COPART, INC. This Quarterly Report on Form 10-Q, including the information incorporated by reference herein, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), 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 toCopart, 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 theSecurities and Exchange Commission (theSEC ). We may from time to time make additional written and oral forward-looking statements, including statements contained in our filings with theSEC . 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 inthe United States ("U.S."),Canada , theUnited Kingdom ("U.K."),Brazil , theRepublic of Ireland ,Germany ,Finland , theUnited Arab Emirates ("U.A.E."),Oman ,Bahrain , andSpain . Our goals are to generate sustainable profits for our stockholders, while also providing environmental and social benefits for the world around us. With respect to our environmental stewardship, we believe our business is a critical enabler for the global re-use and recycling of vehicles, parts, and raw materials. We are not responsible for the carbon emissions resulting from new vehicle manufacturing, governmental fuel emissions standards or vehicle use by consumers. Each vehicle that enters our business operations already exists, with whatever fuel technology and efficiency it was designed and built to have, and the substantial carbon emissions associated with the vehicle's manufacture have already occurred. However, upon our receipt of an existing vehicle, we help decrease its total environmental impact by extending its useful life and thereby avoiding the carbon emissions associated with the alternative of new vehicle and auto parts manufacturing. For example, many of the cars we process and remarket are subsequently restored to drivable condition, reducing the new vehicle manufacturing burden the world would otherwise face. Many of our cars are purchased by dismantlers, who recycle and refurbish parts for vehicle repairs, again reducing new and aftermarket parts manufacturing. And finally, some of our vehicles are returned to their raw material inputs through scrapping, reducing the need for further new resource extraction. In each of these cases, our business reduces the carbon and other environmental footprint of the global transportation industry. Beyond our environmental stewardship, we also support the world's communities in two important ways. First, we believe that we contribute to economic development and well-being by enabling more affordable access to mobility around the world. For example, many of the automobiles sold through our auction platform are purchased for use in developing countries where affordable transportation is a critical enabler of education, health care, and well-being more generally. Secondly, because of the special role we play in responding to catastrophic weather events, we believe we contribute to disaster recovery and resilience in the communities we serve. For example, we mobilized our people, 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 theHouston, Texas metropolitan area in the wake of Hurricane Harvey in the summer of 2017. We provide vehicle sellers with a full range of services to process and sell vehicles primarily over the internet through our Virtual Bidding Third Generation internet auction-style sales technology, which we refer to as VB3. Vehicle sellers consist primarily of insurance companies, but also include banks, finance companies, charities, fleet operators, dealers, and from some individuals. We sell the vehicles principally to licensed vehicle dismantlers, rebuilders, repair licensees, used vehicle dealers, exporters, and in some jurisdictions, to the general public. The majority of the vehicles sold on behalf of insurance companies are either damaged vehicles deemed a total loss; not economically repairable by the insurance companies; or are recovered stolen vehicles for which an insurance settlement with the vehicle owner has already been made. We offer vehicle sellers a full range of services that help expedite each stage of the vehicle sales process, minimize administrative and processing costs, and maximize the ultimate sales price through the online auction process. 20 -------------------------------------------------------------------------------- Table of Contents In theU.S. ,Canada ,Brazil , theRepublic of Ireland ,Finland , theU.A.E. ,Oman , andBahrain , 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 theU.K. ,Germany , andSpain 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. InGermany andSpain , we also derive revenue from listing vehicles on behalf of insurance companies and insurance experts to determine the vehicle's residual value and/or to facilitate a sale for the insured. We monitor and analyze a number of key financial performance indicators in order to manage our business and evaluate our financial and operating performance. Such indicators include: Service and Vehicle Sales Revenue: Our service revenue consists of auction and auction related sales transaction fees charged for vehicle remarketing services. These auction and auction related services may include a combination of vehicle purchasing fees, vehicle listing fees, and vehicle selling fees that can be based on a predetermined percentage of the vehicle sales price, tiered vehicle sales price driven fees, or at a fixed fee based on the sale of each vehicle regardless of the selling price of the vehicle; transportation fees for the cost of transporting the vehicle to or from our facility; title processing and preparation fees; vehicle storage fees; bidding fees; and vehicle loading fees. These fees are recognized as net revenue (not gross vehicle selling price) at the time of auction in the amount of such fees charged. Purchased vehicle revenue includes the gross sales price of the vehicles which we have purchased or are otherwise considered to own. We have certain contracts with insurance companies, primarily in theU.K. , in which we act as a principal, purchasing vehicles and reselling them for our own account. We also purchase vehicles in the open market, primarily from individuals, and resell them for our own account. Our revenue is impacted by several factors, including total loss frequency and the average vehicle auction selling price, as a significant amount of our service revenue is associated in some manner with the ultimate selling price of the vehicle. Vehicle auction selling prices are driven primarily by: (i) market demand for rebuildable, drivable vehicles; (ii) used car pricing, which we also believe has an impact on total loss frequency; (iii) end market demand for recycled and refurbished parts as reflected in demand from dismantlers; (iv) the mix of cars sold; (v) changes in theU.S. dollar exchange rate to foreign currencies, which we believe has an impact on auction participation by international buyers, and; (vi) changes in commodity prices, particularly the per ton price for crushed car bodies, as we believe this has an impact on the ultimate selling price of vehicles sold for scrap and vehicles sold for dismantling. We cannot specifically quantify the financial impact that commodity pricing, used car pricing, and product sales mix has on the selling price of vehicles, our service revenues, or financial results. Total loss frequency is the percentage of cars involved in accidents that insurance companies salvage rather than repair and is driven by the relationship between repair costs, used car values, and auction returns. Over the last several years, we believe there has been an increase in overall growth in the salvage market driven by an increase in total loss frequency. The increase in total loss frequency may have been driven by the change in used car values and repair costs, which we believe are generally trending upward. Changes in used car prices and repair costs, may impact total loss frequency and affect our growth rate. Used car values are determined by many factors, including used car supply, which is tied directly to new car sales, and the average age of cars on the road. The average age of cars on the road continued to increase, growing from 9.6 years in 2002 to 11.9 years in 2020. Repair costs are generally based on damage severity, vehicle complexity, repair parts availability, repair parts costs, labor costs, and repair shop lead times. The factors that can influence repair costs, used car pricing, and auction returns are many and varied and we cannot predict their movements. Accordingly, we cannot predict future trends in total loss frequency. Beginning inMarch 2020 , our business and operations began to experience the impact of the worldwide COVID-19 pandemic. In materially all of our jurisdictions, we have been deemed by local authorities an essential business because our operations ensure the removal of vehicles from repair shops, impound yards, and streets and highways, enabling the critical function of road infrastructure. As a result, we have continued to operate our facilities as well as our online-only auctions, while following appropriate health and safety protocols to ensure safe working conditions for our employees as well as for our sellers, buyers, and other business partners with whom we come in contact. From a financial perspective, our operating results were adversely affected by lower processed vehicle volume, but these adverse effects were more than offset by corresponding increases in vehicle average sales prices. Although we initially saw substantial declines in vehicle assignments following the onset of the COVID-19 pandemic, which we attribute principally to reduced accident volume as miles driven dramatically declined in response to shelter-in-place orders across the globe, we have generally seen vehicle assignment volumes steadily recovering; however additional subsequent shelter-in-place orders have occasionally stalled or regressed the assignment volume commensurate with the severity and duration of such orders. We cannot predict how the pandemic will continue to develop, whether and to what extent new shelter-in-place orders will be issued, or to what extent the pandemic may have longer term unanticipated impacts on our markets, including, for example, the risk of long-term reductions in miles driven. 21 -------------------------------------------------------------------------------- Table of Contents Although we have been deemed an "essential business" in the jurisdictions in which we operate and have largely been able to continue our yard operations, we have been required to make adjustments in our business processes that may reduce efficiency or increase operating expenses, particularly if the pandemic continues over a long period of time. We adjusted, but did not make material modifications to, our operating expenses to be able to continue providing employment for our employees, service to our sellers, and process incoming vehicles for sale in future quarters. The pandemic may have an adverse effect on our future revenues, with the magnitude and timing of these effects dependent upon the extent and duration of suspended economic activity across our markets. We believe that the longer-term impact on our business will depend on potential adverse operational impacts from outbreaks of COVID-19 at any of our locations; additional outbreaks of COVID-19 in one or more of our geographic markets; a reduction in miles driven due to one or more factors relating to the COVID-19 pandemic; any further government actions in response to COVID-19 outbreaks that restrict business activity or travel; disruptions of governmental administrative operations due to COVID-19 outbreaks that adversely impact our core business activities, such as vehicle title processing; and deteriorating economic conditions generally, and the potential availability, among other things, of vaccines or treatments, none of which we can predict. For a further discussion of risks to our business and operating results arising from the pandemic, please see the section of this Quarterly Report on Form 10-Q captioned "Risk Factors." Operating Costs and Expenses: Yard operations expenses consist primarily of operating personnel (which includes yard management, clerical, and yard employees); rent; vehicle transportation; insurance; property related taxes; fuel; equipment maintenance and repair; marketing costs directly related to the auction process; and costs of vehicles sold under the purchase contracts. General and administrative expenses consist primarily of executive management; accounting; data processing; sales personnel; professional services; marketing expenses; and system maintenance and enhancements. Other (Expense) Income: Other (expense) income consists primarily of interest expense on long-term debt, see Notes to Unaudited Consolidated Financial Statements, Note 6 - Long-Term Debt; foreign exchange rate gains and losses; gains and losses from the disposal of assets, which will fluctuate based on the nature of these activities each period; and earnings from unconsolidated affiliates. Liquidity and Cash Flows: Our primary source of working capital is cash operating results and debt financing. The primary source of our liquidity is our cash and cash equivalents and Revolving Loan Facility. The primary factors affecting cash operating results are: (i) seasonality; (ii) market wins and losses; (iii) supplier mix; (iv) accident frequency; (v) total loss frequency; (vi) volume from our existing suppliers; (vii) commodity pricing; (viii) used car pricing; (ix) foreign currency exchange rates; (x) product mix; (xi) contract mix to the extent applicable; (xii) our capital expenditures; and (xiii) other macroeconomic factors such as COVID-19. 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 or equity. However, we cannot predict if these sources will be available in the future or on commercially acceptable terms. Acquisitions and New Operations As part of our overall expansion strategy of offering integrated services to vehicle sellers, we anticipate acquiring and developing facilities in new regions, as well as the regions currently served by our facilities. We believe that these acquisitions and openings will strengthen our coverage, as we have facilities located in theU.S. ,Canada , theU.K. ,Brazil , theRepublic of Ireland ,Germany ,Finland , theU.A.E. ,Oman ,Bahrain , andSpain with the intention of providing global coverage for our sellers. All of these acquisitions have been accounted for using the purchase method of accounting. The following tables set forth operational facilities that we have opened and began operations fromAugust 1, 2019 throughJanuary 31, 2021 : United States Locations DateFort Wayne, Indiana February 2020 Concord, North Carolina March 2020 Salt Lake City, Utah May 2020 Redding, California August 2020 Dothan, Alabama August 2020 Jacksonville, Florida August 2020 Milwaukee, Wisconsin September 2020 Houston, Texas December 2020 22
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International Locations Geographic Service Area Date
Niederlehme, Brandenburg (Berlin) Germany November 2019 Pilsting, Bavaria (Munich) Germany December 2019 São Paulo, São Paulo Brazil May 2020 The period-to-period comparability of our consolidated operating results and financial position is affected by business acquisitions, new openings, weather and product introductions during such periods. In addition to growth through business acquisitions, we seek to increase revenues and profitability by, among other things, (i) acquiring and developing additional vehicle storage facilities in key markets, including foreign markets; (ii) pursuing global, national, and regional vehicle seller agreements; (iii) increasing our service offerings; and (iv) expanding the application of VB3 into new markets. In addition, we implement our pricing structure and auction procedures, and attempt to introduce cost efficiencies at each of our acquired facilities by implementing our operational procedures, integrating our management information systems, and redeploying personnel, when necessary. Results of Operations The following table shows certain data from our consolidated statements of income expressed as a percentage of total service revenues and vehicle sales for the three and six months endedJanuary 31, 2021 and 2020: Three Months Ended January 31, Six Months Ended January 31, 2021 2020 2021 2020 Service revenues and vehicle sales: Service revenues 86 % 89 % 87 % 88 % Vehicle sales 14 % 11 % 13 % 12 % Total service revenues and vehicle sales 100 % 100 % 100 % 100 % Operating expenses: Yard operations 38 % 45 % 39 % 44 % Cost of vehicle sales 12 % 10 % 11 % 10 % General and administrative 8 % 9 % 8 % 9 % Total operating expenses 58 % 64 % 58 % 63 % Operating income 42 % 36 % 42 % 37 % Other expense (1) % (1) % (1) % (1) % Income before income taxes 41 % 35 % 41 % 36 % Income taxes 10 % 6 % 9 % 2 % Net income 31 % 29 % 32 % 34 %
Comparison of the Three and Six Months Ended
Three Months Ended January 31, Six Months Ended January 31,
(In thousands) 2021 2020 Change % Change 2021 2020 Change % Change
Service revenues
United States $ 465,423 $ 447,345 $ 18,078 4.0 % $ 915,658 $ 878,148 $ 37,510 4.3 %
International 67,178 62,689 4,489 7.2 % 132,315 119,742 12,573 10.5 %
Total service revenues $ 532,601 $ 510,034 $ 22,567 4.4 % $ 1,047,973 $ 997,890 $ 50,083 5.0 %
Service Revenues. The increase in service revenues during the three months ended
January 31, 2021 of $22.6 million , or 4.4%, as compared to the same period last
year resulted from (i) an increase in the U.S. of $18.1 million and (ii) an
increase in International of $4.5 million . The growth in the U.S. was driven
primarily by (i) an increase in revenue per car, partially offset by (ii) a
decrease in volume. The decrease in volume in the U.S. was driven by the
COVID-19 pandemic, which reduced accident volume as miles driven declined.
Excluding the beneficial impact of $0.6 million due to changes in foreign
currency exchange rates, primarily from the change in the British pound,
Brazilian real and European Union euro to U.S. dollar exchange rates, the growth
in International of $3.9 million was driven primarily by increased revenue per
car, partially offset by decreased volume driven by the COVID-19 pandemic, which
reduced accident volume as miles driven declined.
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The increase in service revenues during the six months ended January 31, 2021 of
$50.1 million , or 5.0%, as compared to the same period last year resulted from
(i) an increase in the U.S. of $37.5 million and (ii) an increase in
International of $12.6 million . The growth in the U.S. was driven primarily by
(i) an increase in revenue per car, partially offset by (ii) a decrease in
volume. The decrease in volume in the U.S. was driven by the COVID-19 pandemic,
which reduced accident volume as miles driven declined. Excluding the beneficial
impact of $1.4 million due to changes in foreign currency exchange rates,
primarily from the change in the British pound, Brazilian real and European
Union euro to U.S. dollar exchange rates, the growth in International of $11.2
million was driven primarily by increased revenue per car, partially offset by
decreased volume driven by the COVID-19 pandemic, which reduced accident volume
as miles driven declined.
The following table presents a comparison of vehicle sales for the three and six
months ended January 31, 2021 and 2020:
Three Months Ended January 31, Six Months Ended January 31,
(In thousands) 2021 2020 Change % Change 2021 2020 Change % Change
Vehicle sales
United States $ 52,500 $ 35,392 $ 17,108 48.3 % $ 99,520 $ 68,753 $ 30,767 44.8 %
International 31,930 29,714 2,216 7.5 % 62,478 62,921 (443) (0.7) %
Total vehicle sales $ 84,430 $ 65,106 $ 19,324 29.7 % $ 161,998 $ 131,674 $ 30,324 23.0 %
Vehicle Sales. The increase in vehicle sales for the three months ended January
31, 2021 of $19.3 million , or 29.7%, as compared to the same period last year
resulted from (i) an increase in the U.S. of $17.1 million and an (ii) an
increase in International of $2.2 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,
increased demand, and reduced supply. Excluding a beneficial impact of $1.6
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 increase in International of $0.6 million was primarily the result of
higher average auction selling prices, partially offset by decreased volume
driven by COVID-19's impact on volume, which reduced accident volume as miles
driven declined.
The increase in vehicle sales for the six months ended January 31, 2021 of $30.3
million , or 23.0%, as compared to the same period last year resulted from (i) an
increase in the U.S. of $30.8 million , partially offset by (ii) a decrease in
International of $0.4 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, increased demand, and reduced
supply. Excluding a beneficial impact of $3.3 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 $3.7 million was primarily the result of decreased volume driven by
contractual shift from purchase contracts to fee based service contracts,
COVID-19's impact on volume, which reduced accident volume as miles driven
declined and was partially offset by higher auction selling prices.
The following table presents a comparison of yard operations expenses for the
three and six months ended January 31, 2021 and 2020:
Three Months Ended January 31, Six Months Ended January 31,
(In thousands) 2021 2020 Change % Change 2021 2020 Change % Change
Yard operations expenses
United States $ 199,107 $ 219,278 $ (20,171) (9.2) % $ 393,526 $ 424,108 $ (30,582) (7.2) %
International 36,797 38,073 (1,276) (3.4) % 74,189 74,034 155 0.2 %
Total yard operations
expenses $ 235,904 $ 257,351 $ (21,447) (8.3) % $ 467,715 $ 498,142 $ (30,427) (6.1) %
Yard operations expenses, excluding
depreciation and amortization
United States $ 177,044 $ 203,342 $ (26,298) (12.9) % $ 350,755 $ 393,274 $ (42,519) (10.8) %
International 33,680 35,778 (2,098) (5.9) % 68,486 69,817 (1,331) (1.9) %
Yard depreciation and amortization
United States $ 22,063 $ 15,936 $ 6,127 38.4 % $ 42,771 $ 30,834 $ 11,937 38.7 %
International 3,117 2,295 822 35.8 % 5,703 4,217 1,486 35.2 %
24-------------------------------------------------------------------------------- Table of Contents Yard Operations Expenses. The decrease in yard operations expense for the three months endedJanuary 31, 2021 of$21.4 million , or 8.3%, as compared to the same period last year resulted from (i) a decrease in theU.S. of$20.2 million and (ii) a decrease in International of$1.3 million . The decrease in theU.S. compared to the same period last year relates primarily to declines in volume driven by the COVID-19 pandemic, which reduced accident volume as miles driven declined, partially offset by an increase in the cost to process each car. The decline in International was primarily from a decline in volume driven by the COVID-19 pandemic, which reduced accident volume as miles driven declined, partially offset by the detrimental impact of$0.7 million due to changes in foreign currency exchange rates, primarily from the change in the British pound,European Union euro, and Brazilian real toU.S. dollar exchange rate, and an increase in the cost to process each car. Included in yard operations expenses were depreciation and amortization expenses. The increase in yard operations depreciation and amortization expenses during the three months endedJanuary 31, 2021 as compared to the same period last year resulted primarily from depreciating new and expanded facilities placed into service in theU.S. The decrease in yard operations expense for the six months endedJanuary 31, 2021 of$30.4 million , or 6.1%, as compared to the same period last year resulted from (i) a decrease in theU.S. of$30.6 million , partially offset by (ii) an increase in International of$0.2 million . The decrease in theU.S. compared to the same period last year relates primarily to declines in volume driven by the COVID-19 pandemic, which reduced accident volume as miles driven declined, partially offset by 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 the detrimental impact of$1.4 million due to changes in foreign currency exchange rates, primarily from the change in the British pound,European Union euro, and Brazilian real toU.S. dollar exchange rate, partially offset by a decline in volume driven by the COVID-19 pandemic, which reduced accident volume as miles driven declined Included in yard operations expenses were depreciation and amortization expenses. The increase in yard operations depreciation and amortization expenses six months endedJanuary 31, 2021 as compared to the same period last year resulted primarily from depreciating new and expanded facilities placed into service in theU.S. The following table presents a comparison of cost of vehicle sales for the three and six months endedJanuary 31, 2021 and 2020: Three Months Ended January 31, Six Months Ended January 31, (In thousands) 2021 2020 Change % Change 2021 2020 Change % Change
Cost of vehicle sales
United States $ 48,601 $ 33,887 $ 14,714 43.4 %$ 90,107 $ 64,959 $ 25,148 38.7 % International 25,028 24,013 1,015 4.2 % 47,882 51,705 (3,823) (7.4) % Total cost of vehicle sales$ 73,629 $ 57,900 $ 15,729 27.2 %$ 137,989 $ 116,664 $ 21,325 18.3 % Cost of Vehicle Sales. The increase in cost of vehicle sales for the three months endedJanuary 31, 2021 of$15.7 million , or 27.2%, as compared to the same period last year resulted from (i) an increase in theU.S. of$14.7 million and (ii) an increase in International of$1.0 million . The increase in theU.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, increased demand, and reduced supply. Excluding the detrimental impact of$1.4 million due to changes in foreign currency exchange rates, primarily from the change in the British pound andEuropean Union euro toU.S. dollar exchange rates, the decrease in International of$0.4 million was primarily the result of decreased volume driven by COVID-19's impact on volume, which reduced accident volume as miles driven declined, partially offset by higher average purchase prices. The increase in cost of vehicle sales for the six months endedJanuary 31, 2021 of$21.3 million , or 18.3%, as compared to the same period last year resulted from (i) an increase in theU.S. of$25.1 million , partially offset by (ii) a decrease in International of$3.8 million . The increase in theU.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, increased demand, and reduced supply. Excluding the detrimental impact of$2.6 million due to changes in foreign currency exchange rates, primarily from the change in the British pound andEuropean Union euro toU.S. dollar exchange rates, the decrease in International of$6.4 million was primarily the result of decreased volume driven by contractual shifts from purchase contracts to fee based service contracts, COVID-19's impact on volume, which reduced accident volume as miles driven declined, partially offset by higher average purchase prices. 25 -------------------------------------------------------------------------------- Table of Contents The following table presents a comparison of general and administrative expenses for the three and six months endedJanuary 31, 2021 and 2020: Three Months Ended January 31, Six Months Ended January 31, (In thousands) 2021 2020 Change % Change 2021 2020 Change % Change
General and administrative expenses
United States $ 40,763 $ 40,583 $ 180 0.4 % $ 80,501 $ 81,171 $ (670) (0.8) %
International 8,514 9,414 (900) (9.6) % 16,951 18,304 (1,353) (7.4) %
Total general and
administrative expenses $ 49,277 $ 49,997 $ (720) (1.4) % $ 97,452 $ 99,475 $ (2,023) (2.0) %
General and administrative expenses,
excluding depreciation and
amortization
United States $ 35,081 $ 34,791 $ 290 0.8 % $ 69,365 $ 69,668 $ (303) (0.4) %
International 7,984 9,155 (1,171) (12.8) % 16,220 17,562 (1,342) (7.6) %
General and administrative
depreciation and amortization
United States $ 5,682 $ 5,792 $ (110) (1.9) % $ 11,136 $ 11,503 $ (367) (3.2) %
International 530 259 271 104.6 % 731 742 (11) (1.5) %
General and Administrative Expenses. The decrease in general and administrative
expenses for the three months ended January 31, 2021 of $0.7 million , or 1.4%,
as compared to the same period last year resulted from (i) a decrease in
International of $0.9 million , partially offset by (ii) an increase in the U.S.
of $0.2 million . Excluding depreciation and amortization, the decrease in
International of $1.2 million resulted primarily from lower current period costs
including decreased travel costs and the nonrecurrence of certain legal costs
incurred in the same period last year. The increase in the U.S. of $0.3 million
resulted primarily from increases in stock compensation, partially offset by
decreases in travel costs. Depreciation and amortization expenses for the three
months ended January 31, 2021 as compared to the same period last year was
relatively flat in both the U.S. and International locations.
The decrease in general and administrative expenses for the six months ended
January 31, 2021 of $2.0 million , or 2.0%, as compared to the same period last
year resulted from (i) a decrease in International of $1.4 million and (ii) a
decrease in the U.S. of $0.7 million . Excluding depreciation and amortization,
the decrease in International of $1.3 million resulted primarily from lower
current period costs including decreased travel costs and the nonrecurrence of
certain legal costs incurred in the same period last year and lower payroll
taxes from the exercise of employee stock options. The decrease in the U.S. of
$0.3 million resulted primarily from increases in stock compensation, partially
offset by decreases in payroll taxes from the exercise of employee stock options
and travel costs. Depreciation and amortization expenses for the six months
ended January 31, 2021 as compared to the same period last year was relatively
flat in both the U.S. and International locations.
The following table summarizes total other expense and income taxes for the
three and six months ended January 31, 2021 and 2020:
Three Months Ended January 31, Six Months Ended January 31,
(In thousands) 2021 2020 Change % Change 2021 2020 Change % Change
Total other expense $ (5,769) $ (4,818) $ (951) (19.7) % $ (7,548) $ (8,127) $ 579 7.1 %
Income taxes 59,012 36,367 22,645 62.3 % 105,542 20,269 85,273 420.7 %
Other Expense. The increase in total other expense for the three months ended
January 31, 2021 of $1.0 million as compared to the same period last year was
primarily due to lower earnings of unconsolidated affiliates and lower gains on
the disposal of certain non-operating assets in the current year.
The decrease in total other expense for the six months ended January 31, 2021 of
$0.6 million as compared to the same period last year was primarily due to
higher earnings of unconsolidated affiliates, partially offset by lower gains on
the disposal of certain non-operating assets in the current year, increased
interest expense as a result of the increased size of our Revolving Loan
Facility and lower interest income earned in the current year.
Income Taxes. Our effective income tax rates were 23.4% and 17.7% for the three
months ended January 31, 2021 and 2020, respectively, and 21.1%, and 5.0% for
the six months ended January 31, 2021 and 2020, respectively. The effective tax
rates in the current and prior year were impacted by the recognition of excess
tax benefits from the exercise of employee stock options of $2.2 million and
$14.8 million for the three months ended January 31, 2021 and 2020,
respectively, and $13.9 million and $77.2 million for the six months ended
January 31, 2021 and 2020, 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 January 31, 2021 and July 31, 2020 and for the six months
ended January 31, 2021 and 2020, respectively, excluding additional funds
available to us through our Revolving Loan Facility:
January 31,
(In thousands) 2021 July 31, 2020 Change % Change
Cash, cash equivalents, and restricted cash $ 616,403 $ 477,718 $ 138,685 29.0 %
Working capital 854,452 607,715 246,737 40.6 %
Six Months Ended January 31,
(In thousands) 2021 2020 Change % Change
Operating cash flows $ 393,041 $ 356,920 $ 36,121 10.1 %
Investing cash flows (283,085) (398,713) 115,628 29.0 %
Financing cash flows 26,583 (51,273) 77,856 151.8 %
Capital expenditures $ (283,214) $ (400,352) $ 117,138 29.3 %
Cash, cash equivalents, and restricted cash and working capital increased $138.7
million and $246.7 million at January 31, 2021 , respectively, as compared to
July 31, 2020 . Cash, cash equivalents, and restricted cash increased primarily
due to cash generated from operations and proceeds from stock option exercises
not fully offset by capital expenditures. Working capital increased primarily
from cash generated from operations and timing of cash receipts and payments,
partially offset by capital expenditures, certain income tax benefits related to
stock option exercises, and timing of cash payments. Cash equivalents consisted
of bank deposits, domestic certificates of deposit, U.S. Treasury Bills, 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 5% to 20% more vehicles than at
other times of the year. Severe weather events, including but not limited to
tornadoes, hurricanes, and hailstorms, can also impact our volumes. These
increased volumes require the increased use of our cash to pay out advances and
handling costs of the additional business.
The pandemic may also impact our liquidity, with the magnitude and timing of
these effects dependent upon the extent and duration of suspended economic
activity across our markets. The pandemic may impact our processed vehicle
volume and corresponding vehicle average selling prices.
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 into the foreseeable future. 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 January 31, 2021 , $174.5 million of the $616.4 million of cash, cash
equivalents, and restricted cash 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.
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Net cash provided by operating activities increased for the six months ended
January 31, 2021 as compared to the same period in 2020 due to improved cash
operating results primarily from an increase in service revenues and vehicle
sales, declines 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 net income taxes receivable of $74.0
million primarily related to excess tax benefits from stock option exercises;
partially offset by increases in funds used to pay accounts payable of $14.8
million ; a decrease in funds received in accounts receivable of $32.6 million
and a decrease in cash generated from the sale of inventory of $17.7 million .
Net cash used in investing activities decreased for the six months ended January
31, 2021 as compared to the same period in 2020 due primarily to decreased
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.
Net cash provided by (used in) financing activities increased for the six months
ended January 31, 2021 as compared to the same period in 2020 due primarily to
lower payments for employee stock based tax withholdings, as discussed in
further detail under the subheading "Stock Repurchases", and a decrease in
proceeds from the exercise of stock options.
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").
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 .
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 amended 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 provided 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.
On July 21, 2020 , we entered into a First Amended and Restated Credit Agreement
with Wells Fargo Bank, National Association , Truist Bank (as successor by merger
to Suntrust Bank ), BMO Harris Bank N.A ., Santander Bank, N.A ., and Bank of
America, N.A ., as administrative agent. The First Amended and Restated Credit
Agreement amended certain terms of the Credit Agreement, dated as of December 3,
2014 as amended by the Amendment to Credit Agreement, dated as of March 15,
2016 , as amended by the Second Amendment to Credit Agreement, dated as July 21,
2016 . The First Amended and Restated Credit Agreement provides for, among other
things, (a) an increase in the secured revolving credit commitments by $200.0
million , bringing the aggregate principal amount of the revolving credit
commitments under the Credit Agreement to $1,050.0 million , and (b) an extension
of the termination date of the revolving credit facility under the Credit
Agreement from July 21, 2021 to July 21, 2023 . The First Amended and Restated
Credit Agreement additionally increased the pricing levels under the Credit
Agreement to a range of 0.25% to 0.35% in the case of the commitment fee, 1.50%
to 2.25% in the case of the applicable margin for Eurodollar Rate Loans, and
0.50% to 1.25% in the case of the applicable margin for base rate loans, in each
case depending on our consolidated total net leverage ratio during the preceding
fiscal quarter. The principal purposes of these financing transactions were to
increase the size and availability under our Revolving Loan Facility and to
provide additional long-term financing. The proceeds may be used for general
corporate purposes, including working capital and capital expenditures,
potential share repurchases, acquisitions, or other investments relating to our
expansion strategies in domestic and international markets.
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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
Eurodollar Rate plus 1.0%, subject to an interest rate floor of 0.75%, in each
case plus an applicable margin ranging from 0.50% to 1.25% based on our
consolidated total net leverage ratio during the preceding fiscal quarter; or
(b) the Eurodollar Rate plus an applicable margin ranging from 1.50% to 2.25%
depending on our consolidated total net leverage ratio during the preceding
fiscal quarter. Interest is due and payable in arrears, at the end of each
calendar quarter for loans bearing interest at the Base Rate, and at the end of
an interest period (or at each three month interval in the case of loans with
interest periods greater than three months) in the case of Eurodollar Rate
Loans. The interest rate as of January 31, 2021 on our Revolving Loan Facility
was the Eurodollar Rate of 0.75% plus an applicable margin of 1.50%. The
carrying amount of the Credit Agreement is comprised of borrowings under which
interest accrues under a fluctuating interest rate structure. Accordingly, the
carrying value approximated fair value at January 31, 2021 , and was classified
within Level II of the fair value hierarchy.
Amounts borrowed under the Revolving Loan Facility may be repaid and reborrowed
until the maturity date of July 21, 2023 . We are obligated to pay a commitment
fee on the unused portion of the Revolving Loan Facility. The commitment fee
rate ranges from 0.25% to 0.35%, depending on our consolidated total net
leverage ratio during the preceding fiscal quarter, on the average daily unused
portion of the revolving credit commitment under the Credit Agreement. We had no
outstanding borrowings under the Revolving Loan Facility as of January 31, 2021
or July 31, 2020 .
Our obligations under the Credit Agreement are guaranteed by certain of our
domestic subsidiaries meeting materiality thresholds set forth in the Credit
Agreement. Such obligations, including the guaranties, are secured by
substantially all of our assets and the assets of the subsidiary guarantors
pursuant to a Security Agreement as part of the First Amended and Restated
Credit Agreement, dated July 21, 2020 , among us, the subsidiary guarantors from
time to time party thereto, and Bank of America, N.A ., as collateral agent.
The Credit Agreement contains customary affirmative and negative covenants,
including covenants that limit or restrict us and our subsidiaries' ability to,
among other things, incur indebtedness, grant liens, merge or consolidate,
dispose of assets, make investments, make acquisitions, enter into transactions
with affiliates, pay dividends, or make distributions on and repurchase stock,
in each case subject to certain exceptions. We are also required to maintain
compliance, measured at the end of each fiscal quarter, with a consolidated
total net leverage ratio and a consolidated interest coverage ratio. The Credit
Agreement contains no restrictions on the payment of dividends and other
restricted payments, as defined, as long as (1) the consolidated total net
leverage ratio, as defined, both before and after giving effect to any such
dividend or restricted payment on a pro forma basis, is less than 3.25:1, in an
unlimited amount, (2) if clause (1) is not available, so long as the
consolidated total net leverage ratio both before and after giving effect to any
such dividend on a pro forma basis is less than 3.50:1, in an aggregate amount
not to exceed the available amount, as defined, and (3) if clauses (1) and (2)
are not available, in an aggregate amount not to exceed $50.0 million ; provided,
that, minimum liquidity, as defined, shall be not less than $75.0 million both
before and after giving effect to any such dividend or restricted payment. As of
January 31, 2021 , the consolidated total net leverage ratio was (0.15):1.
Minimum liquidity as of January 31, 2021 was $1.6 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 January 31, 2021 .
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 January 31, 2021 , the
consolidated total net leverage ratio was (0.15):1. Minimum liquidity as of
January 31, 2021 was $1.6 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 January 31, 2021 .
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 six months ended
January 31, 2021 or 2020. As of January 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.
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 during the six months ended January 31, 2020 , to the proper
taxing authorities in satisfaction of the employee's statutory withholding
requirements.
The exercised stock options, utilizing a cashless exercise, are summarized in
the following table:
Employee
Weighted Weighted Average Stock-Based Tax
Average Shares Net Settled Shares Withheld for Share Price for Withholding (in
Period Options Exercised Exercise Price for Exercise Taxes(1) Net Shares to Employees Withholding 000s)
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, 2020 filed with the SEC on September 28, 2020 . 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.
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.
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Table of Contents Contractual Obligations and Commitments There have been no material changes during the six months endedJanuary 31, 2021 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, 2020, filed with theSEC onSeptember 28, 2020 . Off-Balance Sheet Arrangements As ofJanuary 31, 2021 , 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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