate principal amount of 4.19% Senior Notes, Series B, due December 3, 2026; (iii) $100.0 million aggregate principal amount of 4.25% Senior Notes, Series C, due December 3, 2027; and (iv) $100.0 million aggregate principal amount of 4.35% Senior Notes, Series D, due December 3, 2029. Interest is due and payable quarterly, in arrears, on each of the Senior Notes. The Company may prepay the Senior Notes, in whole or in part, at any time, subject to certain conditions, including minimum amounts and payment of a make-whole amount equal to the discounted value of the remaining scheduled interest payments under the Senior Notes. The Note Purchase Agreement contains customary affirmative and negative covenants and the Company was in compliance with all covenants related to the Note Purchase Agreement as of October 31, 2021.

NOTE 7 – Fair Value Measurements

The following table summarizes the carrying values and fair values of the Company’s financial instruments that were not carried at fair value in the consolidated balance sheets:


	October 31, 2021				July 31, 2021
(In thousands)	Carrying Value Total		Fair Value Total		Carrying Value Total		Fair Value Total
Assets
Cash equivalents	$	1,019,239	$	1,019,249	$	754,300	$	754,304

Total Assets	$	1,019,239	$	1,019,249	$	754,300	$	754,304
Liabilities

Long-term fixed rate debt, including current portion	$	399,742	$	422,386	$	399,733	$	432,027

Total Liabilities	$	399,742	$	422,386	$	399,733	$	432,027

During the three months ended October 31, 2021, no transfers were made between any levels within the fair value hierarchy. The fair value of the Senior Notes is based on the discounted value of each interest and principal payment calculated utilizing market interest rates of similar types of borrowing arrangements and was classified within Level II of the fair value hierarchy. See Note 1 – Summary of Significant Accounting Policies, and Note 6 – Long-Term Debt.

NOTE 8 – Net Income Per Share

The table below reconciles basic weighted average shares outstanding to diluted weighted average shares outstanding:


	Three Months Ended October 31,
(In thousands)		2021	2020
Weighted average common shares outstanding		237,068	235,791
Effect of dilutive securities		4,153	4,177
Weighted average common and dilutive potential common shares outstanding		241,221	239,968

There were no material adjustments to net income required in calculating diluted net income per share. Excluded from the dilutive earnings per share calculation were 55,250 and 1,350,000 options to purchase the Company’s common stock for the three months ended October 31, 2021 and 2020, respectively, because their inclusion would have been anti-dilutive.

NOTE 9 – Stock-based Compensation

The Company recognizes compensation expense for stock option awards, without a market condition, on a straight-line basis over the requisite service period of the award. The following is a summary of activity for the Company’s stock options for the three months ended October 31, 2021:


(In thousands, except per share and term data)	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (In years)	Aggregate Intrinsic Value
Outstanding as of July 31, 2021	7,557	$	56.19	6.53	$	686,269
Grants of options	25	143.23
Exercises	(146)	38.17
Forfeitures or expirations	—	—
Outstanding as of October 31, 2021	7,436	$	56.84	6.29	$	732,121
Exercisable as of October 31, 2021	4,507	$	41.08	5.08	$	514,746

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock. The number of options that were in-the-money was 7,436,171 at October 31, 2021.

In June 2020, the Compensation Committee of the Company’s Board of Directors approved the grant to A. Jayson Adair, the Company’s Chief Executive Officer, of nonqualified stock options to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $85.04 per share, which equaled the closing price of the Company’s common stock on June 12, 2020, the effective date of grant. The option will become exercisable over five years, subject to continued service by Mr. Adair, with 20% vesting on June 12, 2021, and the balance vesting monthly over the subsequent four years. Separate and apart from the time-based vesting schedule, the options are also subject to market based vesting, such that no options will be exercisable unless and until the average closing price in trading of Copart, Inc., common stock on the NASDAQ Global Select Market is greater than or equal to $106.30 per share (which is an amount equivalent to 125% of the exercise price of the options) for a period of 20 consecutive trading days. The market based vesting condition was satisfied in the first quarter of fiscal 2021. The time-based vesting conditions of the option held by Mr. Adair will become fully vested, assuming continued service by Mr. Adair on June 12, 2025. The fair value of each option at the date of grant using the Monte Carlo simulation model was $25.47, with an expected life of 7.64 years, a risk-free interest rate of 0.71%, estimated volatility of 25.2%, and no expected dividends. The total estimated compensation expense to be recognized by the Company over the five year estimated service period for these options is $25.5 million and will be recognized using the accelerated attribution method over each vesting tranche of the award. The Company recognized $1.8 million in compensation expense for this grant in the three months ended October 31, 2021.

Subsequently, on November 17, 2021, the Compensation Committee amended the stock option award to Mr. Adair to implement a new market-based vesting condition with respect to 500,000 of the unvested stock options. Following the amendment, and subject to the existing time-based vesting schedule, no portion of these 500,000 stock options will be exercisable unless the price in trading of Copart, Inc. common stock on the NASDAQ Global Select Market is greater than or equal to $106.30 per share (which is an amount equivalent to 125% of the exercise price of the options), determined both (i) at the time of any exercise, and (ii) based on the closing price on each of the twenty consecutive trading days preceding the date of any exercise.

The table below sets forth the stock-based compensation recognized by the Company for stock options, restricted stock, and restricted unit awards:


	Three Months Ended October 31,
(In thousands)		2021		2020
General and administrative		$	8,471	$	7,382
Yard operations		981		1,531
Total stock-based compensation		$	9,452	$	8,913

The Company’s restricted stock awards (“RSA”) and restricted stock unit awards (“RSU”) have generally been issued with vesting periods ranging from two years to five years and vest solely on service conditions. Accordingly, the Company recognizes compensation expense for RSA and RSU awards on a straight-line basis over the requisite service period of the award.

The following is a summary of activity for the Company’s RSA’s and RSU’s for the three months ended October 31, 2021:


(In thousands, except per share data)	Restricted Shares	Weighted Average Grant Date Fair Value
Outstanding as of July 31, 2021	102	$	90.46
Grants	39	143.88
Vested	(5)	70.68
Forfeitures or expirations	(3)	109.77
Outstanding as of October 31, 2021	133	$	106.74

NOTE 10 – Stock Repurchases

On September 22, 2011, the Company’s Board of Directors approved an 80 million share increase in the stock repurchase program, bringing the total current authorization to 196 million shares. The repurchases may be effected through solicited or unsolicited transactions in the open market or in privately negotiated transactions. No time limit has been placed on the duration of the stock repurchase program. Subject to applicable securities laws, such repurchases will be made at such times and in such amounts as the Company deems appropriate and may be discontinued at any time. The Company did not repurchase any shares of its common stock under the program during the three months ended October 31, 2021 or 2020. As of October 31, 2021, the total number of shares repurchased under the program was 114,549,198, and 81,450,802 shares were available for repurchase under the program.

NOTE 11 – Recent Accounting Pronouncements

Adopted

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. ASU 2019-12 eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. This guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company’s adoption of ASU 2019-12 did not have a material impact on the Company’s consolidated results of operations and financial position.

NOTE 12 – Legal Proceedings

The Company is subject to threats of litigation and is involved in actual litigation and damage claims arising in the ordinary course of business, such as actions related to injuries, property damage, contract disputes, and handling or disposal of vehicles. There are no material pending legal proceedings to which the Company is a party, or with respect to which any of the Company’s property is subject.

The Company provides for costs relating to matters when a loss is probable and the amount can be reasonably estimated. The effect of the outcome of any such matters on the Company’s future consolidated results of operations and cash flows cannot be predicted because any such effect depends on future results of operations and the amount and timing of the resolution of any such matters. The Company believes that any ultimate liability regarding existing litigation and claims would not have a material effect on its consolidated results of operations, financial position, or cash flows. However, the amount of the liabilities associated with claims, if any, cannot be determined with certainty. The Company maintains insurance which may or may not provide coverage for claims made against the Company. There is no assurance that there will be insurance coverage available when and if needed. Additionally, the insurance that the Company carries requires that the Company pay for costs and/or claims exposure up to the amount of the insurance deductibles.

NOTE 13 – Segments and Other Geographic Reporting

The Company’s U.S. and International regions are considered two separate operating segments and are disclosed as two reportable segments. The segments represent geographic areas and reflect how the chief operating decision maker allocates resources and measures results, including total revenues and operating income.

The following table presents financial information by segment:


	Three Months Ended October 31, 2021						Three Months Ended October 31, 2020
(In thousands)	United States		International		Total		United States		International		Total
Service revenues	$	590,758	$	77,060	$	667,818	$	450,235	$	65,137	$	515,372
Vehicle sales	87,703		54,611		142,314		47,020		30,548		77,568
Total service revenues and vehicle sales	678,461		131,671		810,132		497,255		95,685		592,940
Yard operations	256,621		42,073		298,694		194,419		37,392		231,811
Cost of vehicle sales	80,342		46,066		126,408		41,506		22,854		64,360
General and administrative	46,548		8,361		54,909		39,738		8,437		48,175

Operating income	$	294,949	$	35,172	$	330,121	$	221,591	$	27,003	$	248,594

Depreciation and amortization	$	27,725	$	4,035	$	31,760	$	26,162	$	2,787	$	28,949
Capital expenditures and acquisitions	54,272		10,424		64,696		122,459		24,634		147,093


	October 31, 2021						July 31, 2021
(In thousands)	United States		International		Total		United States		International		Total
Total assets	$	4,223,448	$	695,404	$	4,918,852	$	3,900,712	$	661,431	$	4,562,143
Goodwill	270,269		83,793		354,062		270,305		85,412		355,717

Next: Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS