COPART, INC. CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the fiscal year endedJuly 31, 2021 , or this Form 10-K, including the information incorporated by reference herein, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including forward-looking statements concerning the potential impact of the COVID-19 pandemic on our business, operations, and operating results. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expect," "plan," "intend," "forecast," "anticipate," "believe," "estimate," "predict," "potential," "continue" or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Form 10-K involve known and unknown risks, uncertainties and situations that may cause our or our industry's actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. These forward-looking statements are made in reliance upon the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These factors include those listed in Part I, Item 1A under the caption entitled "Risk Factors" in this Form 10-K and those discussed elsewhere in this Form 10-K. Unless the context otherwise requires, references in this Form 10-K to "Copart," the "Company," "we," "us," or "our" refer 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 (the "SEC"). 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. All references to numbered Notes are to specific Notes to our Consolidated Financial Statements included in this Annual Report on Form 10-K and which descriptions are incorporated into the applicable response by reference. Capitalized terms used, but not defined, in this Management's Discussion and Analysis of Financial Condition and Results of Operation ("MD&A") have the same meanings as in such Notes. Overview We are a leading provider of online auctions and vehicle remarketing services with operations 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 driveable 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. 33 -------------------------------------------------------------------------------- Table of Contents We provide vehicle sellers with a full range of services to process and sell vehicles primarily over the internet through our Virtual Bidding Third Generation internet auction-style sales technology, which we refer to as VB3. Vehicle sellers consist primarily of insurance companies, but also include banks, finance companies, charities, fleet operators, dealers, vehicle rental companies, and individuals. We sell the vehicles principally to licensed vehicle dismantlers, rebuilders, repair licensees, used vehicle dealers, exporters, and to the general public. The majority of the vehicles sold on behalf of insurance companies are either damaged vehicles deemed a total loss; not economically repairable by the insurance companies; or are recovered stolen vehicles for which an insurance settlement with the vehicle owner has already been made. We offer vehicle sellers a full range of services that help expedite each stage of the vehicle sales process, minimize administrative and processing costs, and maximize the ultimate sales price through the online auction process. 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, driveable vehicles; (ii) used car pricing, which we also believe has an impact on total loss frequency; (iii) end market demand for recycled and refurbished parts as reflected in demand from dismantlers; (iv) the mix of cars sold; (v) changes in 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 12.1 years in 2021. 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. 34 -------------------------------------------------------------------------------- Table of Contents 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. 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; the relationship of supply and demand for newly manufactured vehicles, on the one hand, and used and salvage vehicles, on the other hand, due to reduced manufacturing capacity and broader supply chain disruptions during the COVID-19 pandemic and the effects of these supply and demand relationships on the average sale prices obtained at auction for the vehicles assigned to us for remarketing; further government actions in response to COVID-19 outbreaks that restrict business activity or travel; disruptions of governmental administrative operations due to COVID-19 outbreaks that adversely impact our core business activities, such as vehicle title processing; and deteriorating economic conditions generally, and the potential availability, among other things, of vaccines or treatments, none of which we can predict. For a further discussion of risks to our business and operating results arising from the pandemic, please see the section of this Annual Report on Form 10-K captioned "Risk Factors." 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 Consolidated Financial Statements, Note 8 - 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 Annual Report on Form 10-K. Potential internal sources of additional working capital and liquidity are the sale of assets or the issuance of shares through option exercises and shares issued under our Employee Stock Purchase Plan. A potential external source of additional working capital and liquidity is the issuance of additional debt or equity. However, we cannot predict if these sources will be available in the future or on commercially acceptable terms. 35 -------------------------------------------------------------------------------- Table of Contents 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
are now operational from
United States Locations DateSpartanburg, South Carolina August 2018 Madison, Wisconsin September 2018 Harleyville, South Carolina January 2019 Macon, Georgia January 2019 Mocksville, North Carolina January 2019 Antelope, California January 2019 Sacramento, California March 2019 Fredericksburg, Virginia April 2019 West Mifflin, Pennsylvania May 2019 Hartford, Connecticut July 2019 Buffalo, New York July 2019 Fort Wayne, Indiana February 2020 Concord, North Carolina March 2020 Salt Lake City, Utah May 2020 Redding, California August 2020 Dothan, Alabama August 2020 Jacksonville, Florida August 2020 Milwaukee, Wisconsin September 2020 Houston, Texas December 2020 Knightdale, North Carolina March 2021 Gastonia, North Carolina May 2021 Bismarck, North Dakota June 2021 Fairburn, Georgia July 2021 Dyer, Indiana July 2021 36
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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
São Paulo, São Paulo Brazil May 2020
Bruchmühlbach-Miesau, Rhineland-Palatinate (Mannheim) Germany February 2021
Mallorca, Balearic Islands Spain April 2021
The following table sets forth the operational facilities obtained through
business acquisitions from
Locations Geographic Service Area Date
Greenville, Kentucky United States March 2019
Des Moines, Iowa United States July 2021
The period-to-period comparability of our consolidated operating results and
financial position is affected by business acquisitions, new openings, weather,
and product introductions during such periods.
In addition to growth through business acquisitions, we seek to increase
revenues and profitability by, among other things, (i) acquiring and developing
additional vehicle storage facilities in key markets, including foreign markets;
(ii) pursuing global, national, and regional vehicle seller agreements; (iii)
increasing our service offerings; and (iv) expanding the application of VB3 into
new markets. In addition, we implement our pricing structure and auction
procedures, and attempt to introduce cost efficiencies at each of our acquired
facilities by implementing our operational procedures, integrating our
management information systems, and redeploying personnel, when necessary.
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Results of Operations
The following table shows certain data from our consolidated statements of
income expressed as a percentage of total service revenues and vehicle sales for
fiscal 2021, 2020 and 2019:
Year Ended July 31,
(In percentages) 2021 2020 2019
Service revenues and vehicle sales:
Service revenues 85 % 88 % 86 %
Vehicle sales 15 % 12 % 14 %
Total service revenues and vehicle sales 100 % 100 % 100 %
Operating expenses:
Yard operations 37 % 44 % 43 %
Cost of vehicle sales 13 % 10 % 13 %
General and administrative 8 % 9 % 9 %
Total operating expenses 58 % 63 % 65 %
Operating income 42 % 37 % 35 %
Total other expense (1) % (1) % (1) %
Income before income taxes 41 % 36 % 34 %
Income tax expense 6 % 4 % 5 %
Net income 35 % 32 % 29 %
Comparison of Fiscal Years ended
The following table presents a comparison of service revenues for fiscal 2021,
2020 and 2019:
Year Ended July 31, 2021 vs. 2020 2020 vs. 2019
(In thousands) 2021 2020 2019 Change % Change Change % Change
Service revenues
United States $ 2,017,504 $ 1,714,724 $ 1,537,431 $ 302,780 17.7 % $ 177,293 11.5 %
International 274,363 232,416 218,263 41,947 18.0 % 14,153 6.5 %
Total service revenues $ 2,291,867 $ 1,947,140 $ 1,755,694 $ 344,727 17.7 % $ 191,446 10.9 %
Service Revenues. The increase in service revenues for fiscal 2021 of $344.7
million , or 17.7% as compared to fiscal 2020 came from (i) an increase in the
U.S. of $302.8 million , and (ii) an increase in International of $41.9 million .
The growth in the U.S. was driven primarily by an increase in revenue per car,
partially offset by 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 $12.0 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 rates, the growth in International of
$29.9 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 decreased.
The following table presents a comparison of vehicle sales for fiscal 2021, 2020
and 2019:
Year Ended July 31, 2021 vs. 2020 2020 vs. 2019
(In thousands) 2021 2020 2019 Change % Change Change % Change
Vehicle sales
United States $ 254,568 $ 145,962 $ 119,138 $ 108,606 74.4 % $ 26,824 22.5 %
International 146,076 112,481 167,125 33,595 29.9 % (54,644) (32.7) %
Total vehicle sales $ 400,644 $ 258,443 $ 286,263 $ 142,201 55.0 % $ (27,820) (9.7) %
38-------------------------------------------------------------------------------- Table of Contents Vehicle Sales. The increase in vehicle sales for fiscal 2021 of$142.2 million , or 55.0% as compared to fiscal 2020 came from (i) an increase in theU.S. of$108.6 million and (ii) an increase in International of$33.6 million . The growth in theU.S. was primarily the result of (i) increased volume and (ii) 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$10.2 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 increase in International of$23.4 million was primarily the result of higher average auction selling prices partially offset by decreased volume driven by contractual shifts from purchase contracts to fee based service contracts and COVID-19's impact on volume, which reduced accident volume as miles driven declined. The following table presents a comparison of yard operations expense for fiscal 2021, 2020 and 2019: Year Ended July 31, 2021 vs. 2020 2020 vs. 2019 (In thousands) 2021 2020 2019 Change % Change Change % Change
Yard operations expenses
United States $ 849,037 $ 828,066 $ 751,653 $ 20,971 2.5 % $ 76,413 10.2 %
International 154,255 144,421 136,458 9,834 6.8 % 7,963 5.8 %
Total yard operations expenses $ 1,003,292 $ 972,487 $ 888,111 $ 30,805 3.2 % $ 84,376 9.5 %
Yard operations expenses, excluding
depreciation and amortization
United States $ 761,021 $ 760,043 $ 697,115 $ 978 0.1 % $ 62,928 9.0 %
International 141,354 135,445 127,829 5,909 4.4 % 7,616 6.0 %
Yard depreciation and amortization
United States $ 88,016 $ 68,023 $ 54,538 $ 19,993 29.4 % $ 13,485 24.7 %
International 12,901 8,976 8,629 3,925 43.7 % 347 4.0 %
Yard Operations Expenses. The increase in yard operations expenses for fiscal
2021 of $30.8 million , or 3.2% as compared to fiscal 2020 resulted from (i) an
increase in the U.S. of $21.0 million , primarily from a $20.0 million increase
in depreciation and an increase in the cost to process each car partially offset
by a decline in volume driven by the COVID-19 pandemic, which reduced accident
volume as miles driven declined; and (ii) an increase in International of $9.8
million related primarily from the detrimental impact of $7.6 million due to
changes in foreign currency exchange rates, driven by changes in the British
pound, Brazilian real, and European Union euro to U.S. dollar exchange rate; and
an increase in the cost to process each car, partially offset by a decrease in
volume driven by the COVID-19 pandemic. The increase in yard operations
depreciation and amortization expenses resulted primarily from depreciating new
and expanded facilities placed into service in the U.S. and International
locations.
The following table presents a comparison of cost of vehicle sales for fiscal 2021, 2020 and 2019:
Year Ended July 31, 2021 vs. 2020 2020 vs. 2019
(In thousands) 2021 2020 2019 Change % Change Change % ChangeCost of vehicle sales
United States $ 227,365 $ 135,095 $ 112,268 $ 92,270 68.3 % $ 22,827 20.3 %
International 118,763 90,199 143,236 28,564 31.7 % (53,037) (37.0) %
Total cost of vehicle sales $ 346,128 $ 225,294 $ 255,504 $ 120,834 53.6 % $ (30,210) (11.8) %
Cost of Vehicle Sales. The increase in cost of vehicle sales for fiscal 2021 of
$120.8 million , or 53.6% as compared to fiscal 2020 was the result of (i) an
increase in the U.S. of $92.3 million and (ii) an increase in International of
$28.6 million . The increase in the U.S. was primarily the result of (i)
increased volume and (ii) 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 $8.3 million due to changes in
foreign currency exchange rates, driven by changes in the British pound and
European euro to U.S. dollar exchange rate, the increase in International of
$20.3 million was primarily the result of higher average purchase prices
partially offset by decreased volume driven by contractual shifts from purchase
contracts to fee based service contracts and COVID-19's impact on volume, which
reduced accident volume as miles driven declined.
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The following table presents a comparison of general and administrative expenses
for fiscal 2021, 2020 and 2019:
Year Ended July 31, 2021 vs. 2020 2020 vs. 2019
(In thousands) 2021 2020 2019 Change % Change Change % ChangeGeneral and administrative expenses
United States $ 172,115 $ 154,346 $ 155,180 $ 17,769 11.5 % $ (834) (0.5) %
International 34,550 37,357 26,687 (2,807) (7.5) % 10,670 40.0 %
Total general and administrative expenses $ 206,665 $ 191,703 $ 181,867 $ 14,962 7.8 % $ 9,836 5.4 %
General and administrative expenses, excluding
depreciation and amortization
United States $ 152,366 $ 131,551 $ 134,452 $ 20,815 15.8 % $ (2,901) (2.2) %
International 33,245 35,761 25,687 (2,516) (7.0) % 10,074 39.2 %
General and administrative depreciation and
amortization
United States $ 19,749 $ 22,795 $ 20,727 $ (3,046) (13.4) % $ 2,068 10.0 %
International 1,305 1,596 1,001 (291) (18.2) % 595 59.4 %
General and Administrative Expenses. The increase in general and administrative
expenses for fiscal 2021 of $15.0 million , or 7.8% as compared to fiscal 2020
came primarily from (i) an increase in the U.S. of $17.8 million , partially
offset by (ii) a decrease in International of $2.8 million . Excluding
depreciation and amortization, the decrease in International of $2.5 million
resulted primarily from the detrimental 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 rate and lower
current period costs including decreased travel costs and the nonrecurrence of
certain legal costs incurred in fiscal 2020. Excluding depreciation and
amortization, the increase in the U.S. of $20.8 million resulted primarily from
increases in stock compensation and increased legal costs, partially offset by
decreased payroll taxes from the exercise of employee stock options and travel
costs. The decrease in depreciation and amortization expenses resulted primarily
from fully depreciating certain intangible and technology assets in the U.S. and
International locations.
The following table summarizes total other expenses and income taxes for fiscal 2021, 2020 and 2019:
Year Ended July 31, 2021 vs. 2020 2020 vs. 2019
(In thousands) 2021 2020 2019 Change % Change Change % Change
Total other expenses (14,580) (15,260) (11,524) 680 4.5 % (3,736) (32.4) %
Income taxes 185,351 100,932 113,258 84,419 83.6 % (12,326) (10.9) %
Other Expenses. The decrease in total other expenses for fiscal 2021 of $0.7
million , or 4.5% as compared to fiscal 2020 was primarily due to a decrease in
currency losses, primarily due to the change in the British pound and Brazilian
real to U.S. dollar exchange rate, lower gains on the disposal of certain
non-operating assets in the current year, and lower interest income earned in
the current year, partially offset by higher earnings of unconsolidated
affiliates.
Income Taxes. Our effective income tax rates were 16.5% and 12.6%, for fiscal
2021 and 2020, respectively. The current and prior year's effective tax rate was
computed based on the U.S. federal statutory tax rate of 21.0%. The effective
tax rate for fiscal year ending July 31, 2021 was favorably impacted by $19.8
million of discrete tax adjustments made in connection with finalizing our
fiscal year 2020 tax return. The effective tax rate for fiscal year ending July
31, 2020 was negatively impacted by $1.7 million of discrete tax items related
to amending previously filed income tax returns. The effective tax rates in the
current and prior year were also impacted by the recognition of excess tax
benefits from the exercise of employee stock options of $29.8 million and $92.5
million for fiscal years 2021 and 2020, respectively.
Discussion of Fiscal Year ended
For a discussion of fiscal 2020 as compared to fiscal 2019, please refer to Part
II, Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations in our Form 10-K for the fiscal year ended July 31,
2020, filed with the SEC on September 28, 2020 .
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Liquidity and Capital Resources
The following table presents a comparison of key components of our liquidity and
capital resources for fiscal 2021, 2020 and 2019, excluding additional funds
available to us through our Revolving Loan Facility:
July 31, 2021 vs. 2020 2020 vs. 2019
(In thousands) 2021 2020 2019 Change % Change Change % Change
Cash, cash equivalents, and
restricted cash $ 1,048,260 $ 477,718 $ 186,319 $ 570,542 119.4 % $ 291,399 156.4 %
Working capital 1,281,580 607,715 405,163 673,865 110.9 % 202,552 50.0 %
Year Ended July 31, 2021 vs. 2020 2020 vs. 2019
(In thousands) 2021 2020 2019 Change % Change Change
% Change
Operating cash flows $ 990,891 $ 917,885 $ 646,646 $ 73,006 8.0 % $ 271,239 41.9 %
Investing cash flows (465,466) (601,208) (356,267) 135,742 22.6 % (244,941) (68.8) %
Financing cash flows 40,922 (27,414) (370,304) 68,336 249.3 % 342,890 92.6 %
Capital expenditures,
excluding acquisitions $ (462,996) $ (591,972) $ (373,883) $ 128,976 21.8 % $ (218,089) (58.3) %
Acquisitions, net of cash
acquired (5,000) (11,702) (745) 6,702 57.3 % (10,957) (1,470.7) %
Cash, cash equivalents, and restricted cash and working capital increased $570.5
million and $673.9 million at July 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,
partially offset by capital expenditures and payments for employee stock-based
tax withholdings. Working capital increased primarily from cash generated from
operations and timing of cash receipts and payments, partially offset by capital
expenditures and certain income tax benefits related to stock option exercises.
Cash equivalents consisted of bank deposits, 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 Consolidated Financial
Statements, Note 8 - Long-Term Debt and Note 11 - Stockholders' Equity and under
the subheadings "Credit Agreement" and "Note Purchase Agreement" below.
Our business is seasonal as inclement weather during the winter months increases
the frequency of accidents and consequently, the number of cars involved in
accidents which the insurance companies salvage rather than repair. During the
winter months, most of our facilities process 5% to 20% more vehicles than at
other times of the year. Severe weather events, including but not limited to
tornadoes, floods, 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 COVID-19 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 COVID-19 pandemic may impact our processed vehicle volume and corresponding vehicle average selling prices.
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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 the next 12 months and for 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 July 31, 2021 , $159.5 million of the $1.0 billion 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.
Net cash provided by operating activities increased for fiscal 2021 as compared
to fiscal 2020 due to improved cash operating results primarily from an increase
in service and vehicle sales 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 a decrease in funds received in accounts receivable of
$143.5 million and a decrease in cash generated from the sale of inventory of
$49.0 million , partially offset by net income taxes receivable of $12.9 million
primarily related to excess tax benefits from stock option exercises, decreases
in funds primarily used to pay land acquisition deposits of of $6.9 million , and
decreases in funds used to pay accounts payable of $2.9 million .
Net cash used in investing activities decreased for fiscal 2021 as compared to
fiscal 2020 due primarily to decreases in capital expenditures and acquisitions
and proceeds from the sale of assets. Our capital expenditures are primarily
related to acquiring land, opening and improving facilities, capitalized
software development costs for new software for internal use and major software
enhancements, acquiring yard equipment, and lease buyouts of certain facilities.
We continue to develop, expand, and invest in new and existing facilities and
standardize the appearance of existing locations. As of July 31, 2021 , we have
no material non-cancelable commitments for future capital expenditures.
Capitalized software development costs were $13.6 million , $13.2 million , and
$8.4 million for fiscal 2021, 2020 and 2019, respectively. If, at any time it is
determined that capitalized software provides a reduced economic benefit, the
unamortized portion of the capitalized development costs will be impaired. See
Notes to Consolidated Financial Statements, Capitalized Software Costs in Note 1
- Summary of Significant Accounting Policies.
Net cash provided by (used in) financing activities changed from a use of cash
to providing cash in fiscal 2021 as compared to fiscal 2020 due primarily to
lower payments for employee stock-based tax withholdings as discussed in further
detail under the subheading "Stock Repurchases"and the Notes to Consolidated
Financial Statements, Note 11 - Stockholders' Equity and lower debt issuance
costs for the restructuring of our revolving loan facility as discussed in
further detail in Notes to Consolidated Financial Statements, Note 8 - Long-Term
Debt, partially offset by a decrease in proceeds from the exercise of stock
options.
For a discussion of fiscal 2020 as compared to fiscal 2019, please refer to Part
II, Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations in our Form 10-K for the fiscal year ended July 31,
2020, filed with the SEC on September 28, 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. For fiscal 2021 and 2020, we
did not repurchase any shares of our common stock under the program. For fiscal
2019, we repurchased 7,635,596 shares of our common stock under the program at a
weighted average price of $47.81 per share totaling $365.0 million . As of
July 31, 2021 , the total number of shares repurchased under the program was
114,549,198 and 81,450,802 shares were available for repurchase under our
program.
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In fiscal 2019, our former President exercised all of his vested stock options
through a cashless exercise. In fiscal 2020, our Chief Executive Officer
exercised all of his vested stock options through a cashless exercise. In fiscal
2021, certain employees exercised stock options through a cashless exercise. A
portion of the options exercised were net settled in satisfaction of the
exercise price. We remitted $3.8 million , $101.3 million , and $45.6 million
during the years ended July 31, 2021 , 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:
Weighted Weighted Average Employee Stock-Based
Average Shares Net Settled Shares Withheld for Taxes Share Price for Tax Withholding (in
Period Options Exercised Exercise Price for Exercise (1) Net Shares to Employees 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
FY 2021-Q4 90,000 17.73 12,366 29,349 48,285 129.01 3,786
(1)Shares withheld for taxes are treated as a repurchase of shares for accounting purposes but do not count against our stock repurchase program.
Credit Agreement
OnJuly 21, 2020 , we entered into a First Amended and Restated Credit Agreement withWells Fargo Bank, National Association ,Truist Bank (as successor by merger toSuntrust Bank ),BMO Harris Bank N.A .,Santander Bank, N.A ., andBank of America, N.A ., as administrative agent (as amended from time to time, the "Credit Amendment"), bringing the aggregate principal amount of the revolving credit commitments under the Credit Agreement ( the "Revolving Loan Facility") to$1,050.0 million . The 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 atJuly 31, 2021 , and was classified within Level II of the fair value hierarchy. The interest rate as ofJuly 31, 2021 on our Revolving Loan Facility was the Eurodollar Rate of 0.75% plus an applicable margin of 1.50%. Amounts borrowed under the Revolving Loan Facility may be repaid and reborrowed until the maturity date ofJuly 21, 2023 . We had no outstanding borrowings under the Revolving Loan Facility as ofJuly 31, 2021 or 2020. The Credit Agreement contains customary affirmative and negative covenants and we were in compliance with all covenants related to the Credit Agreement as ofJuly 31, 2021 .
Note Purchase Agreement
OnDecember 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, dueDecember 3, 2024 ; (ii)$100.0 million aggregate principal amount of 4.19% Senior Notes, Series B, dueDecember 3, 2026 ; (iii)$100.0 million aggregate principal amount of 4.25% Senior Notes, Series C, dueDecember 3, 2027 ; and (iv)$100.0 million aggregate principal amount of 4.35% Senior Notes, Series D, dueDecember 3, 2029 . Interest is due and payable quarterly, in arrears, on each of the Senior Notes. 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. The Note Purchase Agreement contains customary affirmative and negative covenants and we were in compliance with all covenants related to the Note Purchase Agreement as ofJuly 31, 2021 .
For further detail on both the Credit Agreement and Note Purchase Agreement, see Notes to Consolidated Financial Statements, Note 8 - Long-Term Debt .
Off-Balance Sheet Arrangements
As ofJuly 31, 2021 , we had no off-balance sheet arrangements pursuant to Item 303(a)(4) of Regulation S-K promulgated under the Securities Exchange Act of 1934, as amended. 43 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in theU.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions. We consider the following policies to be the most critical to understanding the judgments that are involved and the uncertainties that could impact our results of operations, financial condition, and cash flows. For additional information, see Note 1 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements.
The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related Notes in Part I., Item I., "Financial Statements."
Revenue Recognition
Our primary performance obligation is the auctioning of consigned vehicles through an online auction process. Service revenue and vehicle sales revenue are recognized at the date the vehicles are sold at auction, excluding annual registration fees. Costs to prepare the vehicles for auction, including inbound transportation costs and titling fees, are deferred and recognized at the time of revenue recognition at auction. Our disaggregation between service revenues and vehicle sales at the segment level reflects how the nature, timing, amount, and uncertainty of our revenues and cash flows are impacted by economic factors. We report sales taxes on relevant transactions on a net basis in our consolidated results of operations, and therefore do not include sales taxes in revenues or costs.
Service revenues
Our service revenue consists of auction and auction related sales transaction fees charged for vehicle remarketing services. Within this revenue category, our primary performance obligation is the auctioning of consigned vehicles through an online auction process. These auction and auction related services may include a combination of vehicle purchasing fees, vehicle listing fees, and vehicle selling fees that can be based on a predetermined percentage of the vehicle sales price, tiered vehicle sales price driven fees, or at a fixed fee based on the sale of each vehicle regardless of the selling price of the vehicle; transportation fees for the cost of transporting the vehicle to or from our facility; title processing and preparation fees; vehicle storage fees; bidding fees; and vehicle loading fees. These services are not distinct within the context of the contract. Accordingly, revenue for these services is recognized when the single performance obligation is satisfied at the completion of the auction process. We do not take ownership of these consigned vehicles, which are stored at our facilities located throughout theU.S. and at its international locations. These fees are recognized as net revenue (not gross vehicle selling price) at the time of auction in the amount of such fees charged. We have a separate performance obligation related to providing access to our online auction platform. We charge members an annual registration fee for the right to participate in our online auctions and access our bidding platform. This fee is recognized ratably over the term of the arrangement, generally one year, as each day of access to the online auction platform represents the best depiction of the transfer of the service. No provision for returns has been established, as all sales are final with no right of return or warranty, although we provide for credit loss expense in the case of non-performance by our buyers or sellers. Year Ended July 31, (In thousands) 2021 2020 2019 Service revenues United States$ 2,017,504 $ 1,714,724 $ 1,537,431 International 274,363 232,416 218,263 Total service revenues$ 2,291,867 $ 1,947,140 $ 1,755,694 44
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Certain vehicles are purchased and remarketed on our own behalf. We have a single performance obligation related to the sale of these vehicles, which is the completion of the online auction process. Vehicle sales revenue is recognized on the auction date. As we act as a principal in vehicle sales transactions, the gross sales price at auction is recorded as revenue.
Year Ended July 31,
(In thousands) 2021 2020 2019
Vehicle sales
United States $ 254,568 $ 145,962 $ 119,138
International 146,076 112,481 167,125
Total vehicle sales $ 400,644 $ 258,443 $ 286,263
Contract assets
We capitalize certain contract assets related to obtaining a contract, where the
amortization period for the related asset is greater than one year. These assets
are amortized over the expected life of the customer relationship. Contract
assets are classified as current or long-term other assets, based on the timing
of when we expect to recognize the related revenues and are amortized as an
offset to the associated revenues on a straight-line basis. We assess these
costs for impairment at least quarterly and as "triggering" events occur that
indicate it is more likely than not that an impairment exists. The contract
asset costs where the amortization period for the related asset is one year or
less are expensed as incurred and recorded within general and administrative
expenses in the accompanying consolidated statements of income.
Uncertain Tax Positions
In determining net income for financial statement purposes, we must make certain estimates and judgments in the calculation of tax provisions and the resultant tax liabilities. In the ordinary course of global business, there may be transactions and calculations where the ultimate tax outcome is uncertain. In addition, our actual and forecasted earnings are subject to change due to economic, political and other conditions, such as new COVID-19 variants. Our effective tax rates could be affected by numerous factors such as changes in our business operations; acquisitions; investments; entry into new businesses and geographies; intercompany transactions; the relative amount of our foreign earnings, including earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates; losses incurred in jurisdictions for which we are not able to realize related tax benefits; the applicability of special tax regimes; changes in foreign currency exchange rates; changes in our stock price; changes to our forecasts of income and loss and the mix of jurisdictions to which they relate; changes in our deferred tax assets and liabilities and their valuation; changes in the laws, regulations, administrative practices, principles, and interpretations related to tax, including changes to the global tax framework; competition; and other laws and accounting rules in various jurisdictions. In addition, a number of countries have enacted or are actively pursuing changes to their tax laws applicable to corporate multinationals. The calculation of tax liabilities involves dealing with uncertainties in the interpretation and application of complex tax laws, and significant judgment is necessary to (i) determine whether, based on the technical merits, a tax position is more likely than not to be sustained and (ii) measure the amount of tax benefit that qualifies for recognition. Development in an audit, investigation, or other tax controversy could have a material effect on our operating results or cash flows in the period or periods for which that development occurs, as well as for prior and subsequent periods. We recognize potential liabilities for anticipated tax audit issues in theU.S. and other tax jurisdictions based on an estimate of the ultimate resolution of whether, and the extent to which, additional taxes will be due. Although we believe the estimates are reasonable, no assurance can be given that the final outcome of these matters will not be different from what is reflected in the historical income tax provisions and accruals. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Recently Issued Accounting Standards
For a description of the new accounting standards that affect us, refer to the Notes to Consolidated Financial Statements, Note 1 - Summary of Significant Accounting Policies.
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