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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Copart, Inc.    CPRT

COPART, INC.

(CPRT)
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COPART : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

05/28/2020 | 06:04am EST
This Quarterly Report on Form 10-Q, including the information incorporated by
reference herein, contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the Securities Act), and
Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange
Act), 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-Q involve
known and unknown risks, uncertainties and situations that may cause our or our
industry's actual results, level of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by these statements. These forward-looking
statements are made in reliance upon the safe harbor provision of the Private
Securities Litigation Reform Act of 1995. These factors include those listed in
Part II, Item 1A. under the caption entitled "Risk Factors" in this Form 10-Q
and those discussed elsewhere in this Form 10-Q. Unless the context otherwise
requires, references in this Form 10-Q 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.
Although we believe that, based on information currently available to us and our
management, the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. You should not place undue reliance on these forward-looking
statements.
Overview
We are a leading provider of online auctions and vehicle remarketing services
with operations in the United States ("U.S."), Canada, the United Kingdom
("U.K."), Brazil, the Republic of Ireland, Germany, Finland, the United Arab
Emirates ("U.A.E."), Oman, Bahrain, and Spain.
Our goals are to generate sustainable profits for our stockholders, while also
providing environmental and social benefits for the world around us. With
respect to our environmental stewardship, we believe our business is a critical
enabler for the global re-use and recycling of vehicles, parts, and raw
materials. 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 de novo
resource extraction. In each case, our business has reduced 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 vehicles
sourced directly from individual owners. We sell the vehicles principally to
licensed vehicle dismantlers, rebuilders, repair licensees, used vehicle
dealers, exporters, and, at certain locations, 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.
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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)
domestic and 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 decline in used car values relative to
repair costs, which we believe are generally trending upward. Conversely,
increases in used car prices, such as occurred during the most recent recession,
may decrease total loss frequency and adversely 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
11.8 years in 2019. 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 our world's 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 quarter ended April 30, 2020. We
received and sold fewer vehicles in the quarter than we otherwise would have due
to the effect of the pandemic, and at times during the crisis experienced lower
selling prices for vehicles at our auctions, therefore lowering revenues within
the quarter. We attribute these volume declines principally to fewer accidents
occurring as a result of fewer miles being driven in response to state and
national shelter-in-place orders, and price effects principally due to a
substantially strengthened U.S. dollar, global demand for vehicles given
economic uncertainty, and potential logistics challenges in exporting vehicles.
We minimized, 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 any additional outbreaks of
the pandemic, governmental responses to those outbreaks, disruptions of
governmental administrative operations due to COVID-19 outbreaks that adversely
impact our core business activities, such as vehicle title processing; a
reduction in miles driven due to one or more factors relating to the COVID-19
pandemic, 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 Quarterly
Report on Form 10-Q captioned "Risk Factors."
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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 April 30, 2020, we had cash and cash
equivalents of $306.4 million, an increase of $212.9 million over January 31,
2020, and had $1.1 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, contract vehicle transportation, insurance, fuel, equipment
maintenance and repair, and costs of vehicles sold under the purchase contracts.
General and administrative expenses consist primarily of executive management,
accounting, data processing, sales personnel, human resources, professional
fees, information technology, and marketing expenses.
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 Unaudited
Consolidated Financial Statements, Note 6 - 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) increased 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; and (xii) our capital expenditures.
These factors are further discussed in the Results of Operations and Risk
Factors sections of this Quarterly Report on Form 10-Q.
Potential internal sources of additional working capital and liquidity are the
sale of assets or the issuance of shares through option exercises and shares
issued under our Employee Stock Purchase Plan. A potential external source of
additional working capital 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.
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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 national coverage for our sellers.
The following tables set forth operational facilities that we have opened and
began operations from August 1, 2018 through April 30, 2020:
   United States Locations             Date
Spartanburg, South CarolinaAugust 2018Madison, WisconsinSeptember 2018Harleyville, South CarolinaJanuary 2019Macon, GeorgiaJanuary 2019Mocksville, North CarolinaJanuary 2019Antelope, CaliforniaJanuary 2019Sacramento, CaliforniaMarch 2019Fredericksburg, VirginiaApril 2019West Mifflin, PennsylvaniaMay 2019Hartford, ConnecticutJuly 2019Buffalo, New YorkJuly 2019Fort Wayne, IndianaFebruary 2020Concord, North CarolinaMarch 2020


         International Locations              Geographic Service Area       

Date

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

The following table sets forth operational facilities obtained through business acquisitions from August 1, 2018 through April 30, 2020:

       Locations            Geographic Service Area          Date
Greenville, Kentucky       United States                 March 2019


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 national and regional vehicle seller agreements; (iii) increasing
our service offerings; and (iv) expanding the application of VB3 into new
markets. In addition, we implement our pricing structure and auction procedures,
and attempt to introduce cost efficiencies at each of our acquired facilities by
implementing our operational procedures, integrating our management information
systems, and redeploying personnel, when necessary.
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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
the three and nine months ended April 30, 2020 and 2019:
                                                                                                                   Nine Months Ended
                                                        Three Months Ended April 30,                                   April 30,
                                                          2020                2019                2020                 2019
Service revenues and vehicle sales:
Service revenues                                              89  %               86  %               89  %                86  %
Vehicle sales                                                 11  %               14  %               11  %                14  %
Total service revenues and vehicle sales                     100  %              100  %              100  %               100  %

Operating expenses:
Yard operations                                               46  %               41  %               45  %                43  %
Cost of vehicle sales                                         10  %               13  %               10  %                13  %
General and administrative                                     8  %                8  %                9  %                 9  %

Total operating expenses                                      64  %               62  %               64  %                65  %
Operating income                                              36  %               38  %               36  %                35  %
Other expense                                                 (1) %               (1) %               (1) %                 -  %
Income before income taxes                                    35  %               37  %               35  %                35  %
Income taxes                                                   8  %                2  %                4  %                 5  %
Net income                                                    27  %               35  %               31  %                30  %

Comparison of the Three and Nine Months Ended April 30, 2020 and 2019 The following table presents a comparison of service revenues for the three and nine months ended April 30, 2020 and 2019:

                                                                                    Three Months Ended April 30,                                                                                                               Nine Months Ended April 30,
(In thousands)                                                             2020                 2019                Change               % Change                   2020                   2019                 Change                  % Change
Service revenues
             United States                                   $ 431,875
      $ 416,874$ 15,001                  3.6  %             $ 1,310,023$ 1,122,470$ 187,553

16.7 %

             International                                      59,707               56,808               2,899                  5.1  %                 179,449                162,825               16,624                    10.2 

%

             Total service revenues                          $ 491,582$ 473,682$ 17,900                  3.8  %             $ 1,489,472$ 1,285,295$ 204,177                    15.9  %


Service Revenues. The increase in service revenues during the three months ended
April 30, 2020 of $17.9 million, or 3.8%, as compared to the same period last
year resulted from (i) an increase in the U.S. of $15.0 million and (ii) an
increase in International of $2.9 million. The growth in the U.S. was driven
primarily by (i) increased volume and (ii) an increase in revenue per car. 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 $2.8 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 growth in
International of $5.7 million was driven primarily by an increase in revenue per
car.
The increase in service revenues during the nine months ended April 30, 2020 of
$204.2 million, or 15.9%, as compared to the same period last year resulted from
(i) an increase in the U.S. of $187.6 million and (ii) an increase in
International of $16.6 million. The growth in the U.S. was driven primarily by
(i) increased volume and (ii) an increase in revenue per car. 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 $5.1 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 growth in International of
$21.7 million was driven primarily by increased volume and increased revenue per
car.
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The following table presents a comparison of vehicle sales for the three and
nine months ended April 30, 2020 and 2019:
                                                                                  Three Months Ended April 30,                                         
                                                                  Nine Months Ended April 30,
(In thousands)                                                          2020                 2019                 Change                % Change                 2020                 2019                 Change                   % Change
Vehicle sales
            United States$  35,323$  31,325$   3,998                  12.8  %             $ 104,076$  87,010$  17,066                     19.6  %
            International                                    23,455               48,109              (24,654)                (51.2) %                86,376              127,077              (40,701)                   (32.0) %
            Total vehicle sales                           $  58,778$  79,434$ (20,656)                (26.0) %             $ 190,452$ 214,087$ (23,635)                   (11.0) %


Vehicle Sales. The decrease in vehicle sales during the three months ended April
30, 2020 of $20.7 million, or 26.0%, as compared to the same period last year
resulted from (i) a decrease in International of $24.7 million partially offset
by (ii) an increase in the U.S. of $4.0 million. 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 decline in International of $24.7 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 decrease in vehicle sales for the nine months ended April 30, 2020 of $23.6
million, or 11.0%, as compared to the same period last year resulted from (i) a
decrease in International of $40.7 million partially offset by (ii) an increase
in the U.S. of $17.1 million. 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. Excluding
a detrimental impact of $2.2 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 $38.5 million was
primarily the result of decreased volume driven by contractual shift from
purchase contracts to fee based service contracts and a change in mix of
vehicles sold.
The following table presents a comparison of yard operations expenses for the
three and nine months ended April 30, 2020 and 2019:
                                                                                 Three Months Ended April 30,                                                                                                           Nine Months Ended April 30,
(In thousands)                                                          2020                 2019                Change                % Change                 2020                 2019                Change                   % Change
Yard operations expenses
              United States$ 216,879$ 194,228$ 22,651                  11.7  %             $ 640,987$ 553,205$ 87,782                     15.9  %
              International                                  36,881               36,325                 556                   1.5  %               110,915              100,502              10,413                     10.4  %
              Total yard operations expenses              $ 253,760$ 230,553$ 23,207                  10.1  %             $ 751,902$ 653,707$ 98,195                     15.0  %

Yard operations expenses, excluding depreciation
and amortization
              United States$ 198,925$ 181,018$ 17,907                   9.9  %             $ 592,199$ 512,342$ 79,857                     15.6  %
              International                                  34,502               34,137                 365                   1.1  %               104,319               93,943              10,376                     11.0  %

Yard depreciation and amortization

              United States$  17,954$  13,210$  4,744                  35.9  %             $  48,788$  40,863$  7,925                     19.4  %
              International                                   2,379                2,188                 191                   8.7  %                 6,596                6,559                  37                      0.6  %


Yard Operations Expenses. The increase in yard operations expense for the three
months ended April 30, 2020 of $23.2 million, or 10.1%, as compared to the same
period last year resulted from (i) an increase in the U.S. of $22.7 million and
(ii) an increase in International of $0.6 million. The increase in the U.S.
compared to the same period last year relates primarily to growth in volume and
an increase in the cost to process each car. The increase in International was
primarily from an increase in the cost to process each car partially offset by
the beneficial impact of $1.6 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 rate. Included in yard operations expenses were
depreciation and amortization expenses. The increase in yard operations
depreciation and amortization expenses resulted primarily from depreciating new
and expanded facilities placed into service in the U.S.
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The increase in yard operations expense for the nine months ended April 30, 2020
of $98.2 million, or 15.0%, as compared to the same period last year resulted
from (i) an increase in the U.S. of $87.8 million and (ii) an increase in
International of $10.4 million. The increase in the U.S. compared to the same
period last year relates primarily to growth in volume and an increase in the
cost to process each car. The increase in International was primarily from an
increase in the cost to process each car, and growth in volume partially offset
by the beneficial impact of $3.0 million due to changes in foreign currency
exchange rates, primarily from the change in the British pound and Brazilian
real to U.S. dollar exchange rate. Included in yard operations expenses were
depreciation and amortization expenses. The increase in yard operations
depreciation and amortization expenses resulted primarily from depreciating new
and expanded facilities placed into service in the U.S.
The following table presents a comparison of cost of vehicle sales for the three
and nine months ended April 30, 2020 and 2019:
                                                                                     Three Months Ended April 30,                                                                                                            Nine Months Ended April 30,
(In thousands)                                                             2020                 2019                 Change                % Change                 2020                 2019                 Change                   % Change
Cost of vehicle sales
                  United States$  34,032$  29,032$   5,000                  17.2  %             $  98,991$  81,858$  17,133                     20.9  %
                  International                                 19,955               41,952              (21,997)                (52.4) %                71,660              108,094              (36,434)                   (33.7) %
                  Total cost of vehicle sales                $  53,987$  70,984$ (16,997)                (23.9) %             $ 170,651$ 189,952$ (19,301)                   (10.2) %


Cost of Vehicle Sales. The decrease in cost of vehicle sales for the three
months ended April 30, 2020 of $17.0 million, or 23.9%, as compared to the same
period last year resulted from (i) a decrease in International of $22.0 million,
and partially offset by (ii) an increase in the U.S. of $5.0 million. The
increase in the U.S. was primarily the result of increased volume and higher
average purchase prices, which we believe was due to a change in the mix of
vehicles sold and increased demand. The decrease in International of $22.0
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 decrease in cost of vehicle sales for the nine months ended April 30, 2020
of $19.3 million, or 10.2%, as compared to the same period last year resulted
from (i) a decrease in International of $36.4 million, and partially offset by
(ii) an increase in the U.S. of $17.1 million. The increase in the U.S. was
primarily the result of increased volume and higher average purchase prices,
which we believe was due to a change in the mix of vehicles sold and increased
demand. Excluding the beneficial impact of $1.8 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 decrease in
International of $38.2 million was primarily the result of decreased volume
driven by contractual shifts from purchase contracts to fee based service
contracts and a change in the mix of vehicles sold.
The following table presents a comparison of general and administrative expenses
for the three and nine months ended April 30, 2020 and 2019:
                                                                                       Three Months Ended April 30,                                                                                                           Nine Months Ended April 30,
(In thousands)                                                               2020                 2019                Change                 % Change                 2020                 2019                Change                   % Change
General and administrative expenses
                   United States$  35,600$  36,681$ (1,081)                  (2.9) %             $ 114,299$ 110,465$  3,834                      3.5  %
                   International                                  11,912                7,404               4,508                   60.9  %                32,688               21,585              11,103                     51.4  %
                   Total general and administrative
                   expenses                                    $  47,512$  44,085$  3,427                    7.8  %             $ 146,987$ 132,050$ 14,937                     11.3  %

General and administrative expenses, excluding
depreciation and amortization
                   United States$  29,851$  31,255$ (1,404)                  (4.5) %             $  97,119$  95,423$  1,696                      1.8  %
                   International                                  11,279                7,116               4,163                   58.5  %                31,241               20,669              10,572                     51.1  %

General and administrative depreciation and amortization

                   United States$   5,749$   5,426$    323                    6.0  %             $  17,180$  15,042$  2,138                     14.2  %
                   International                                     633                  288                 345                  119.8  %                 1,447                  916                 531                     58.0  %


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General and Administrative Expenses. The increase in general and administrative
expenses for the three months ended April 30, 2020 of $3.4 million, or 7.8%, as
compared to the same period last year resulted from (i) an increase in
International of $4.5 million partially offset by (ii) a decrease in the U.S. of
$1.1 million. Excluding depreciation and amortization, the increase in
International of $4.2 million resulted primarily from the expansion of our
European businesses and the decrease in the U.S. of $1.4 million resulted
primarily from decreases in payroll taxes from the exercise of employee stock
options, decreases in legal and travel costs, and higher capitalizable software
development, partially offset by supporting our continued growth initiatives.
The increase in general and administrative expenses for the nine months ended
April 30, 2020 of $14.9 million, or 11.3%, as compared to the same period last
year resulted from (i) an increase in International of $11.1 million and (ii) an
increase in the U.S. of $3.8 million. Excluding depreciation and amortization,
the increase in International of $10.6 million resulted primarily from the
expansion of our European businesses partially offset by the beneficial impact
of $1.3 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
rate. The increase in the U.S. of $1.7 million resulted primarily from
supporting our continued growth initiatives, as well as an increase in payroll
taxes from the exercise of employee stock options, partially offset by higher
capitalizable software development, decreases in stock compensation, and
decreases in legal and travel costs. The increase in depreciation and
amortization expenses for the nine months ended April 30, 2020 as compared to
the same period last year resulted primarily from depreciating certain corporate
and technology assets in the U.S.
The following table summarizes total other expense and income taxes for the
three and nine months ended April 30, 2020 and 2019:
                                                          Three Months Ended April 30,                                                                                     Nine Months Ended April 30,
(In thousands)                            2020                2019             Change            % Change              2020              2019             Change            % Change

Total other expense                  $    (3,301)$ (3,365)$     64                 1.9  %       $ (11,428)$ (5,792)$ (5,636)             (97.3) %
Income taxes                              44,313             11,388            32,925               289.1  %          64,582            79,684           (15,102)             (19.0) %


Other Expense. The increase in total other expense for the nine months ended
April 30, 2020 of $5.6 million as compared to the same period last year was
primarily due to losses of unconsolidated affiliates and lower gains on the
disposal of certain non-operating assets in the current year.
Income Taxes. Our effective income tax rates were 23.1% and 5.6% for the three
months ended April 30, 2020 and 2019, respectively, and 10.8%, and 15.4% for the
nine months ended April 30, 2020 and 2019, respectively. The effective tax rates
in the current and prior year were impacted from the result of recognizing
excess tax benefits from the exercise of employee stock options of $8.8 million
and $29.1 million for the three months ended April 30, 2020 and 2019,
respectively, and $86.0 million and $34.1 million for the nine months ended
April 30, 2020 and 2019, respectively. See Note 11 - Income Taxes.
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Liquidity and Capital Resources
The following table presents a comparison of key components of our liquidity and
capital resources at April 30, 2020 and July 31, 2019 and for the nine months
ended April 30, 2020 and 2019, respectively, excluding additional funds
available to us through our Revolving Loan Facility:
(In thousands)                    April 30, 2020       July 31, 2019         Change        % Change
Cash and cash equivalents        $      306,387$     186,319$ 120,068          64.4  %

Working capital                         507,584             405,163         102,421          25.3  %


                                                                               Nine Months Ended April 30,
(In thousands)                                              2020                2019               Change              % Change
Operating cash flows                                    $  650,968$  453,496$  197,472                 43.5  %
Investing cash flows                                      (488,845)           (242,153)           (246,692)              (101.9) %
Financing cash flows                                       (42,580)           (382,829)            340,249                 88.9  %

Capital expenditures, including acquisitions            $ (490,998)$ (260,081)$ (230,917)               (88.8) %
Net proceeds on revolving loan facility                          -               7,000              (7,000)              (100.0) %


Cash and cash equivalents and working capital increased at April 30, 2020 as
compared to July 31, 2019. Cash and cash equivalents increased primarily due to
cash generated from operations and proceeds from stock option exercises not
fully 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 Unaudited Consolidated Financial
Statements, Note 6 - Long-Term Debt and Note 10 - Stock Repurchases 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 10% to 30% more vehicles than at
other times of the year. This increased volume requires the increased use of our
cash to pay out advances and handling costs of the additional business.
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 April 30, 2020, $72.9 million of the $306.4 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 provided by operating activities increased for the nine months ended
April 30, 2020 as compared to the same period in 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 $89.0 million, cash generated from the sale of inventory
of $22.6 million, and net income taxes receivable of $6.6 million primarily
related to excess tax benefits from stock option exercises, partially offset by
increases in funds used to pay accounts payable of $33.4 million.
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Net cash used in investing activities increased for the nine months ended April
30, 2020 as compared to the same period in 2019 due primarily to increased
capital expenditures. 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.
Net cash used in financing activities decreased for the nine months ended April
30, 2020 as compared to the same period in 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 lower proceeds on our
revolving loan facility.
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. 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 are being 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.
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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
LIBOR rate plus 1.0%, in each case plus an applicable margin ranging from 0.0%
to 0.75% based on our consolidated total net leverage ratio during the preceding
fiscal quarter; or (b) the LIBOR rate plus an applicable margin ranging from
1.00% to 1.75% depending on our consolidated total net leverage ratio during the
preceding fiscal quarter. Interest is due and payable quarterly, in arrears, 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 loans bearing interest at the LIBOR
rate. The interest rate as of April 30, 2020 on our Revolving Loan Facility was
the LIBOR Rate of 0.33% plus an applicable margin of 1.00%. 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 April 30, 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, 2021. We are obligated to pay a commitment
fee on the unused portion of the Revolving Loan Facility. The commitment fee
rate ranges from 0.125% to 0.20%, 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 April 30, 2020
and July 31, 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 Second Amendment to Credit
Agreement, dated July 21, 2016, 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
April 30, 2020, the consolidated total net leverage ratio was 0.15:1. Minimum
liquidity as of April 30, 2020 was $1.1 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 April 30, 2020.
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
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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 April 30, 2020, the consolidated
total net leverage ratio was 0.15:1. Minimum liquidity as of April 30, 2020 was
$1.1 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 were in
compliance with all covenants related to the Note Purchase Agreement as of
April 30, 2020.
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. We did not repurchase any
shares of our common stock under the program during the nine months ended
April 30, 2020. During 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 April 30, 2020, 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.
In fiscal 2019, the Company's former President exercised all of his vested stock
options through a cashless exercise. In fiscal 2020, the Company's 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 and $45.6 million for the nine
months ended April 30, 2020 and 2019, 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:
                                                                             Shares Net                                                                                         Employee Stock-Based
                                                    Weighted Average       

Settled for Shares Withheld Net Shares to Weighted Average Share Tax Withholding (in

       Period              Options Exercised         Exercise Price           Exercise             for Taxes(1)              Employees            Price for Withholding                 000s)
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.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and the related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including costs
related 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 assumptions that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Management has discussed the selection of critical accounting policies and
estimates with the Audit Committee of the Board of Directors and the Audit
Committee has reviewed our disclosure relating to critical accounting policies
and estimates in this Quarterly Report on Form 10-Q. There have been no
significant changes to the critical accounting policies and estimates from what
was disclosed in our Annual Report on Form 10-K for the fiscal year ended
July 31, 2019 filed with the SEC on September 30, 2019. Our significant
accounting policies are described in the Notes to Unaudited Consolidated
Financial Statements, Note 1 - Summary of Significant Accounting Policies in
this Quarterly Report on Form 10-Q.
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Recently Issued Accounting Standards
For a description of the new accounting standards that affect us, refer to the
Notes to Unaudited Consolidated Financial Statements, Note 12 - Recent
Accounting Pronouncements.
Contractual Obligations and Commitments
There have been no material changes during the nine months ended April 30, 2020
to our contractual obligations disclosed in our "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in our
Annual Report on Form 10-K for the fiscal year ended July 31, 2019, filed with
the SEC on September 30, 2019.
Off-Balance Sheet Arrangements
As of April 30, 2020, there are 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.

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