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Copart Inc (CPRT) SEC Filing 10-Q Quarterly report for the period ending Thursday, October 31, 2019

Copart Inc

CIK: 900075 Ticker: CPRT


Exhibit 99.1
Copart, Inc.
For Immediate Release
Copart Reports First Quarter Fiscal 2020 Financial Results
Dallas, Texas. (November 20, 2019) — Copart, Inc. (NASDAQ: CPRT) today reported financial results for the quarter ended October 31, 2019.
For the three months ended October 31, 2019, revenue, gross profit, and net income were $554.4 million, $254.9 million, and $218.2 million, respectively. These represent an increase in revenue of $93.1 million, or 20.2%; an increase in gross profit of $59.0 million, or 30.1%; and an increase in net income of $104.1 million, or 91.2%, respectively, from the same period last year. Fully diluted earnings per share for the three months were $0.91 compared to $0.47 last year, an increase of 93.6%.
Excluding the impact of discrete income tax items, foreign currency-related gains, certain income tax benefits and payroll taxes related to accounting for stock option exercises, and the effect on common equivalent shares from ASU 2016-09, non-GAAP fully diluted earnings per share for the three months ended October 31, 2019 and 2018, were $0.65 and $0.47, respectively. A reconciliation of non-GAAP financial measures to the most directly comparable financial measures computed in accordance with U.S. generally accepted accounting principles (GAAP) can be found in the tables attached to this press release.
On Thursday, November 21, 2019, at 11 a.m. Eastern Time, Copart will conduct a conference call to discuss the results for the quarter. The call will be webcast live and can be accessed at http://stream.conferenceamerica.com/copart112119. A replay of the call will be available through January 20, 2020 by calling (877) 919-4059. Use confirmation code: 98898573.
About Copart
Copart, Inc., founded in 1982, is a global leader in online vehicle auctions. Copart’s innovative technology and online auction platform links sellers to more than 750,000 Members in over 170 countries. Copart offers services to process and sell salvage and clean title vehicles to dealers, dismantlers, rebuilders, exporters, and in some cases, to end users. Copart sells vehicles on behalf of insurance companies, banks, finance companies, charities, fleet operators, dealers and also sells vehicles sourced from individual owners. With operations at over 200 locations in 11 countries, Copart has more than 150,000 vehicles available online every day. Copart currently operates in the United States (Copart.com), Canada (Copart.ca), the United Kingdom (Copart.co.uk), Brazil (Copart.com.br), the Republic of Ireland (Copart.ie), Germany (Copart.de), Finland (Copart.fi), the United Arab Emirates, Oman and Bahrain (Copartmea.com), and Spain (Copart.es). For more information, or to become a Member, visit Copart.com/Register.

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Copart, Inc. ~ 14185 Dallas Parkway, Suite 300, Dallas TX 75254 ~ (972) 391-5000

The following information was filed by Copart Inc (CPRT) on Thursday, November 21, 2019 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-Q Quarterly Report statement of earnings and operation as management may choose to highlight particular information in the press release.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                         to                        
Commission file number: 000-23255
COPART, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
000-23255
94-2867490
 
(State or other jurisdiction of incorporation or organization)
 
(Commission File Number)
(I.R.S. Employer Identification No.)
 
 
 
 
14185 Dallas Parkway
Suite 300
Dallas
Texas
75254
 
(Address of principal executive offices, including zip code)
 
(972) 391-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.0001
CPRT
The NASDAQ Global Select Market
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
As of November 22, 2019, 232,454,206 shares of the registrant’s common stock were outstanding.



Copart, Inc.
Index to the Quarterly Report
October 31, 2019
Table of Contents
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2




Copart, Inc.
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share amounts)
 
October 31, 2019
 
July 31, 2019
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
181,102

 
$
186,319

Accounts receivable, net
 
394,309

 
367,265

Vehicle pooling costs
 
86,035

 
76,548

Inventories
 
19,482

 
20,941

Income taxes receivable
 
48,370

 
19,526

Prepaid expenses and other assets
 
14,778

 
16,568

Total current assets
 
744,076

 
687,167

Property and equipment, net
 
1,545,714

 
1,427,726

Operating lease right-of-use assets
 
136,368

 

Intangibles, net
 
52,617

 
55,156

Goodwill
 
337,179

 
333,321

Deferred income taxes
 
404

 
411

Other assets
 
39,581

 
43,836

Total assets
 
$
2,855,939

 
$
2,547,617

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable and accrued liabilities
 
$
289,247

 
$
270,918

Deferred revenue
 
5,113

 
6,466

Income taxes payable
 
1,313

 
3,482

Current portion of operating lease liabilities
 
27,055

 

Current portion of revolving loan facility and finance lease liabilities
 
590

 
1,138

Total current liabilities
 
323,318

 
282,004

Deferred income taxes
 
53,678

 
48,683

Income taxes payable
 
38,965

 
35,116

Operating lease liabilities, net of current portion
 
113,263

 

Long-term debt, revolving loan facility and finance lease liabilities, net of discount
 
399,979

 
400,091

Other liabilities
 
137

 
3,342

Total liabilities
 
929,340

 
769,236

Commitments and contingencies
 

 

Stockholders’ equity:
 
 
 
 
Preferred stock: $0.0001 par value - 5,000,000 shares authorized; none issued
 

 

Common stock: $0.0001 par value - 400,000,000 shares authorized; 232,433,578 and 229,790,268 shares issued and outstanding, respectively.
 
23

 
23

Additional paid-in capital
 
587,643

 
572,559

Accumulated other comprehensive loss
 
(119,290
)
 
(132,529
)
Retained earnings
 
1,458,223

 
1,338,328

Total stockholders’ equity
 
1,926,599

 
1,778,381

Total liabilities and stockholders’ equity
 
$
2,855,939

 
$
2,547,617

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

3


Copart, Inc.
Consolidated Statements of Income
(Unaudited)
 
 
Three Months Ended October 31,
(In thousands, except per share amounts)
 
2019
 
2018
Service revenues and vehicle sales:
 
 
 
 
Service revenues
 
$
487,856

 
$
394,806

Vehicle sales
 
66,568

 
66,562

Total service revenues and vehicle sales
 
554,424

 
461,368

Operating expenses:
 
 
 
 
Yard operations
 
240,791

 
207,694

Cost of vehicle sales
 
58,764

 
57,756

General and administrative
 
49,478

 
44,478

Total operating expenses
 
349,033

 
309,928

Operating income
 
205,391

 
151,440

 
 
 
 
 
Other (expense) income:
 
 
 
 
Interest expense
 
(4,611
)
 
(4,651
)
Interest income
 
585

 
960

Other income, net
 
717

 
1,037

Total other expense
 
(3,309
)
 
(2,654
)
Income before income taxes
 
202,082

 
148,786

Income tax (benefit) expense
 
(16,098
)
 
34,703

Net income
 
$
218,180

 
$
114,083

 
 
 
 
 
Basic net income per common share
 
$
0.94

 
$
0.49

Weighted average common shares outstanding
 
231,169

 
233,888

 
 
 
 
 
Diluted net income per common share
 
$
0.91

 
$
0.47

Diluted weighted average common shares outstanding
 
238,662

 
244,826

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

4


Copart, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
Three Months Ended October 31,
(In thousands)
 
2019
 
2018
Comprehensive income, net of tax:
 
 
 
 
Net income
 
$
218,180

 
$
114,083

Other comprehensive income:
 
 
 
 
Foreign currency translation adjustments
 
13,239

 
(7,718
)
Comprehensive income
 
$
231,419

 
$
106,365


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

5


Copart, Inc.
Consolidated Statements of Stockholders’ Equity
(Unaudited)
 
 
Common Stock
 
 
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 
 
 
 
 
 
Additional
Paid in
Capital
 
 
 
 
 
(in thousands, except share amounts)
 
Outstanding
Shares
 
Amount
 
 
 
Retained
Earnings
 
Stockholders’
Equity
Balances at July 31, 2019
 
229,790,268

 
$
23

 
$
572,559

 
$
(132,529
)
 
$
1,338,328

 
$
1,778,381

Net income
 

 

 

 

 
218,180

 
218,180

Currency translation adjustment
 

 

 

 
13,239

 

 
13,239

Exercise of stock options, net of repurchased shares
 
2,643,310

 

 
9,551

 

 
(98,285
)
 
(88,734
)
Stock-based compensation
 

 

 
5,533

 

 

 
5,533

Balances at October 31, 2019
 
232,433,578

 
$
23

 
$
587,643

 
$
(119,290
)
 
$
1,458,223

 
$
1,926,599

 
 
Common Stock
 
 
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 
 
 
 
 
 
Additional
Paid in
Capital
 
 
 
 
 
(in thousands, except share amounts)
 
Outstanding
Shares
 
Amount
 
 
 
Retained
Earnings
 
Stockholders’
Equity
Balances at July 31, 2018
 
233,898,841

 
$
23

 
$
526,858

 
$
(107,928
)
 
$
1,162,146

 
$
1,581,099

Net income
 

 

 

 

 
114,083

 
114,083

Currency translation adjustment
 

 

 

 
(7,718
)
 

 
(7,718
)
Cumulative effect of change in accounting standard
 

 

 

 

 
(22,954
)
 
(22,954
)
Exercise of stock options, net of repurchased shares
 
109,321

 

 
1,229

 

 
(2
)
 
1,227

Stock-based compensation
 

 

 
6,021

 

 

 
6,021

Balances at October 31, 2018
 
234,008,162

 
$
23

 
$
534,108

 
$
(115,646
)
 
$
1,253,273

 
$
1,671,758

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


6


Copart, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 
 
Three Months Ended October 31,
(In thousands)
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income
 
$
218,180

 
$
114,083

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization, including debt cost
 
23,704

 
21,978

Allowance for doubtful accounts
 
382

 
128

Equity in losses (earnings) of unconsolidated affiliates
 
855

 
(184
)
Stock-based compensation
 
5,533

 
6,021

Gain on sale of property and equipment
 
(272
)
 
(102
)
Deferred income taxes
 
4,839

 
(888
)
Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
(25,408
)
 
(29,270
)
Vehicle pooling costs
 
(9,358
)
 
(10,313
)
Inventories
 
1,710

 
(3,268
)
Prepaid expenses and other current and non-current assets
 
4,079

 
614

Operating lease right-of-use assets and lease liabilities
 
256

 

Accounts payable and accrued liabilities
 
16,587

 
(20,611
)
Deferred revenue
 
(1,437
)
 
467

Income taxes receivable
 
(28,740
)
 
15,286

Income taxes payable
 
1,700

 
14,177

Other liabilities
 
(152
)
 
(435
)
Net cash provided by operating activities
 
212,458

 
107,683

Cash flows from investing activities:
 
 
 
 
Purchases of property and equipment
 
(131,793
)
 
(62,336
)
Proceeds from sale of property and equipment
 
283

 
810

Net cash used in investing activities
 
(131,510
)
 
(61,526
)
Cash flows from financing activities:
 
 
 
 
Proceeds from the exercise of stock options
 
12,620

 
1,229

Payments for employee stock-based tax withholdings
 
(101,354
)
 
(2
)
Net cash (used in) provided by financing activities
 
(88,734
)
 
1,227

Effect of foreign currency translation
 
2,569

 
(1,595
)
Net (decrease) increase in cash and cash equivalents
 
(5,217
)
 
45,789

Cash and cash equivalents at beginning of period
 
186,319

 
274,520

Cash and cash equivalents at end of period
 
$
181,102

 
$
320,309

Supplemental disclosure of cash flow information:
 
 
 
 
Interest paid
 
$
4,506

 
$
4,525

Income taxes paid, net of refunds
 
$
7,465

 
$
6,053

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

7


Copart, Inc.
Notes to Consolidated Financial Statements

October 31, 2019
(Unaudited)
NOTE 1 – Summary of Significant Accounting Policies
Basis of Presentation and Description of Business
Copart, Inc. (“the Company”) provides vehicle sellers with a full range of services to process and sell vehicles over the internet through the Company’s Virtual Bidding Third Generation (“VB3”) internet auction-style sales technology. Sellers are primarily insurance companies but also include banks, finance companies, charities, fleet operators, dealers and vehicles sourced directly from individual owners. The Company sells principally to licensed vehicle dismantlers, rebuilders, repair licensees, used vehicle dealers and exporters; however, at certain locations, the Company sells directly to the general public. The majority of vehicles sold on behalf of insurance companies are either damaged vehicles deemed a total loss or not economically repairable by the insurance companies or are recovered stolen vehicles for which an insurance settlement with the vehicle owner has already been made. The Company offers vehicle sellers a full range of services that expedite each stage of the vehicle sales process, minimize administrative and processing costs and maximize the ultimate sales price through the online auction process. In the United States (“U.S.”), Canada, Brazil, the Republic of Ireland, Finland, the United Arab Emirates (“U.A.E.”), Oman, and Bahrain, the Company sells vehicles primarily as an agent and derives revenue primarily from auction and auction related sales transaction fees charged for vehicle remarketing services as well as fees for services subsequent to the auction, such as delivery and storage. In the United Kingdom (“U.K.”), Germany, and Spain, the Company operates both as an agent and on a principal basis, in some cases purchasing salvage vehicles outright and reselling the vehicles for its own account. In Germany and Spain, the Company also derives revenue from listing vehicles on behalf of insurance companies and insurance experts to determine the vehicle’s residual value and/or to facilitate a sale for the insured.
Principles of Consolidation
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments of a normal recurring nature considered necessary for fair presentation of its financial position as of October 31, 2019 and July 31, 2019, its consolidated statements of income, comprehensive income and stockholders’ equity for the three months ended October 31, 2019 and 2018, and its cash flows for the three months ended October 31, 2019 and 2018. Interim results for the three months ended October 31, 2019 are not necessarily indicative of the results that may be expected for any future period, or for the entire year ending July 31, 2020. These consolidated financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The interim consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2019. Certain prior year amounts have been reclassified to conform to current year presentation.
The consolidated financial statements of the Company include the accounts of the parent company and its wholly-owned subsidiaries. Significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates include, but are not limited to, vehicle pooling costs; income taxes; stock-based compensation; purchase price allocations; and contingencies. Actual results could differ from these estimates.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”), which superseded the revenue recognition requirements in ASC 605, Revenue Recognition (“ASC 605”). ASC 606 revised the timing of revenue recognition based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASC 606 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. On August 1, 2018, the Company adopted ASC 606 using the modified retrospective method for all contracts. Results for reporting periods beginning August 1, 2018 are presented under ASC 606, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting under ASC 605.

8


Under the new standard, the Company concluded its primary performance obligation is the auctioning of consigned vehicles through an online auction process. Upon adoption of ASC 606, service revenue and vehicle sales revenue are recognized at the date the vehicles are sold at auction, excluding annual registration fees. This timing of revenue recognition under ASC 606 represents a change in the timing of revenue recognition for certain service revenues, such as inbound transportation and titling fees, which were recognized under ASC 605 prior to auction, when the services were performed. Under ASC 606, costs to prepare the vehicles for auction, including inbound transportation costs and titling fees, are deferred and recognized at the time of revenue recognition at auction.
There were no contract liabilities on the consolidated balance sheets at October 31, 2019 and July 31, 2019. The Company’s disaggregation between service revenues and vehicle sales at the segment level reflects how the nature, timing, amount and uncertainty of its revenues and cash flows are impacted by economic factors. The Company reports sales taxes on relevant transactions on a net basis in the Company’s consolidated results of operations, and therefore does not include sales taxes in revenues or costs.
Service revenues
The Company’s service revenue consists of auction and auction related sales transaction fees charged for vehicle remarketing services. Within this revenue category, the Company’s primary performance obligation is the auctioning of consigned vehicles through an online auction process. These auction and auction related services may include a combination of vehicle purchasing fees, vehicle listing fees, and vehicle selling fees that can be based on a predetermined percentage of the vehicle sales price, tiered vehicle sales price driven fees, or at a fixed fee based on the sale of each vehicle regardless of the selling price of the vehicle; transportation fees for the cost of transporting the vehicle to or from the Company’s facility; title processing and preparation fees; vehicle storage fees; bidding fees; and vehicle loading fees. These services are not distinct within the context of the contract. Accordingly, revenue for these services is recognized when the single performance obligation is satisfied at the completion of the auction process. The Company does not take ownership of these consigned vehicles, which are stored at the Company’s facilities located throughout the U.S. and at its international locations. These fees are recognized as net revenue (not gross vehicle selling price) at the time of auction in the amount of such fees charged.
The Company identified a separate performance obligation related to providing access to its online auction platform. The Company also charges members an annual registration fee for the right to participate in its online auctions and access the Company’s bidding platform. Under the new standard, this fee will continue to be recognized ratably over the term of the arrangement, generally one year, as each day of access to the online auction platform represents the best depiction of the transfer of the service.
No provision for returns has been established, as all sales are final with no right of return or warranty, although the Company provides for bad debt expense in the case of non-performance by its buyers or sellers.
 
 
 
Three Months Ended October 31,
(In thousands)
 
2019
 
2018
Service revenues
 
 
 
 
 
United States
 
$
430,803

 
$
343,573

 
International
 
57,053

 
51,233

 
Total service revenues
 
$
487,856

 
$
394,806

Vehicle sales
Certain vehicles are purchased and remarketed on the Company’s own behalf. The Company identified a single performance obligation related to the sale of these vehicles, which is the completion of the online auction process. Under the new standard, vehicle sales revenue will continue to be recognized on the auction date. As the Company acts as a principal in vehicle sales transactions, the gross sales price at auction is recorded as revenue.
 
 
 
Three Months Ended October 31,
(In thousands)
 
2019
 
2018
Vehicle sales
 
 
 
 
 
United States
 
$
33,361

 
$
27,636

 
International
 
33,207

 
38,926

 
Total vehicle sales
 
$
66,568

 
$
66,562



9


Contract assets
The Company capitalizes certain contract assets related to obtaining a contract, where the amortization period for the related asset is greater than one year. These assets are amortized over the expected life of the customer relationship. Contract assets are classified as current or long-term other assets, based on the timing of when the Company expects to recognize the related revenues and are amortized as an offset to the associated revenues on a straight-line basis. The Company assesses these costs for impairment at least quarterly and as “triggering” events occur that indicate it is more likely than not that an impairment exists. The contract asset costs where the amortization period for the related asset is one year or less are expensed as incurred and recorded within general and administrative expenses in the accompanying statements of income.
The change in the carrying amount of contract assets was as follows (in thousands):
Balance as of July 31, 2019
 
$
10,574

Capitalized contract assets during the period
 

Costs amortized during the period
 
(875
)
Effect of foreign currency exchange rates
 
432

Balance as of October 31, 2019
 
$
10,131


Vehicle Pooling Costs
The Company defers costs that relate directly to the fulfillment of its contracts associated with vehicles consigned to and received by the Company, but not sold as of the end of the period. The Company quantifies the deferred costs using a calculation that includes the number of vehicles at its facilities at the beginning and end of the period, the number of vehicles sold during the period and an allocation of certain yard operation costs of the period. The primary expenses allocated and deferred are inbound transportation costs, titling fees, certain facility costs, labor, and vehicle processing. If the allocation factors change, then yard operation expenses could increase or decrease correspondingly in the future. These costs are expensed into yard operations expenses as vehicles are sold in subsequent periods on an average cost basis.
Foreign Currency Translation
The Company records foreign currency translation adjustments from the process of translating the functional currency of the financial statements of its foreign subsidiaries into the U.S. dollar reporting currency. The Canadian dollar, British pound, Brazilian real, European Union euro, U.A.E. dirham, Omani rial, Bahraini dinar, and Indian rupee are the functional currencies of the Company’s foreign subsidiaries as they are the primary currencies within the economic environment in which each subsidiary operates. The original equity investment in the respective subsidiaries is translated at historical rates. Assets and liabilities of the respective subsidiary’s operations are translated into U.S. dollars at period-end exchange rates, and revenues and expenses are translated into U.S. dollars at average exchange rates in effect during each reporting period. Adjustments resulting from the translation of each subsidiary’s financial statements are reported in other comprehensive income.
The cumulative effects of foreign currency exchange rate fluctuations were as follows (in thousands):
Cumulative loss on foreign currency translation as of July 31, 2018
 
$
(107,928
)
Loss on foreign currency translation
 
(24,601
)
Cumulative loss on foreign currency translation as of July 31, 2019
 
$
(132,529
)
Gain on foreign currency translation
 
13,239

Cumulative loss on foreign currency translation as of October 31, 2019
 
$
(119,290
)


10


Fair Value of Financial Instruments
The Company records its financial assets and liabilities at fair value in accordance with the framework for measuring fair value in U.S. GAAP. In accordance with ASC 820, Fair Value Measurements and Disclosures, as amended by Accounting Standards Update 2011-04, the Company considers fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants under current market conditions. This framework establishes a fair value hierarchy that prioritizes the inputs used to measure fair value:
Level I
Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets.
Level II
Inputs other than quoted prices included within Level I that are observable for the asset or liability, either directly or indirectly.
Level III
Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate.
The amounts recorded for financial instruments in the Company’s consolidated financial statements, which included cash, accounts receivable, accounts payable, accrued liabilities and Revolving Loan Facility approximated their fair values as of October 31, 2019 and July 31, 2019, due to the short-term nature of those instruments, and are classified within Level II of the fair value hierarchy. Cash equivalents are classified within Level II of the fair value hierarchy because they are valued using quoted market prices of the underlying investments. See Note 3 – Long-Term Debt, and Note 6 – Fair Value Measures.
Income Taxes and Deferred Tax Assets
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, their respective tax basis, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company considers the need to maintain a valuation allowance on deferred tax assets based on an assessment of whether it is more likely than not that the Company would realize those deferred tax assets based on future reversals of existing taxable temporary differences and the ability to generate sufficient taxable income within the carryforward period available under the applicable tax law. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Excess tax benefits and deficiencies related to exercises of stock options are recognized as expense or benefit in the income statement as discrete items in the reporting period in which they occur.
The Company recognizes and measures uncertain tax positions in accordance with ASC 740, Income Taxes, pursuant to which the Company only recognizes the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. ASC 740 further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the quarter in which such change occurs. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
The Company files annual income tax returns in multiple taxing jurisdictions. A number of years may elapse before an uncertain tax position is audited by the relevant tax authorities and finally resolved. The Company believes that its reserves for income taxes reflect the most likely outcome. The Company adjusts these reserves, as well as the related interest, where appropriate in light of changing facts and circumstances.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original maturities of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents include cash held in checking, domestic certificates of deposit, and money market accounts. The Company periodically invests its excess cash in money market funds and U.S. Treasury Bills. The Company’s cash and cash equivalents are placed with high credit quality financial institutions.
Segments and Other Geographic Reporting
The Company’s U.S. and International regions are considered two separate operating segments and are disclosed as two reportable segments. The segments represent geographic areas and reflect how the chief operating decision maker allocates resources and measures results, including total revenues and operating income.

11


Capitalized Software Costs
The Company capitalizes system development costs and website development costs related to the enterprise computing services during the application development stage. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life, generally three to seven years. The Company evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that impact the recoverability of these assets.
Total gross capitalized software as of October 31, 2019 and July 31, 2019 was $42.6 million and $39.4 million, respectively. Accumulated amortization expense related to software as of October 31, 2019 and July 31, 2019 totaled $25.9 million and $23.6 million, respectively.
Acquisitions
The Company recognizes and measures identifiable assets acquired and liabilities assumed in acquired entities in accordance with ASC 805, Business Combinations. The allocation of the purchase consideration for acquisitions can require extensive use of accounting estimates and judgments to allocate the purchase consideration to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values. The excess of the fair value of purchase consideration over the values of the identifiable assets and liabilities is recorded as goodwill. Critical estimates in valuing certain identifiable assets include but are not limited to expected long-term revenues; future expected operating expenses; cost of capital; appropriate attrition; and discount rates.
NOTE 2 — Accounts Receivable, Net
Accounts receivable, net consisted of:
(In thousands)
 
October 31, 2019
 
July 31, 2019
Advance charges receivable
 
$
307,738

 
$
280,835

Trade accounts receivable
 
87,467

 
89,274

Other receivables
 
4,488

 
2,098

 
 
399,693

 
372,207

Less: Allowance for doubtful accounts
 
(5,384
)
 
(4,942
)
Accounts receivable, net
 
$
394,309

 
$
367,265


Advance charges receivable represents amounts paid to third parties on behalf of insurance companies for which the Company will be reimbursed when the vehicle is sold. As advance charges are recovered within one year, the Company has not adjusted the amount of consideration received from the customer for a significant financing component. Trade accounts receivable includes fees and gross auction proceeds to be collected from insurance companies and buyers.
NOTE 3 – Long-Term Debt
Credit Agreement
On December 3, 2014, the Company entered into a Credit Agreement (as amended from time to time, the “Credit Amendment”) with Wells Fargo Bank, National Association, as administrative agent, and Bank of America, N.A., as syndication agent. The Credit Agreement provided for (a) a secured revolving loan facility in an aggregate principal amount of up to $300.0 million (the “Revolving Loan Facility”), and (b) a secured term loan facility in an aggregate principal amount of $300.0 million (the “Term Loan”), which was fully drawn at closing. The Term Loan amortized $18.8 million per quarter.
On March 15, 2016, the Company entered into a First Amendment to Credit Agreement (the “Amendment to Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent and Bank of America, N.A. The Amendment to Credit Agreement amended certain terms of the Credit Agreement, dated as of December 3, 2014. The Amendment to Credit Agreement provided for (a) an increase in the secured revolving credit commitments by $50.0 million, bringing the aggregate principal amount of the revolving credit commitments under the Credit Agreement to $350.0 million, (b) a new secured term loan (the “Incremental Term Loan”) in the aggregate principal amount of $93.8 million having a maturity date of March 15, 2021, and (c) an extension of the termination date of the Revolving Loan Facility and the maturity date of the Term Loan from December 3, 2019 to March 15, 2021. The Amendment to Credit Agreement extended the amortization period for the Term Loan and decreased the quarterly amortization payments for that loan to $7.5 million per quarter. The Amendment to Credit Agreement additionally reduced the pricing levels under the Credit Agreement to a range of 0.15% to 0.30% in the case of the commitment fee, 1.125% to 2.0% in the case of the applicable margin for LIBOR loans, and 0.125% to 1.0% in the case of the applicable margin for base rate loans, based on the Company’s consolidated total net leverage ratio during the preceding fiscal quarter. The Company borrowed the entire $93.8 million principal amount of the Incremental Term Loan concurrent with the closing of the Amendment to Credit Agreement.

12


On July 21, 2016, the Company entered into a Second Amendment to Credit Agreement (the “Second Amendment to Credit Agreement”) with Wells Fargo Bank, National Association, SunTrust Bank, and Bank of America, N.A., as administrative agent (as successor in interest to Wells Fargo Bank). The Second Amendment to Credit Agreement amends certain terms of the Credit Agreement, dated as of December 3, 2014 as amended by the Amendment to Credit Agreement, dated as of March 15, 2016. The Second Amendment to Credit Agreement provides for, among other things, (a) an increase in the secured revolving credit commitments by $500.0 million, bringing the aggregate principal amount of the revolving credit commitments under the Credit Agreement to $850.0 million, (b) the repayment of existing term loans outstanding under the Credit Agreement, (c) an extension of the termination date of the revolving credit facility under the Credit Agreement from March 15, 2021 to July 21, 2021, and (d) increased covenant flexibility.
Concurrent with the closing of the Second Amendment to Credit Agreement, the Company prepaid in full the outstanding $242.5 million principal amount of the Term Loan and Incremental Term Loan under the Credit Agreement without premium or penalty. The Second Amendment to Credit Agreement reduced the pricing levels under the Credit Agreement to a range of 0.125% to 0.20% in the case of the commitment fee, 1.00% to 1.75% in the case of the applicable margin for LIBOR loans, and 0.0% to 0.75% in the case of the applicable margin for base rate loans, in each case depending on the Company’s 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 the Company’s Revolving Loan Facility and to provide additional long-term financing. The proceeds are being used for general corporate purposes, including working capital and capital expenditures, potential share repurchases, acquisitions, or other investments relating to the Company’s expansion strategies in domestic and international markets.
The Revolving Loan Facility under the Credit Agreement bears interest, at the election of the Company, at either (a) the Base Rate, which is defined as a fluctuating rate per annum equal to the greatest of (i) the Prime Rate in effect on such day; (ii) the Federal Funds Rate in effect on such date plus 0.50%; or (iii) the LIBOR rate plus 1.0%, in each case plus an applicable margin ranging from 0.0% to 0.75% based on the Company’s consolidated total net leverage ratio during the preceding fiscal quarter; or (b) the LIBOR rate plus an applicable margin ranging from 1.00% to 1.75% depending on the Company’s consolidated total net leverage ratio during the preceding fiscal quarter. Interest is due and payable quarterly, in arrears, for loans bearing interest at the Base Rate, and at the end of an interest period (or at each three month interval in the case of loans with interest periods greater than three months) in the case of loans bearing interest at the LIBOR rate. The interest rate as of October 31, 2019 on the Company’s Revolving Loan Facility was the one month LIBOR rate of 1.78% plus an applicable margin of 1.00%. The carrying amount of the Credit Agreement is comprised of borrowings under which interest accrues under a fluctuating interest rate structure. Accordingly, the carrying value approximates fair value at October 31, 2019, and was classified within Level II of the fair value hierarchy.
Amounts borrowed under the Revolving Loan Facility may be repaid and reborrowed until the maturity date of July 21, 2021. The Company is obligated to pay a commitment fee on the unused portion of the Revolving Loan Facility. The commitment fee rate ranges from 0.125% to 0.20%, depending on the Company’s 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. The Company had no outstanding borrowings under the Revolving Loan Facility as of October 31, 2019 and July 31, 2019.
The Company’s obligations under the Credit Agreement are guaranteed by certain of the Company’s domestic subsidiaries meeting materiality thresholds set forth in the Credit Agreement. Such obligations, including the guaranties, are secured by substantially all of the assets of the Company and the assets of the subsidiary guarantors pursuant to a Security Agreement as part of the Second Amendment to Credit Agreement, dated July 21, 2016, among the Company, 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 the Company and its 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. The Company is 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 October 31, 2019, the consolidated total net leverage ratio was 0.29:1. Minimum liquidity as of October 31, 2019 was $1.0 billion. Accordingly, the Company does not believe that the provisions of the Credit Agreement represent a significant restriction to its ability to pay dividends or to the successful future operations of the business. The Company has not paid a cash dividend since becoming a public company in 1994. The Company was in compliance with all covenants related to the Credit Agreement as of October 31, 2019.

13


Note Purchase Agreement
On December 3, 2014, the Company entered into a Note Purchase Agreement and sold to certain purchasers (collectively, the “Purchasers”) $400.0 million in aggregate principal amount of senior secured notes (the “Senior Notes”) consisting of (i) $100.0 million aggregate principal amount of 4.07% Senior Notes, Series A, due December 3, 2024; (ii) $100.0 million aggregate principal amount of 4.19% Senior Notes, Series B, due December 3, 2026; (iii) $100.0 million aggregate principal amount of 4.25% Senior Notes, Series C, due December 3, 2027; and (iv) $100.0 million aggregate principal amount of 4.35% Senior Notes, Series D, due December 3, 2029. Interest is due and payable quarterly, in arrears, on each of the Senior Notes. Proceeds from the Note Purchase Agreement are being used for general corporate purposes.
On July 21, 2016, the Company 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.
The Company may prepay the Senior Notes, in whole or in part, at any time, subject to certain conditions, including minimum amounts and payment of a make-whole amount equal to the discounted value of the remaining scheduled interest payments under the Senior Notes.
The Company’s obligations under the Note Purchase Agreement are guaranteed by certain of the Company’s domestic subsidiaries meeting materiality thresholds set forth in the Note Purchase Agreement. Such obligations, including the guaranties, are secured by substantially all of the assets of the Company and assets of the subsidiary guarantors. The obligations of the Company and its subsidiary guarantors under the Note Purchase Agreement will be treated on a pari passu basis with the obligations of those entities under the Credit Agreement as well as any additional debt the Company may obtain.
The Note Purchase Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its 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. The Company is 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 October 31, 2019, the consolidated total net leverage ratio was 0.29:1. Minimum liquidity as of October 31, 2019 was $1.0 billion. Accordingly, the Company does not believe that the provisions of the Note Purchase Agreement represent a significant restriction to its ability to pay dividends or to the successful future operations of the business. The Company has not paid a cash dividend since becoming a public company in 1994. The Company was in compliance with all covenants related to the Note Purchase Agreement as of October 31, 2019.
Related to the execution of the Credit Agreement, First Amendment to Credit Agreement, Second Amendment to Credit Agreement, and the Note Purchase Agreement, the Company incurred $3.4 million in costs, of which $2.0 million was capitalized as debt issuance fees and $1.4 million was recorded as a reduction of the long-term debt proceeds as a debt discount. Both the debt issuance fees and debt discount are amortized to interest expense over the term of the respective debt instruments and are classified as reductions of the outstanding liability.
NOTE 4 – Leases
The Company leases certain facilities and certain equipment under non-cancelable capital and operating leases, which are recorded as right-of-use assets and lease liabilities. Certain leases provide the Company with either a right of first refusal to acquire or an option to purchase a facility at fair value. Certain leases also have renewal options to extend the leases for additional periods at the Company’s discretion. Certain leases also contain escalation clauses and renewal option clauses calling for increased rents. Where a lease contains an escalation clause or a concession, such as a rent holiday or tenant improvement allowance, the Company includes these items in the determination of the right-of-use asset and the lease liabilities. The effects of these escalation clauses or concessions have been reflected in lease expense on a straight-line basis over the expected lease term and any variable lease payments subsequent to establishing the lease liability are expensed as incurred. The lease term commences on the date when the Company has the right to control the use of the leased property, which is typically before lease payments are due under the terms of the lease. Certain of the Company’s leases have renewal periods up to 40 years, exercisable at the Company’s option, and generally require the Company to pay property taxes, insurance and maintenance costs, in addition to the lease payments. At lease inception, the Company includes all renewals or option periods that are reasonably certain to exercise when determining the expected lease term, as failure to renew the lease would impose an economic penalty.

14


The Company determines whether a contract is or contains a lease at the inception of the contract. A contract will be deemed to be or contain a lease if the contract conveys the right to control and direct the use of identified property, plant, or equipment for a period of time in exchange for consideration. The Company generally must also have the right to obtain substantially all of the economic benefits from the use of the property, plant, and equipment.
Operating lease assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the expected lease term. To determine the present value of lease payments not yet paid, the Company estimates incremental borrowing rates based on the information available at lease commencement date, as rates are not implicitly stated in the Company’s leases.
Components of lease expense for the three months ended October 31, 2019 were as follows:
 
 
 
Three Months Ended October 31,
(In thousands)
 
2019
Operating lease expense
 
$
7,976

Finance lease expense:
 
 
 
Amortization of right-of-use assets
 
155

 
Interest on finance lease liabilities
 
7

Short-term lease expense
 
1,995

Variable lease expense
 
144

Total lease expense
 
$
10,277


The components of right-of-use assets and lease liabilities on the consolidated balance sheet are as follows (in thousands):
Lease Asset and Liabilities
 
Balance Sheet Classification (In thousands)
 
October 31, 2019
Operating lease right-of-use assets
 
Operating lease right-of-use assets
 
$
136,368

Finance lease right-of-use assets
 
Property and equipment, net
 
1,561

Total lease assets, net
 
 
 
$
137,929

 
 
 
 
 
Operating lease liabilities - current
 
Current portion of operating lease liabilities
 
$
27,055

Finance lease liabilities - current
 
Current portion of revolving loan facility and finance lease liabilities
 
590

Operating lease liabilities - non-current
 
Operating lease liabilities, net of current portion
 
113,263

Finance lease liabilities - non-current
 
Long-term debt, revolving loan facility and finance lease liabilities, net of discount
 
978

Total lease liabilities
 
 
 
$
141,886


The weighted-average remaining lease terms and discount rates as of October 31, 2019 are as follows:
(in thousands)
 
Weighted-Average Remaining Lease Term (in years)
 
Weighted-Average Discount Rate(1)
Operating leases
 
9.12
 
3.03
%
Finance leases
 
2.55
 
1.73
%
(1)
We cannot determine the interest rate implicit in the Company’s leases. Therefore, the discount rate represents the Company’s incremental borrowing rate and is determined based on the risk-free rate, adjusted for the risk premium attributed to our corporate credit rating for a secured or collateralized instrument.

15


Supplemental cash flow information related to leases:
(in thousands)
 
Three Months Ended
 October 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
 
 
Operating cash flows related to operating leases
 
$
7,753

 
Operating cash flows related to finance leases
 
7

 
Financing cash flows related to finance leases
 
159

Right-of-use assets obtained in exchange for new operating lease liabilities
 
9,009

Right-of-use assets obtained in exchange for new finance lease liabilities
 


The annual maturities of our lease liabilities as of October 31, 2019 are as follows:
Fiscal year (In thousands)
 
Finance leases
 
Operating leases
2020 (remaining nine months)
 
$
478

 
$
22,918

2021
 
619

 
26,450

2022
 
505

 
21,574

2023
 

 
18,831

2024
 

 
14,492

Thereafter
 

 
59,518

Total future lease commitments
 
$
1,602

 
$
163,783

Less: imputed interest
 
(34
)
 
(23,465
)
Present value of lease liabilities
 
$
1,568

 
$
140,318


NOTE 5 – Goodwill and Intangible Assets
The following table sets forth amortizable intangible assets by major asset class:
(In thousands)
 
October 31, 2019
 
July 31, 2019
Amortized intangibles:
 
 
 
 
Supply contracts and customer relationships
 
$
49,072

 
$
49,109

Trade names
 
23,518

 
23,501

Licenses and databases
 
7,695

 
7,688

Accumulated amortization
 
(27,668
)
 
(25,142
)
Net intangibles
 
$
52,617

 
$
55,156


Aggregate amortization expense on amortizable intangible assets was $2.5 million and $2.9 million for the three months ended October 31, 2019 and 2018, respectively.
The change in the carrying amount of goodwill was as follows (in thousands):
Balance as of July 31, 2019
 
$
333,321

Effect of foreign currency exchange rates
 
3,858

Balance as of October 31, 2019
 
$
337,179



16


NOTE 6 – Fair Value Measures
The following table summarizes the fair value of the Company’s financial assets and liabilities measured and recorded at fair value on a recurring basis based on inputs used to derive their fair values:
 
 
October 31, 2019
 
July 31, 2019
(In thousands)
 
Fair Value Total
 
Significant Observable Inputs (Level II)
 
Fair Value Total
 
Significant Observable Inputs (Level II)
Assets
 
 
 
 
 
 
 
 
Cash equivalents
 
$
13,958

 
$
13,958

 
$
12,389

 
$
12,389

Total Assets
 
$
13,958

 
$
13,958

 
$
12,389

 
$
12,389

Liabilities
 
 
 
 
 
 
 
 
Long-term fixed rate debt, including current portion
 
$
420,602

 
$
420,602

 
$
411,510

 
$
411,510

Total Liabilities
 
$
420,602

 
$
420,602

 
$
411,510

 
$
411,510



During the three months ended October 31, 2019, no transfers were made between any levels within the fair value hierarchy. See Note 1 – Summary of Significant Accounting Policies, and Note 3 – Long-Term Debt.
NOTE 7 – Net Income Per Share
The table below reconciles basic weighted average shares outstanding to diluted weighted average shares outstanding:
 
 
Three Months Ended October 31,
(In thousands)
 
2019
 
2018
Weighted average common shares outstanding
 
231,169

 
233,888

Effect of dilutive securities — stock options
 
7,493

 
10,938

Weighted average common and dilutive potential common shares outstanding
 
238,662

 
244,826


There were no material adjustments to net income required in calculating diluted net income per share. Excluded from the dilutive earnings per share calculation were 50,000 and 35,000 options to purchase the Company’s common stock for the three months ended October 31, 2019 and 2018, respectively, because their inclusion would have been anti-dilutive.
NOTE 8 – Stock-based Compensation
The Company recognizes compensation expense for stock option awards on a straight-line basis over the requisite service period of the award. The following is a summary of activity for the Company’s stock options for the three months ended October 31, 2019:
(In thousands, except per share and term data)
 
Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (In years)
 
Aggregate Intrinsic Value
Outstanding as of July 31, 2019
 
14,552

 
$
26.29

 
6.04
 
$
745,592

Exercises
 
(4,710
)
 
17.81

 
 
 
 
Outstanding as of October 31, 2019
 
9,842

 
$
30.35

 
6.57
 
$
514,578

Exercisable as of October 31, 2019
 
6,051

 
$
21.95

 
5.56
 
$
367,269


The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock. The number of options that were in-the-money was 9,841,658 at October 31, 2019.
The Company recognizes compensation expense for restricted stock awards on a straight-line basis over the requisite service period of the award. The following is a summary of activity for the Company’s restricted stock for the three months ended October 31, 2019:
(In thousands, except per share data)
 
Restricted Shares
 
Weighted Average Grant Date Fair Value
Outstanding as of July 31, 2019
 
134

 
$
56.62

Grants of restricted stock
 
69

 
82.33

Forfeited restricted stock
 
(1
)
 
50.22

Outstanding as of October 31, 2019
 
202

 
$
65.34



17


The table below sets forth the stock-based compensation recognized by the Company for stock options and restricted stock awards:
 
 
Three Months Ended October 31,
(In thousands)
 
2019
 
2018
General and administrative
 
$
4,441

 
$
4,989

Yard operations
 
1,092

 
1,032

Total stock-based compensation
 
$
5,533

 
$
6,021


In accordance with ASC 718, Compensation – Stock Compensation, the Company made an estimate of expected forfeitures and recognized compensation cost only for those equity awards expected to vest.
NOTE 9 – Stock Repurchases
On September 22, 2011, the Company’s Board of Directors approved an 80 million share increase in the stock repurchase program, bringing the total current authorization to 196 million shares. The repurchases may be effected through solicited or unsolicited transactions in the open market or in privately negotiated transactions. No time limit has been placed on the duration of the stock repurchase program. Subject to applicable securities laws, such repurchases will be made at such times and in such amounts as the Company deems appropriate and may be discontinued at any time. The Company did not repurchase any shares of its common stock under the program during the three months ended October 31, 2019. During fiscal 2019, the Company repurchased 7,635,596 shares of its common stock under the program at a weighted average price of $47.81 per share totaling $365.0 million. As of October 31, 2019, 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. The Company remitted $101.3 million for the three months ended October 31, 2019, to the proper taxing authorities in satisfaction of the employees’ statutory withholding requirements.
The exercised stock options, utilizing a cashless exercise, are summarized in the following table:
Period
 
Options Exercised
 
Weighted Average Exercise Price
 
Shares Net Settled for Exercise
 
Shares Withheld for Taxes(1)
 
Net Shares to Employees
 
Weighted Average Share Price for Withholding
 
Employee Stock-Based Tax Withholding (in 000s)
FY 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 the Company’s stock repurchase program.
NOTE 10 – Income Taxes
The Company applies the provisions of the accounting standard for uncertain tax positions to its income taxes. For benefits to be realized, a tax position must be more likely than not to be sustained upon examination. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
The Company files income tax returns in the U.S. federal jurisdiction, various states and foreign jurisdictions. The Company is currently under examination by certain taxing authorities in the U.S. for fiscal years between 2014 and 2018. At this time, the Company does not believe that the outcome of any examination will have a material impact on the Company’s consolidated results of operations and financial position.
The Company’s effective income tax rates were (8.0)% and 23.3% for the three months ended October 31, 2019 and 2018, respectively. The effective tax rates in the current and prior year were impacted from the result of recognizing excess tax benefits from the exercise of employee stock options of $62.4 million and $0.2 million for the three months ended October 31, 2019 and 2018, respectively.
NOTE 11 – Recent Accounting Pronouncements
Pending
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350). ASU 2017-04 amends the requirement that entities compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, entities should perform their annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment if the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 is effective for annual periods beginning after December 15, 2019. The Company’s adoption of ASU 2017-04 will not have a material impact on the Company’s consolidated results of operations and financial position.

18


In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). ASU 2016-13 requires entities to use a current lifetime expected credit loss methodology to measure impairments of certain financial assets. Using this methodology will result in earlier recognition of losses than under the current incurred loss approach, which requires waiting to recognize a loss until it is probable of having been incurred. There are other provisions within the standard that affect how impairments of other financial assets may be recorded and presented, and that expand disclosures. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, and must be applied on a modified retrospective basis. The Company is continuing its assessment, which may identify additional impacts ASU 2016-13 may have on the Company’s consolidated results of operations, financial position, and related disclosures.
Adopted
In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The current standard, ASC Topic 740 - Income Taxes, requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. This includes the tax effects of items in accumulated other comprehensive income ("AOCI") that were originally recognized in other comprehensive income, subsequently creating stranded tax effects. ASU 2018-02 allows a reclassification from AOCI to retained earnings for stranded tax effects specifically resulting from the U.S. federal government's recently enacted tax bill, the Tax Cuts and Jobs Act. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those periods. Early adoption is permitted. The adoption of ASU 2018-02 did not result in a reclassification from AOCI to retained earnings and did not have an impact on the Company’s consolidated results of operations, financial position or cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), that supersedes all existing guidance on accounting for leases in ASC Topic 840. ASU 2016-02 is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. ASU 2016-02 will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income. ASU 2016-02 is effective for annual and interim periods within those annual reporting periods beginning after December 15, 2018 and adoption is to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical expedients. Most of the Company’s operating lease commitments are subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in a significant increase in the assets and liabilities on the Company’s consolidated balance sheets. The Company implemented the policy elections and practical expedients as part of adopting ASU 2016-02 included: (i) excluding from the balance sheet leases with terms that are less than one year; (ii) for agreements that contain both lease and non-lease components, combining these components together and accounting for them as a single lease; (iii) the package of practical expedients, which allowed the Company to avoid reassessing contracts that commenced prior to adoption that were properly evaluated under legacy GAAP; and (iv) the policy election that eliminated the need for adjusting prior period comparable financial statements prepared under legacy lease accounting guidance. The adoption of ASU 2016-02 resulted in the recording of a right-of-use asset of and a lease liability in the first quarter of fiscal 2020, as a result of the application of the standard and did not have a material impact to the Company’s consolidated results of operations. See Note 4 – Leases for additional disclosures as a result of the adoption of the standard.

19


NOTE 12 – Legal Proceedings
The Company is subject to threats of litigation and is involved in actual litigation and damage claims arising in the ordinary course of business, such as actions related to injuries, property damage, contract disputes, and handling or disposal of vehicles. There are no material pending legal proceedings to which the Company is a party, or with respect to which any of the Company’s property is subject.
The Company provides for costs relating to matters when a loss is probable and the amount can be reasonably estimated. The effect of the outcome of any such matters on the Company’s future consolidated results of operations and cash flows cannot be predicted because any such effect depends on future results of operations and the amount and timing of the resolution of any such matters. The Company believes that any ultimate liability would not have a material effect on its consolidated results of operations, financial position or cash flows. However, the amount of the liabilities associated with claims, if any, cannot be determined with certainty. The Company maintains insurance which may or may not provide coverage for claims made against the Company. There is no assurance that there will be insurance coverage available when and if needed. Additionally, the insurance that the Company carries requires that the Company pay for costs and/or claims exposure up to the amount of the insurance deductibles.
NOTE 13 – Segments and Other Geographic Reporting
The Company’s U.S. and International regions are considered two separate operating segments and are disclosed as two reportable segments. The segments represent geographic areas and reflect how the chief operating decision maker allocates resources and measures results, including total revenues, operating income and income before income taxes. Intercompany income (expense) is primarily related to charges for services provided by the U.S. segment.
The following table presents financial information by segment:
 
 
Three Months Ended October 31, 2019
 
Three Months Ended October 31, 2018
(In thousands)
 
United States
 
International
 
Total
 
United States
 
International
 
Total
Service revenues
 
$
430,803

 
$
57,053

 
$
487,856

 
$
343,573

 
$
51,233

 
$
394,806

Vehicle sales
 
33,361

 
33,207

 
66,568

 
27,636

 
38,926

 
66,562

Total service revenues and vehicle sales
 
464,164

 
90,260

 
554,424

 
371,209

 
90,159

 
461,368

Yard operations
 
204,830

 
35,961

 
240,791

 
177,642

 
30,052

 
207,694

Cost of vehicle sales
 
31,072

 
27,692

 
58,764

 
25,943

 
31,813

 
57,756

General and administrative
 
39,212

 
10,266

 
49,478

 
37,332

 
7,146

 
44,478

Operating income
 
$
189,050

 
$
16,341

 
$
205,391

 
$
130,292

 
$
21,148

 
$
151,440

 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
20,567

 
$
2,447

 
$
23,014

 
$
19,392

 
$
2,477

 
$
21,869

Capital expenditures
 
113,266

 
18,527

 
131,793

 
35,253

 
27,083

 
62,336

 
 
October 31, 2019
 
July 31, 2019
(In thousands)
 
United States
 
International
 
Total
 
United States
 
International
 
Total
Total assets
 
$
2,322,493

 
$
533,446

 
$
2,855,939

 
$
2,094,592

 
$
453,025

 
$
2,547,617

Goodwill
 
256,998

 
80,181

 
337,179

 
256,998

 
76,323

 
333,321



20


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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). All statements other than statements of historical facts are statements that could be deemed forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Form 10-Q involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. These forward-looking statements are made in reliance upon the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These factors include those listed in Part II, Item 1A. under the caption entitled “Risk Factors” in this Form 10-Q and those discussed elsewhere in this Form 10-Q. Unless the context otherwise requires, references in this Form 10-Q to “Copart,” the “Company,” “we,” “us,” or “our” refer to Copart, Inc. We encourage investors to review these factors carefully together with the other matters referred to herein, as well as in the other documents we file with the Securities and Exchange Commission (the SEC). We may from time to time make additional written and oral forward-looking statements, including statements contained in our filings with the SEC. We do not undertake to update any forward-looking statement that may be made from time to time by or on behalf of us.
Although we believe that, based on information currently available to us and our management, the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements.
Overview
We are a leading provider of online auctions and vehicle remarketing services with operations in the United States (“U.S.”), Canada, the United Kingdom (“U.K.”), Brazil, the Republic of Ireland, Germany, Finland, the United Arab Emirates (“U.A.E.”), Oman, Bahrain, and Spain.
Our goals are to generate sustainable profits for our stockholders, while also providing environmental and social benefits for the world around us. With respect to our environmental stewardship, we believe our business is a critical enabler for the global re-use and recycling of vehicles, parts and raw materials. Many of the cars we process and remarket are subsequently restored to drivable condition, reducing the new vehicle manufacturing burden the world would otherwise face. Many of our cars are purchased by dismantlers, who recycle and refurbish parts for vehicle repairs, again reducing new and aftermarket parts manufacturing. And finally, some of our vehicles are returned to their raw material inputs through scrapping, reducing the need for further de novo resource extraction. In each case, our business has reduced the carbon and other environmental footprint of the global transportation industry. Beyond our environmental stewardship, we also support the world’s communities in two important ways. First, we believe that we contribute to economic development and well-being by enabling more affordable access to mobility around the world. For example, many of the automobiles sold through our auction platform are purchased for use in developing countries where affordable transportation is a critical enabler of education, health care, and well-being more generally. In addition, because of the special role we play in responding to catastrophic weather events, we believe we contribute to disaster recovery and resilience in the communities we serve. For example, we mobilized our people, entered into emergency leases, and engaged with a multitude of service providers to timely retrieve, store, and remarket tens of thousands of flood-damaged vehicles in the Houston, Texas metropolitan area in the wake of Hurricane Harvey in the summer of 2017.
We provide vehicle sellers with a full range of services to process and sell vehicles primarily over the internet through our Virtual Bidding Third Generation internet auction-style sales technology, which we refer to as VB3. Vehicle sellers consist primarily of insurance companies, but also include banks, finance companies, charities, fleet operators, dealers and vehicles sourced directly from individual owners. We sell the vehicles principally to licensed vehicle dismantlers, rebuilders, repair licensees, used vehicle dealers and exporters and, at certain locations, to the general public. The majority of the vehicles sold on behalf of insurance companies are either damaged vehicles deemed a total loss; not economically repairable by the insurance companies; or are recovered stolen vehicles for which an insurance settlement with the vehicle owner has already been made. We offer vehicle sellers a full range of services that help expedite each stage of the vehicle sales process, minimize administrative and processing costs, and maximize the ultimate sales price through the online auction process.
In the U.S., Canada, Brazil, the Republic of Ireland, Finland, the U.A.E., Oman, and Bahrain, we sell vehicles primarily as an agent and derive revenue primarily from auction and auction related sales transaction fees charged for vehicle remarketing services as well as fees for services subsequent to the auction, such as delivery and storage. In the U.K., Germany, and Spain, we operate both as an agent and on a principal basis, in some cases purchasing salvage vehicles outright and reselling the vehicles for our own account. In Germany and Spain, we also derive revenue from listing vehicles on behalf of insurance companies and insurance experts to determine the vehicle’s residual value and/or to facilitate a sale for the insured.

21


We monitor and analyze a number of key financial performance indicators in order to manage our business and evaluate our financial and operating performance. Such indicators include:
Service and Vehicle Sales Revenue: Our service revenue consists of auction and auction related sales transaction fees charged for vehicle remarketing services. These auction and auction related services may include a combination of vehicle purchasing fees, vehicle listing fees, and vehicle selling fees that can be based on a predetermined percentage of the vehicle sales price, tiered vehicle sales price driven fees, or at a fixed fee based on the sale of each vehicle regardless of the selling price of the vehicle; transportation fees for the cost of transporting the vehicle to or from our facility; title processing and preparation fees; vehicle storage fees; bidding fees; and vehicle loading fees. These fees are recognized as net revenue (not gross vehicle selling price) at the time of auction in the amount of such fees charged. Purchased vehicle revenue includes the gross sales price of the vehicles which we have purchased or are otherwise considered to own. We have certain contracts with insurance companies, primarily in the U.K., in which we act as a principal, purchasing vehicles and reselling them for our own account. We also purchase vehicles in the open market, primarily from individuals, and resell them for our own account.
Our revenue is impacted by several factors, including total loss frequency and the average vehicle auction selling price, as a significant amount of our service revenue is associated in some manner with the ultimate selling price of the vehicle. Vehicle auction selling prices are driven primarily by: (i) domestic and market demand for rebuildable, drivable vehicles; (ii) used car pricing, which we also believe has an impact on total loss frequency; (iii) end market demand for recycled and refurbished parts as reflected in demand from dismantlers; (iv) the mix of cars sold; (v) changes in the U.S. dollar exchange rate to foreign currencies, which we believe has an impact on auction participation by international buyers; and (vi) changes in commodity prices, particularly the per ton price for crushed car bodies, as we believe this has an impact on the ultimate selling price of vehicles sold for scrap and vehicles sold for dismantling. We cannot specifically quantify the financial impact that commodity pricing, used car pricing, and product sales mix has on the selling price of vehicles, our service revenues or financial results. Total loss frequency is the percentage of cars involved in accidents that insurance companies salvage rather than repair and is driven by the relationship between repair costs, used car values, and auction returns. Over the last several years, we believe there has been an increase in overall growth in the salvage market driven by an increase in total loss frequency. The increase in total loss frequency may have been driven by the decline in used car values relative to repair costs, which we believe are generally trending upward. Conversely, increases in used car prices, such as occurred during the most recent recession, may decrease total loss frequency and adversely affect our growth rate. Used car values are determined by many factors, including used car supply, which is tied directly to new car sales, and the average age of cars on the road. The average age of cars on the road continued to increase, growing from 9.6 years in 2002 to 11.8 years in 2019. The factors that can influence repair costs, used car pricing, and auction returns are many and varied and we cannot predict their movements. Accordingly, we cannot predict future trends in total loss frequency.
Operating Costs and Expenses: Yard operations expenses consist primarily of operating personnel (which includes yard management, clerical and yard employees), rent, contract vehicle transportation, insurance, fuel, equipment maintenance and repair, and costs of vehicles sold under the purchase contracts. General and administrative expenses consist primarily of executive management, accounting, data processing, sales personnel, human resources, professional fees, information technology, and marketing expenses.
Other Income and Expense: Other income primarily includes income from the rental of certain real property, foreign exchange rate gains and losses, and gains and losses from the disposal of assets, which will fluctuate based on the nature of these activities each period. Other expense consists primarily of interest expense on long-term debt. See Notes to Unaudited Consolidated Financial Statements, Note 3 – Long-Term Debt.
Liquidity and Cash Flows: Our primary source of working capital is cash operating results and debt financing. The primary source of our liquidity is our cash and cash equivalents and Revolving Loan Facility. The primary factors affecting cash operating results are: (i) seasonality; (ii) market wins and losses; (iii) supplier mix; (iv) accident frequency; (v) total loss frequency; (vi) increased volume from our existing suppliers; (vii) commodity pricing; (viii) used car pricing; (ix) foreign currency exchange rates; (x) product mix; (xi) contract mix to the extent applicable; and (xii) our capital expenditures. These factors are further discussed in the Results of Operations and Risk Factors sections of this Quarterly Report on Form 10-Q.
Potential internal sources of additional working capital 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 is the issuance of additional debt with new lenders and equity. However, we cannot predict if these sources will be available in the future or on commercially acceptable terms.

22


Acquisitions and New Operations
As part of our overall expansion strategy of offering integrated services to vehicle sellers, we anticipate acquiring and developing facilities in new regions, as well as the regions currently served by our facilities. We believe that these acquisitions and openings will strengthen our coverage, as we have facilities located in the U.S., Canada, the U.K., Brazil, the Republic of Ireland, Germany, Finland, the U.A.E., Oman, Bahrain, and Spain with the intention of providing national coverage for our sellers. All of these acquisitions have been accounted for using the purchase method of accounting.
The following tables set forth operational facilities that we have opened and began operations from August 1, 2018 through October 31, 2019:
United States Locations
 
Date
Spartanburg, South Carolina
 
August 2018
Madison, Wisconsin
 
September 2018
Harleyville, South Carolina
 
January 2019
Macon, Georgia
 
January 2019
Mocksville, North Carolina
 
January 2019
Antelope, California
 
January 2019
Sacramento, California
 
March 2019
Fredericksburg, Virginia
 
April 2019
West Mifflin, Pennsylvania
 
May 2019
Hartford, Connecticut
 
July 2019
Buffalo, New York
 
July 2019
International Locations
 
Geographic Service Area
 
Date
Curitiba, Paraná
 
Brazil
 
September 2018
Mannheim, Rhineland-Palatinate
 
Germany
 
October 2018
Stuttgart, Baden-Württemberg
 
Germany
 
November 2018
Hessen, Frankfurt
 
Germany
 
November 2018
Schleswig-Holstein (Hamburg)
 
Germany
 
November 2018
Furth, Bavaria (Nuremberg)
 
Germany
 
November 2018
Massen, Brandenburg (Berlin)
 
Germany
 
November 2018
Friesack, Brandenburg (Berlin)
 
Germany
 
December 2018
The following table sets forth operational facilities obtained through business acquisitions from August 1, 2018 through October 31, 2019:
Locations
 
Geographic Service Area
 
Date
Greenville, Kentucky
 
United States
 
March 2019
The period-to-period comparability of our consolidated operating results and financial position is affected by business acquisitions, new openings, weather and product introductions during such periods.
In addition to growth through business acquisitions, we seek to increase revenues and profitability by, among other things, (i) acquiring and developing additional vehicle storage facilities in key markets; (ii) pursuing national and regional vehicle seller agreements; (iii) increasing our service offerings; and (iv) expanding the application of VB3 into new markets. In addition, we implement our pricing structure and auction procedures, and attempt to introduce cost efficiencies at each of our acquired facilities by implementing our operational procedures, integrating our management information systems, and redeploying personnel, when necessary.

23


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 months ended October 31, 2019 and 2018:
 
 
Three Months Ended October 31,
 
 
2019
 
2018
Service revenues and vehicle sales:
 
 
 
 
Service revenues
 
88
 %
 
86
 %
Vehicle sales
 
12
 %
 
14
 %
Total service revenues and vehicle sales
 
100
 %
 
100
 %
 
 
 
 
 
Operating expenses:
 
 
 
 
Yard operations
 
43
 %
 
45
 %
Cost of vehicle sales
 
11
 %
 
12
 %
General and administrative
 
9
 %
 
10
 %
Total operating expenses
 
63
 %
 
67
 %
Operating income
 
37
 %
 
33
 %
Other expense
 
(1
)%
 
(1
)%
Income before income taxes
 
36
 %
 
32
 %
Income taxes
 
(3
)%
 
7
 %
Net income
 
39
 %
 
25
 %
Comparison of the Three Months Ended October 31, 2019 and 2018
The following table presents a comparison of service revenues for the three months ended October 31, 2019 and 2018:
 
 
 
Three Months Ended October 31,
(In thousands)
 
2019
 
2018
 
Change
 
% Change
Service revenues
 
 
 
 
 
 
 
 
 
United States
 
$
430,803

 
$
343,573

 
$
87,230

 
25.4
%
 
International
 
57,053

 
51,233

 
5,820

 
11.4
%
 
Total service revenues
 
$
487,856

 
$
394,806

 
$
93,050

 
23.6
%
Service Revenues. The increase in service revenues during the three months ended October 31, 2019 of $93.1 million, or 23.6%, as compared to the same period last year resulted from (i) an increase in the U.S. of $87.2 million and (ii) an increase in International of $5.8 million. The growth in the U.S. was driven primarily by (i) increased volume and (ii) an increase in revenue per car due to higher average auction selling prices, which we believe is due to a change in the mix of vehicles sold. The increase in volume in the U.S. was derived from (i) growth in the number of units sold from new and expanded contracts with insurance companies, and (ii) growth from existing suppliers, driven by what we believe was an increase in total loss frequency. Excluding the detrimental impact of $2.3 million due to changes in foreign currency exchange rates, primarily from the change in the British pound and Brazilian real to U.S. dollar exchange rates, the growth in International of $8.1 million was driven primarily by increased volume and higher average auction selling prices.
The following table presents a comparison of vehicle sales for the three months ended October 31, 2019 and 2018:
 
 
 
Three Months Ended October 31,
(In thousands)
 
2019
 
2018
 
Change
 
% Change
Vehicle sales
 
 
 
 
 
 
 
 
 
United States
 
$
33,361

 
$
27,636

 
$
5,725

 
20.7
 %
 
International
 
33,207

 
38,926

 
(5,719
)
 
(14.7
)%
 
Total vehicle sales
 
$
66,568

 
$
66,562

 
$
6

 
 %

24


Vehicle Sales. Vehicle sales for the three months ended October 31, 2019 remained unchanged, as compared to the same period last year and resulted from (i) an increase in the U.S. of $5.7 million, and offset by (ii) a decrease in International of $5.7 million. The increase in the U.S. was primarily the result of increased volume and higher average auction selling prices, which we believe was due to a change in the mix of vehicles sold and higher commodity prices. Excluding a detrimental impact of $1.5 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 $4.2 million was primarily the result of decreased volume driven by contractual shift from purchase contracts to fee based service contracts and a change in mix of vehicles sold.
The following table presents a comparison of yard operations expenses for the three months ended October 31, 2019 and 2018:
 
 
 
Three Months Ended October 31,
(In thousands)
 
2019
 
2018
 
Change
 
% Change
Yard operations expenses
 
 
 
 
 
 
 
 
 
United States
 
$
204,830

 
$
177,642

 
$
27,188

 
15.3
 %
 
International
 
35,961

 
30,052

 
5,909

 
19.7
 %
 
Total yard operations expenses
 
$
240,791

 
$
207,694

 
$
33,097

 
15.9
 %
 
 
 
 
 
 
 
 
 
 
Yard operations expenses, excluding depreciation and amortization
 
 
 
 
 
 
 
 
 
United States
 
$
189,933

 
$
162,678

 
$
27,255

 
16.8
 %
 
International
 
34,038

 
27,831

 
6,207

 
22.3
 %
 
 
 
 
 
 
 
 
 
 
Yard depreciation and amortization
 
 
 
 
 
 
 
 
 
United States
 
$
14,897

 
$
14,964

 
$
(67
)
 
(0.4
)%
 
International
 
1,923

 
2,221

 
(298
)
 
(13.4
)%
Yard Operations Expenses. The increase in yard operations expense for the three months ended October 31, 2019 of $33.1 million, or 15.9%, as compared to the same period last year resulted from (i) an increase in the U.S. of $27.2 million and (ii) an increase in International of $5.9 million. The increase in the cost to process each car in the same period last year in the U.S. relates primarily from growth in volume and an increase in the cost to process each car. The increase in International was primarily from an increase in the cost to process each car, growth in volume, and partially offset by the beneficial impact of $1.3 million due to changes in foreign currency exchange rates, primarily from the change in the British pound and European Union euro to U.S. dollar exchange rate. Included in yard operations expenses were depreciation and amortization expenses. The decrease in yard operations depreciation and amortization expenses resulted primarily from intangible assets becoming fully amortized.
The following table presents a comparison of cost of vehicle sales for the three months ended October 31, 2019 and 2018:
 
 
 
Three Months Ended October 31,
(In thousands)
 
2019
 
2018
 
Change
 
% Change
Cost of vehicle sales
 
 
 
 
 
 
 
 
 
United States
 
$
31,072

 
$
25,943

 
$
5,129

 
19.8
 %
 
International
 
27,692

 
31,813

 
(4,121
)
 
(13.0
)%
 
Total cost of vehicle sales
 
$
58,764

 
$
57,756

 
$
1,008

 
1.7
 %
Cost of Vehicle Sales. The increase in cost of vehicle sales for the three months ended October 31, 2019 of $1.0 million, or 1.7%, as compared to the same period last year resulted from (i) an increase in the U.S. of $5.1 million, and partially offset by (ii) a decrease in International of $4.1 million. The increase in the U.S. was primarily the result of increased volume and higher average purchase prices, which we believe was due to a change in the mix of vehicles sold and higher commodity prices. Excluding the beneficial impact of $1.3 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 decrease in International of $2.8 million was primarily the result of decreased volume driven by contractual shifts from purchase contracts to fee based service contracts and a change in the mix of vehicles sold.

25


The following table presents a comparison of general and administrative expenses for the three months ended October 31, 2019 and 2018:
 
 
 
Three Months Ended October 31,
(In thousands)
 
2019
 
2018
 
Change
 
% Change
General and administrative expenses
 
 
 
 
 
 
 
 
 
United States
 
$
39,212

 
$
37,332

 
$
1,880

 
5.0
%
 
International
 
10,266

 
7,146

 
3,120

 
43.7
%
 
Total general and administrative expenses
 
$
49,478

 
$
44,478

 
$
5,000

 
11.2
%
 
 
 
 
 
 
 
 
 
 
General and administrative expenses, excluding depreciation and amortization
 
 
 
 
 
 
 
 
 
United States
 
$
33,542

 
$
32,904

 
$
638

 
1.9
%
 
International
 
9,742

 
6,890

 
2,852

 
41.4
%
 
 
 
 
 
 
 
 
 
 
General and administrative depreciation and amortization
 
 
 
 
 
 
 
 
 
United States
 
$
5,670

 
$
4,428

 
$
1,242

 
28.0
%
 
International
 
524

 
256

 
268

 
104.7
%
General and Administrative Expenses. The increase in general and administrative expenses for the three months ended October 31, 2019 of $5.0 million, or 11.2%, as compared to the same period last year resulted from (i) an increase in International of $3.1 million and (ii) an increase in the U.S. of $1.9 million. Excluding depreciation and amortization, the increase in International of $2.9 million resulted primarily from the expansion of our European businesses and the increase in the U.S. of $0.6 million resulted primarily from supporting our continued growth initiatives, as well as an increase in payroll taxes from the exercise of employee stock options, partially offset by higher capitalizable software development, decreases in stock compensation, and decreases in legal costs. The increase in depreciation and amortization expenses for the three months ended October 31, 2019 as compared to the same period last year resulted primarily from depreciating certain corporate and technology assets in the U.S.
The following table summarizes total other expense and income taxes for the three months ended October 31, 2019 and 2018:
 
 
Three Months Ended October 31,
(In thousands)
 
2019
 
2018
 
Change
 
% Change
Total other expense
 
$
(3,309
)
 
$
(2,654
)
 
$
(655
)
 
24.7
 %
Income taxes
 
(16,098
)
 
34,703

 
(50,801
)
 
(146.4
)%
Other Expense. The increase in total other expense for the three months ended October 31, 2019 of $0.7 million as compared to the same period last year was primarily due to losses of unconsolidated affiliates and partially offset by lower gains on the disposal of certain non-operating assets in the prior year.
Income Taxes. Our effective income tax rates were (8.0)%, and 23.3% for the three months ended October 31, 2019 and 2018, respectively. The effective tax rates in the current and prior year were impacted from the result of recognizing excess tax benefits from the exercise of employee stock options of $62.4 million and $0.2 million for the three months ended October 31, 2019 and 2018, respectively. See Note 10 – Income Taxes.

26


Liquidity and Capital Resources
The following table presents a comparison of key components of our liquidity and capital resources at October 31, 2019 and July 31, 2019 and for the three months ended October 31, 2019 and 2018, respectively, excluding additional funds available to us through our Revolving Loan Facility:
(In thousands)
 
October 31, 2019
 
July 31, 2019
 
Change
 
% Change
Cash and cash equivalents
 
$
181,102

 
$
186,319

 
$
(5,217
)
 
(2.8
)%
Working capital
 
420,758

 
405,163

 
15,595

 
3.8
 %
 
 
Three Months Ended October 31,
(In thousands)
 
2019
 
2018
 
Change
 
% Change
Operating cash flows
 
$
212,458

 
$
107,683

 
$
104,775

 
97.3
 %
Investing cash flows
 
(131,510
)
 
(61,526
)
 
(69,984
)
 
(113.7
)%
Financing cash flows
 
(88,734
)
 
1,227

 
(89,961
)
 
(7,331.8
)%
 
 
 
 
 
 
 
 
 
Capital expenditures
 
$
(131,793
)
 
$
(62,336
)
 
$
(69,457
)
 
(111.4
)%
Cash and cash equivalents decreased and working capital increased at October 31, 2019 as compared to July 31, 2019. Cash and cash equivalents decreased primarily due to payments for employee stock-based tax withholdings and capital expenditures not fully offset by cash generated from operations. Working capital increased primarily from certain income tax benefits related to stock option exercises and timing of cash receipts partially offset by our operating lease liabilities and timing of cash payments. Cash equivalents consisted of bank deposits, domestic certificates of deposit, and funds invested in money market accounts, which bear interest at variable rates.
Historically, we have financed our growth through cash generated from operations, public offerings of common stock, equity issued in conjunction with certain acquisitions and debt financing. Our primary source of cash generated by operations is from the collection of service fees and reimbursable advances from the proceeds of vehicle sales. We expect to continue to use cash flows from operations to finance our working capital needs and to develop and grow our business. In addition to our stock repurchase program, we are considering a variety of alternative potential uses for our remaining cash balances and our cash flows from operations. These alternative potential uses include additional stock repurchases, repayments of long-term debt, the payment of dividends, and acquisitions. For further detail, see Notes to Unaudited Consolidated Financial Statements, Note 3 – Long-Term Debt and Note 9 – Stock Repurchases and under the subheadings “Credit Agreement” and “Note Purchase Agreement” below.
Our business is seasonal as inclement weather during the winter months increases the frequency of accidents and consequently, the number of cars involved in accidents which the insurance companies salvage rather than repair. During the winter months, most of our facilities process 10% to 30% more vehicles than at other times of the year. This increased volume requires the increased use of our cash to pay out advances and handling costs of the additional business.
We believe that our currently available cash and cash equivalents and cash generated from operations will be sufficient to satisfy our operating and working capital requirements for at least the next 12 months. We expect to acquire or develop additional locations and expand some of our current facilities in the foreseeable future. We may be required to raise additional cash through drawdowns on our Revolving Loan Facility or issuance of additional equity to fund this expansion. Although the timing and magnitude of growth through expansion and acquisitions are not predictable, the opening of new greenfield yards is contingent upon our ability to locate property that (i) is in an area in which we have a need for more capacity; (ii) has adequate size given the capacity needs; (iii) has the appropriate shape and topography for our operations; (iv) is reasonably close to a major road or highway; and (v) most importantly, has the appropriate zoning for our business. Costs to develop a new yard can range from $3.0 to $50.0 million, depending on size, location and developmental infrastructure requirements.
As of October 31, 2019, $93.3 million of the $181.1 million of cash and cash equivalents was held by our foreign subsidiaries. If these funds are needed for our operations in the U.S., the repatriation of these funds could still be subject to the foreign withholding tax following the U.S. Tax Reform. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not require repatriation to fund our U.S. operations.
Net cash provided by operating activities increased for the three months ended October 31, 2019 as compared to the same period in 2018 due to improved cash operating results from an increase in service revenues, partially offset by an increase in yard operations and general and administrative expenses, and changes in operating assets and liabilities. The change in operating assets and liabilities was primarily the result of a an increase of income taxes receivable of $44.0 million primarily related to excess tax benefits from stock option exercises partially offset by an increase in funds used to pay accounts payable of $37.2 million.

27


Net cash used in investing activities increased for the three months ended October 31, 2019 as compared to the same period in 2018 due primarily to increased capital expenditures. Our capital expenditures are primarily related to lease buyouts of certain facilities, acquiring land, opening and improving facilities, capitalized software development costs for new software for internal use and major software enhancements, and acquiring yard equipment. We continue to develop, expand and invest in new and existing facilities and standardize the appearance of existing locations.
Net cash used in financing activities increased for the three months ended October 31, 2019 as compared to the same period in 2018 due primarily to payments for employee stock based tax withholdings, as discussed in further detail under the subheading "Stock Repurchases" partially offset by an increase 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”), which was fully drawn at closing. The Term Loan amortized $18.8 million per quarter.
On March 15, 2016, we entered into a First Amendment to Credit Agreement (the “Amendment to Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent and Bank of America, N.A. The Amendment to Credit Agreement amended certain terms of the Credit Agreement, dated as of December 3, 2014. The Amendment to Credit Agreement provided for (a) an increase in the secured revolving credit commitments by $50.0 million, bringing the aggregate principal amount of the revolving credit commitments under the Credit Agreement to $350.0 million, (b) a new secured term loan (the “Incremental Term Loan”) in the aggregate principal amount of $93.8 million having a maturity date of March 15, 2021, and (c) an extension of the termination date of the Revolving Loan Facility and the maturity date of the Term Loan from December 3, 2019 to March 15, 2021. The Amendment to Credit Agreement extended the amortization period for the Term Loan and decreased the quarterly amortization payments for that loan to $7.5 million per quarter. The Amendment to Credit Agreement additionally reduced the pricing levels under the Credit Agreement to a range of 0.15% to 0.30% in the case of the commitment fee, 1.125% to 2.0% in the case of the applicable margin for LIBOR loans, and 0.125% to 1.0% in the case of the applicable margin for base rate loans, based on our consolidated total net leverage ratio during the preceding fiscal quarter. We borrowed the entire $93.8 million principal amount of the Incremental Term Loan concurrent with the closing of the Amendment to Credit Agreement.
On