COPART: Management report and analysis of the financial situation and operating results (form 10-K)
ATTENTION REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the fiscal year ended
July 31, 2021, or this Form 10-K, including the information incorporated by reference herein, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including forward-looking statements concerning the potential impact of the COVID-19 pandemic on our business, operations, and operating results. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expect," "plan," "intend," "forecast," "anticipate," "believe," "estimate," "predict," "potential," "continue" or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Form 10-K involve known and unknown risks, uncertainties and situations that may cause our or our industry's actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. These forward-looking statements are made in reliance upon the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These factors include those listed in Part I, Item 1A under the caption entitled "Risk Factors" in this Form 10-K and those discussed elsewhere in this Form 10-K. Unless the context otherwise requires, references in this Form 10-K to "Copart," the "Company," "we," "us," or "our" refer 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. All references to numbered Notes are to specific Notes to our Consolidated Financial Statements included in this Annual Report on Form 10-K and which descriptions are incorporated into the applicable response by reference. Capitalized terms used, but not defined, in this Management's Discussion and Analysis of Financial Condition and Results of Operation ("MD&A") have the same meanings as in such Notes. Overview We are a leading provider of online auctions and vehicle remarketing services with operations 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. We are not responsible for the carbon emissions resulting from new vehicle manufacturing, governmental fuel emissions standards or vehicle use by consumers. Each vehicle that enters our business operations already exists, with whatever fuel technology and efficiency it was designed and built to have, and the substantial carbon emissions associated with the vehicle's manufacture have already occurred. However, upon our receipt of an existing vehicle, we help decrease its total environmental impact by extending its useful life and thereby avoiding the carbon emissions associated with the alternative of new vehicle and auto parts manufacturing. For example, many of the cars we process and remarket are subsequently restored to driveable condition, reducing the new vehicle manufacturing burden the world would otherwise face. Many of our cars are purchased by dismantlers, who recycle and refurbish parts for vehicle repairs, again reducing new and aftermarket parts manufacturing. And finally, some of our vehicles are returned to their raw material inputs through scrapping, reducing the need for further new resource extraction. In each of these cases, our business reduces the carbon and other environmental footprint of the global transportation industry. Beyond our environmental stewardship, we also support the world's communities in two important ways. First, we believe that we contribute to economic development and well-being by enabling more affordable access to mobility around the world. For example, many of the automobiles sold through our auction platform are purchased for use in developing countries where affordable transportation is a critical enabler of education, health care, and well-being more generally. Secondly, because of the special role we play in responding to catastrophic weather events, we believe we contribute to disaster recovery and resilience in the communities we serve. For example, we mobilized our people, entered into emergency leases, and engaged with a multitude of service providers to timely retrieve, store, and remarket tens of thousands of flood-damaged vehicles in the Houston, Texasmetropolitan area in the wake of Hurricane Harvey in the summer of 2017. 33 -------------------------------------------------------------------------------- Table of Contents We provide vehicle sellers with a full range of services to process and sell vehicles primarily over the internet through our Virtual Bidding Third Generation internet auction-style sales technology, which we refer to as VB3. Vehicle sellers consist primarily of insurance companies, but also include banks, finance companies, charities, fleet operators, dealers, vehicle rental companies, and individuals. We sell the vehicles principally to licensed vehicle dismantlers, rebuilders, repair licensees, used vehicle dealers, exporters, and to the general public. The majority of the vehicles sold on behalf of insurance companies are either damaged vehicles deemed a total loss; not economically repairable by the insurance companies; or are recovered stolen vehicles for which an insurance settlement with the vehicle owner has already been made. We offer vehicle sellers a full range of services that help expedite each stage of the vehicle sales process, minimize administrative and processing costs, and maximize the ultimate sales price through the online auction process. In 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 Spainwe 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 Germanyand 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. 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) market demand for rebuildable, driveable vehicles; (ii) used car pricing, which we also believe has an impact on total loss frequency; (iii) end market demand for recycled and refurbished parts as reflected in demand from dismantlers; (iv) the mix of cars sold; (v) changes in 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 change in used car values and repair costs, which we believe are generally trending upward. Changes in used car prices and repair costs, may impact total loss frequency and affect our growth rate. Used car values are determined by many factors, including used car supply, which is tied directly to new car sales, and the average age of cars on the road. The average age of cars on the road continued to increase, growing from 9.6 years in 2002 to 12.1 years in 2021. Repair costs are generally based on damage severity, vehicle complexity, repair parts availability, repair parts costs, labor costs, and repair shop lead times. The factors that can influence repair costs, used car pricing, and auction returns are many and varied and we cannot predict their movements. Accordingly, we cannot predict future trends in total loss frequency. Beginning in March 2020, our business and operations began to experience the impact of the worldwide COVID-19 pandemic. In materially all of our jurisdictions, we have been deemed by local authorities an essential business because our operations ensure the removal of vehicles from repair shops, impound yards, and streets and highways, enabling the critical function of road infrastructure. As a result, we have continued to operate our facilities as well as our online-only auctions, while following appropriate health and safety protocols to ensure safe working conditions for our employees as well as for our sellers, buyers, and other business partners with whom we come in contact. 34 -------------------------------------------------------------------------------- Table of Contents From a financial perspective, our operating results were adversely affected by lower processed vehicle volume, but these adverse effects were more than offset by corresponding increases in vehicle average sales prices. Although we initially saw substantial declines in vehicle assignments following the onset of the COVID-19 pandemic, which we attribute principally to reduced accident volume as miles driven dramatically declined in response to shelter-in-place orders across the globe, we have generally seen vehicle assignment volumes steadily recovering; however additional subsequent shelter-in-place orders have occasionally stalled or regressed the assignment volume commensurate with the severity and duration of such orders. We cannot predict how the pandemic will continue to develop, whether and to what extent new shelter-in-place orders will be issued, or to what extent the pandemic may have longer term unanticipated impacts on our markets, including, for example, the risk of long-term reductions in miles driven. Although we have been deemed an "essential business" in the jurisdictions in which we operate and have largely been able to continue our yard operations, we have been required to make adjustments in our business processes that may reduce efficiency or increase operating expenses, particularly if the pandemic continues over a long period of time. We adjusted, but did not make material modifications to, our operating expenses to be able to continue providing employment for our employees, service to our sellers, and process incoming vehicles for sale in future quarters. The pandemic may have an adverse effect on our future revenues, with the magnitude and timing of these effects dependent upon the extent and duration of suspended economic activity across our markets. We believe that the longer-term impact on our business will depend on potential adverse operational impacts from outbreaks of COVID-19 at any of our locations; additional outbreaks of COVID-19 in one or more of our geographic markets; a reduction in miles driven due to one or more factors relating to the COVID-19 pandemic; the relationship of supply and demand for newly manufactured vehicles, on the one hand, and used and salvage vehicles, on the other hand, due to reduced manufacturing capacity and broader supply chain disruptions during the COVID-19 pandemic and the effects of these supply and demand relationships on the average sale prices obtained at auction for the vehicles assigned to us for remarketing; further government actions in response to COVID-19 outbreaks that restrict business activity or travel; disruptions of governmental administrative operations due to COVID-19 outbreaks that adversely impact our core business activities, such as vehicle title processing; and deteriorating economic conditions generally, and the potential availability, among other things, of vaccines or treatments, none of which we can predict. For a further discussion of risks to our business and operating results arising from the pandemic, please see the section of this Annual Report on Form 10-K captioned "Risk Factors." Operating Costs and Expenses: Yard operations expenses consist primarily of operating personnel (which includes yard management, clerical, and yard employees); rent; vehicle transportation; insurance; property related taxes; fuel; equipment maintenance and repair; marketing costs directly related to the auction process; and costs of vehicles sold under the purchase contracts. General and administrative expenses consist primarily of executive management; accounting; data processing; sales personnel; professional services; marketing expenses; and system maintenance and enhancements. Other (Expense) Income: Other (expense) income consists primarily of interest expense on long-term debt, see Notes to Consolidated Financial Statements, Note 8 - Long-Term Debt; foreign exchange rate gains and losses; gains and losses from the disposal of assets, which will fluctuate based on the nature of these activities each period; and earnings from unconsolidated affiliates. Liquidity and Cash Flows: Our primary source of working capital is cash operating results and debt financing. The primary source of our liquidity is our cash and cash equivalents and Revolving Loan Facility. The primary factors affecting cash operating results are: (i) seasonality; (ii) market wins and losses; (iii) supplier mix; (iv) accident frequency; (v) total loss frequency; (vi) volume from our existing suppliers; (vii) commodity pricing; (viii) used car pricing; (ix) foreign currency exchange rates; (x) product mix; (xi) contract mix to the extent applicable; (xii) our capital expenditures; and (xiii) other macroeconomic factors such as COVID-19. These factors are further discussed in the Results of Operations and Risk Factors sections of this Annual Report on Form 10-K. Potential internal sources of additional working capital and liquidity are the sale of assets or the issuance of shares through option exercises and shares issued under our Employee Stock Purchase Plan. A potential external source of additional working capital and liquidity is the issuance of additional debt or equity. However, we cannot predict if these sources will be available in the future or on commercially acceptable terms. 35 -------------------------------------------------------------------------------- Table of Contents Acquisitions and New Operations As part of our overall expansion strategy of offering integrated services to vehicle sellers, we anticipate acquiring and developing facilities in new regions, as well as the regions currently served by our facilities. We believe that these acquisitions and openings will strengthen our coverage, as we have facilities located in the U.S., Canada, the U.K., Brazil, the Republic of Ireland, Germany, Finland, the U.A.E., Oman, Bahrain, and Spainwith the intention of providing global coverage for our sellers. All of these acquisitions have been accounted for using the purchase method of accounting.
The following tables show the operational facilities that we have opened and are now operational as of
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 Fort Wayne, Indiana February 2020 Concord, North Carolina March 2020 Salt Lake City, Utah May 2020 Redding, California August 2020 Dothan, Alabama August 2020 Jacksonville, Florida August 2020 Milwaukee, Wisconsin September 2020 Houston, Texas December 2020 Knightdale, North Carolina March 2021 Gastonia, North Carolina May 2021 Bismarck, North Dakota June 2021 Fairburn, Georgia July 2021 Dyer, Indiana July 202136
International Locations Geographic Service Area Date Curitiba, ParanÃ¡ Brazil September 2018 Mannheim, Rhineland-Palatinate Germany October 2018 Stuttgart, Baden-WÃ¼rttemberg Germany November 2018 Frankfurt, Hessen Germany November 2018 Itzehoe, Schleswig-Holstein (Hamburg) Germany November 2018 Furth, Bavaria (Nuremberg) Germany November 2018 Massen, Brandenburg (Berlin) Germany November 2018 Friesack, Brandenburg (Berlin) Germany December 2018 Niederlehme, Brandenburg (Berlin) Germany November 2019 Pilsting, Bavaria (Munich) Germany December 2019 SÃ£o Paulo, SÃ£o Paulo Brazil May 2020 BruchmÃ¼hlbach-Miesau, Rhineland-Palatinate (Mannheim) Germany February 2021 Mallorca, Balearic Islands Spain April 2021
The following table shows the operating facilities obtained through the acquisitions of companies from
Locations Geographic Service Area Date Greenville, Kentucky United States March 2019 Des Moines, Iowa United States July 2021 The period-to-period comparability of our consolidated operating results and financial position is affected by business acquisitions, new openings, weather, and product introductions during such periods. In addition to growth through business acquisitions, we seek to increase revenues and profitability by, among other things, (i) acquiring and developing additional vehicle storage facilities in key markets, including foreign markets; (ii) pursuing global, national, and regional vehicle seller agreements; (iii) increasing our service offerings; and (iv) expanding the application of VB3 into new markets. In addition, we implement our pricing structure and auction procedures, and attempt to introduce cost efficiencies at each of our acquired facilities by implementing our operational procedures, integrating our management information systems, and redeploying personnel, when necessary. 37 -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table shows certain data from our consolidated statements of income expressed as a percentage of total service revenues and vehicle sales for fiscal 2021, 2020 and 2019: Year Ended July 31, (In percentages) 2021 2020 2019 Service revenues and vehicle sales: Service revenues 85 % 88 % 86 % Vehicle sales 15 % 12 % 14 % Total service revenues and vehicle sales 100 % 100 % 100 % Operating expenses: Yard operations 37 % 44 % 43 % Cost of vehicle sales 13 % 10 % 13 % General and administrative 8 % 9 % 9 % Total operating expenses 58 % 63 % 65 % Operating income 42 % 37 % 35 % Total other expense (1) % (1) % (1) % Income before income taxes 41 % 36 % 34 % Income tax expense 6 % 4 % 5 % Net income 35 % 32 % 29 %
Comparison of closed years
The following table presents a comparison of service revenues for fiscal 2021, 2020 and 2019: Year Ended July 31, 2021 vs. 2020 2020 vs. 2019 (In thousands) 2021 2020 2019 Change % Change Change % Change Service revenues
$ 2,017,504 $ 1,714,724 $ 1,537,431 $ 302,78017.7 % $ 177,29311.5 % International 274,363 232,416 218,263 41,947 18.0 % 14,153 6.5 % Total service revenues $ 2,291,867 $ 1,947,140 $ 1,755,694 $ 344,72717.7 % $ 191,44610.9 % Service Revenues. The increase in service revenues for fiscal 2021 of $344.7 million, or 17.7% as compared to fiscal 2020 came from (i) an increase in the U.S.of $302.8 million, and (ii) an increase in International of $41.9 million. The growth in the U.S.was driven primarily by an increase in revenue per car, partially offset by a decrease in volume. The decrease in volume in the U.S.was driven by the COVID-19 pandemic, which reduced accident volume as miles driven declined. Excluding the beneficial impact of $12.0 milliondue to changes in foreign currency exchange rates, primarily from the change in the British pound and Brazilian real to U.S.dollar exchange rates, the growth in International of $29.9 millionwas driven primarily by increased revenue per car, partially offset by decreased volume driven by the COVID-19 pandemic, which reduced accident volume as miles driven decreased. The following table presents a comparison of vehicle sales for fiscal 2021, 2020 and 2019: Year Ended July 31, 2021 vs. 2020 2020 vs. 2019 (In thousands) 2021 2020 2019 Change % Change Change % Change
$ 254,568 $ 145,962 $ 119,138 $ 108,60674.4 % $ 26,82422.5 % International 146,076 112,481 167,125 33,595 29.9 % (54,644) (32.7) % Total vehicle sales $ 400,644 $ 258,443 $ 286,263 $ 142,20155.0 % $ (27,820)(9.7) % 38
-------------------------------------------------------------------------------- Table of Contents Vehicle Sales. The increase in vehicle sales for fiscal 2021 of
$142.2 million, or 55.0% as compared to fiscal 2020 came from (i) an increase in the U.S.of $108.6 millionand (ii) an increase in International of $33.6 million. The growth in the U.S.was primarily the result of (i) increased volume and (ii) higher average auction selling prices, which we believe was due to a change in the mix of vehicles sold; increased demand; and reduced supply. Excluding a beneficial impact of $10.2 milliondue to changes in foreign currency exchange rates, primarily from the change in the British pound and European Unioneuro to U.S.dollar exchange rates, the increase in International of $23.4 millionwas primarily the result of higher average auction selling prices partially offset by decreased volume driven by contractual shifts from purchase contracts to fee based service contracts and COVID-19's impact on volume, which reduced accident volume as miles driven declined. The following table presents a comparison of yard operations expense for fiscal 2021, 2020 and 2019: Year Ended July 31, 2021 vs. 2020 2020 vs. 2019 (In thousands) 2021 2020 2019 Change % Change Change % Change
Court operating costs
$ 849,037 $ 828,066 $ 751,653 $ 20,9712.5 % $ 76,41310.2 % International 154,255 144,421 136,458 9,834 6.8 % 7,963 5.8 % Total yard operations expenses $ 1,003,292 $ 972,487 $ 888,111 $ 30,8053.2 % $ 84,3769.5 % Yard operations expenses, excluding depreciation and amortization United States $ 761,021 $ 760,043 $ 697,115$ 978 0.1 % $ 62,9289.0 % International 141,354 135,445 127,829 5,909 4.4 % 7,616 6.0 %
Depreciation and amortization of yard
$ 88,016 $ 68,023 $ 54,538 $ 19,99329.4 % $ 13,48524.7 % International 12,901 8,976 8,629 3,925 43.7 % 347 4.0 % Yard Operations Expenses. The increase in yard operations expenses for fiscal 2021 of $30.8 million, or 3.2% as compared to fiscal 2020 resulted from (i) an increase in the U.S.of $21.0 million, primarily from a $20.0 millionincrease in depreciation and an increase in the cost to process each car partially offset by a decline in volume driven by the COVID-19 pandemic, which reduced accident volume as miles driven declined; and (ii) an increase in International of $9.8 millionrelated primarily from the detrimental impact of $7.6 milliondue to changes in foreign currency exchange rates, driven by changes in the British pound, Brazilian real, and European Unioneuro to U.S.dollar exchange rate; and an increase in the cost to process each car, partially offset by a decrease in volume driven by the COVID-19 pandemic. The increase in yard operations depreciation and amortization expenses resulted primarily from depreciating new and expanded facilities placed into service in the U.S.and International locations.
The following table presents a comparison of the cost of sales of vehicles for fiscal years 2021, 2020 and 2019:
Year Ended July 31, 2021 vs. 2020 2020 vs. 2019 (In thousands) 2021 2020 2019 Change % Change Change % Change
Cost of vehicle sales
$ 227,365 $ 135,095 $ 112,268 $ 92,27068.3 % $ 22,82720.3 % International 118,763 90,199 143,236 28,564 31.7 % (53,037) (37.0) % Total cost of vehicle sales $ 346,128 $ 225,294 $ 255,504 $ 120,83453.6 % $ (30,210)(11.8) % Cost of Vehicle Sales. The increase in cost of vehicle sales for fiscal 2021 of $120.8 million, or 53.6% as compared to fiscal 2020 was the result of (i) an increase in the U.S.of $92.3 millionand (ii) an increase in International of $28.6 million. The increase in the U.S.was primarily the result of (i) increased volume and (ii) higher average purchase prices, which we believe was due to a change in the mix of vehicles sold; increased demand; and reduced supply. Excluding the detrimental impact of $8.3 milliondue to changes in foreign currency exchange rates, driven by changes in the British pound and European euro to U.S.dollar exchange rate, the increase in International of $20.3 millionwas primarily the result of higher average purchase prices partially offset by decreased volume driven by contractual shifts from purchase contracts to fee based service contracts and COVID-19's impact on volume, which reduced accident volume as miles driven declined. 39 -------------------------------------------------------------------------------- Table of Contents The following table presents a comparison of general and administrative expenses for fiscal 2021, 2020 and 2019: Year Ended July 31, 2021 vs. 2020 2020 vs. 2019 (In thousands) 2021 2020 2019 Change % Change Change % Change
General and administrative expenses
$ 172,115 $ 154,346 $ 155,180 $ 17,76911.5 % $ (834)(0.5) % International 34,550 37,357 26,687 (2,807) (7.5) % 10,670 40.0 % Total general and administrative expenses $ 206,665 $ 191,703 $ 181,867 $ 14,9627.8 % $ 9,8365.4 % General and administrative expenses, excluding depreciation and amortization United States $ 152,366 $ 131,551 $ 134,452 $ 20,81515.8 % $ (2,901)(2.2) % International 33,245 35,761 25,687 (2,516) (7.0) % 10,074 39.2 % General and administrative depreciation and amortization United States $ 19,749 $ 22,795 $ 20,727 $ (3,046)(13.4) % $ 2,06810.0 % International 1,305 1,596 1,001 (291) (18.2) % 595 59.4 % General and Administrative Expenses. The increase in general and administrative expenses for fiscal 2021 of $15.0 million, or 7.8% as compared to fiscal 2020 came primarily from (i) an increase in the U.S.of $17.8 million, partially offset by (ii) a decrease in International of $2.8 million. Excluding depreciation and amortization, the decrease in International of $2.5 millionresulted primarily from the detrimental impact of $1.4 milliondue to changes in foreign currency exchange rates, primarily from the change in the British pound, Brazilian real, and European Unioneuro to U.S.dollar exchange rate and lower current period costs including decreased travel costs and the nonrecurrence of certain legal costs incurred in fiscal 2020. Excluding depreciation and amortization, the increase in the U.S.of $20.8 millionresulted primarily from increases in stock compensation and increased legal costs, partially offset by decreased payroll taxes from the exercise of employee stock options and travel costs. The decrease in depreciation and amortization expenses resulted primarily from fully depreciating certain intangible and technology assets in the U.S.and International locations.
The following table summarizes the total of other income taxes and charges for fiscal years 2021, 2020 and 2019:
Year Ended July 31, 2021 vs. 2020 2020 vs. 2019 (In thousands) 2021 2020 2019 Change % Change Change % Change Total other expenses (14,580) (15,260) (11,524) 680 4.5 % (3,736) (32.4) % Income taxes 185,351 100,932 113,258 84,419 83.6 % (12,326) (10.9) % Other Expenses. The decrease in total other expenses for fiscal 2021 of
$0.7 million, or 4.5% as compared to fiscal 2020 was primarily due to a decrease in currency losses, primarily due to the change in the British pound and Brazilian real to U.S.dollar exchange rate, lower gains on the disposal of certain non-operating assets in the current year, and lower interest income earned in the current year, partially offset by higher earnings of unconsolidated affiliates. Income Taxes. Our effective income tax rates were 16.5% and 12.6%, for fiscal 2021 and 2020, respectively. The current and prior year's effective tax rate was computed based on the U.S.federal statutory tax rate of 21.0%. The effective tax rate for fiscal year ending July 31, 2021was favorably impacted by $19.8 millionof discrete tax adjustments made in connection with finalizing our fiscal year 2020 tax return. The effective tax rate for fiscal year ending July 31, 2020was negatively impacted by $1.7 millionof discrete tax items related to amending previously filed income tax returns. The effective tax rates in the current and prior year were also impacted by the recognition of excess tax benefits from the exercise of employee stock options of $29.8 millionand $92.5 millionfor fiscal years 2021 and 2020, respectively.
Discussion of the closed financial year
For a discussion of fiscal 2020 as compared to fiscal 2019, please refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended July 31, 2020, filed with the SEC on September 28, 2020 . 40
-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources The following table presents a comparison of key components of our liquidity and capital resources for fiscal 2021, 2020 and 2019, excluding additional funds available to us through our Revolving Loan Facility: July 31, 2021 vs. 2020 2020 vs. 2019 (In thousands) 2021 2020 2019 Change % Change Change % Change Cash, cash equivalents, and restricted cash
$ 1,048,260 $ 477,718 $ 186,319 $ 570,542119.4 % $ 291,399156.4 % Working capital 1,281,580 607,715 405,163 673,865 110.9 % 202,552 50.0 % Year Ended July 31, 2021 vs. 2020 2020 vs. 2019 (In thousands) 2021 2020 2019 Change % Change Change
% Change Operating cash flows
$ 990,891 $ 917,885 $ 646,646 $ 73,0068.0 % $ 271,23941.9 % Investing cash flows (465,466) (601,208) (356,267) 135,742 22.6 % (244,941) (68.8) % Financing cash flows 40,922 (27,414) (370,304) 68,336 249.3 % 342,890 92.6 % Capital expenditures, excluding acquisitions $ (462,996) $ (591,972) $ (373,883) $ 128,97621.8 % $ (218,089)(58.3) % Acquisitions, net of cash acquired (5,000) (11,702) (745) 6,702 57.3 % (10,957) (1,470.7) % Cash, cash equivalents, and restricted cash and working capital increased $570.5 millionand $673.9 millionat July 31, 2021, respectively, as compared to July 31, 2020. Cash, cash equivalents, and restricted cash increased primarily due to cash generated from operations and proceeds from stock option exercises, partially offset by capital expenditures and payments for employee stock-based tax withholdings. Working capital increased primarily from cash generated from operations and timing of cash receipts and payments, partially offset by capital expenditures and certain income tax benefits related to stock option exercises. Cash equivalents consisted of bank deposits, certificates of deposit, U.S.Treasury Bills, and funds invested in money market accounts, which bear interest at variable rates. Historically, we have financed our growth through cash generated from operations, public offerings of common stock, equity issued in conjunction with certain acquisitions, and debt financing. Our primary source of cash generated by operations is from the collection of service fees and reimbursable advances from the proceeds of vehicle sales. We expect to continue to use cash flows from operations to finance our working capital needs and to develop and grow our business. In addition to our stock repurchase program, we are considering a variety of alternative potential uses for our remaining cash balances and our cash flows from operations. These alternative potential uses include additional stock repurchases, repayments of long-term debt, the payment of dividends, and acquisitions. For further detail, see Notes to Consolidated Financial Statements, Note 8 - Long-Term Debt and Note 11 - Stockholders' Equity and under the subheadings "Credit Agreement" and "Note Purchase Agreement" below. Our business is seasonal as inclement weather during the winter months increases the frequency of accidents and consequently, the number of cars involved in accidents which the insurance companies salvage rather than repair. During the winter months, most of our facilities process 5% to 20% more vehicles than at other times of the year. Severe weather events, including but not limited to tornadoes, floods, hurricanes, and hailstorms, can also impact our volumes. These increased volumes require the increased use of our cash to pay out advances and handling costs of the additional business.
The COVID-19 pandemic may also have an impact on our liquidity, the extent and timing of these effects depending on the extent and duration of the suspension of economic activity in our markets. The COVID-19 pandemic may impact our volume of vehicles processed and the average selling prices of corresponding vehicles.
41 -------------------------------------------------------------------------------- Table of Contents We believe that our currently available cash and cash equivalents and cash generated from operations will be sufficient to satisfy our operating and working capital requirements for the next 12 months and for the foreseeable future. We expect to acquire or develop additional locations and expand some of our current facilities in the foreseeable future. We may be required to raise additional cash through drawdowns on our Revolving Loan Facility or issuance of additional equity to fund this expansion. Although the timing and magnitude of growth through expansion and acquisitions are not predictable, the opening of new greenfield yards is contingent upon our ability to locate property that (i) is in an area in which we have a need for more capacity; (ii) has adequate size given the capacity needs; (iii) has the appropriate shape and topography for our operations; (iv) is reasonably close to a major road or highway; and (v) most importantly, has the appropriate zoning for our business. Costs to develop a new yard can range from
$3.0to $50.0 million, depending on size, location and developmental infrastructure requirements. As of July 31, 2021, $159.5 millionof the $1.0 billionof cash, cash equivalents, and restricted cash was held by our foreign subsidiaries. If these funds are needed for our operations in the U.S., the repatriation of these funds could still be subject to the foreign withholding tax following the U.S.Tax Reform. However, our intent is to permanently reinvest these funds outside of the U.S.and our current plans do not require repatriation to fund our U.S.operations. Net cash provided by operating activities increased for fiscal 2021 as compared to fiscal 2020 due to improved cash operating results primarily from an increase in service and vehicle sales revenues, partially offset by an increase in yard operations and general and administrative expenses, and changes in operating assets and liabilities. The change in operating assets and liabilities was primarily the result of a decrease in funds received in accounts receivable of $143.5 millionand a decrease in cash generated from the sale of inventory of $49.0 million, partially offset by net income taxes receivable of $12.9 millionprimarily related to excess tax benefits from stock option exercises, decreases in funds primarily used to pay land acquisition deposits of of $6.9 million, and decreases in funds used to pay accounts payable of $2.9 million. Net cash used in investing activities decreased for fiscal 2021 as compared to fiscal 2020 due primarily to decreases in capital expenditures and acquisitions and proceeds from the sale of assets. Our capital expenditures are primarily related to acquiring land, opening and improving facilities, capitalized software development costs for new software for internal use and major software enhancements, acquiring yard equipment, and lease buyouts of certain facilities. We continue to develop, expand, and invest in new and existing facilities and standardize the appearance of existing locations. As of July 31, 2021, we have no material non-cancelable commitments for future capital expenditures. Capitalized software development costs were $13.6 million, $13.2 million, and $8.4 millionfor fiscal 2021, 2020 and 2019, respectively. If, at any time it is determined that capitalized software provides a reduced economic benefit, the unamortized portion of the capitalized development costs will be impaired. See Notes to Consolidated Financial Statements, Capitalized Software Costs in Note 1 - Summary of Significant Accounting Policies. Net cash provided by (used in) financing activities changed from a use of cash to providing cash in fiscal 2021 as compared to fiscal 2020 due primarily to lower payments for employee stock-based tax withholdings as discussed in further detail under the subheading "Stock Repurchases"and the Notes to Consolidated Financial Statements, Note 11 - Stockholders' Equity and lower debt issuance costs for the restructuring of our revolving loan facility as discussed in further detail in Notes to Consolidated Financial Statements, Note 8 - Long-Term Debt, partially offset by a decrease in proceeds from the exercise of stock options. For a discussion of fiscal 2020 as compared to fiscal 2019, please refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year ended July 31, 2020, filed with the SEC on September 28, 2020 . Stock Repurchases On September 22, 2011, our Board of Directors approved an 80 million share increase in the stock repurchase program, bringing the total current authorization to 196 million shares. The repurchases may be effected through solicited or unsolicited transactions in the open market or in privately negotiated transactions. No time limit has been placed on the duration of the stock repurchase program. Subject to applicable securities laws, such repurchases will be made at such times and in such amounts as we deem appropriate and may be discontinued at any time. For fiscal 2021 and 2020, we did not repurchase any shares of our common stock under the program. For fiscal 2019, we repurchased 7,635,596 shares of our common stock under the program at a weighted average price of $47.81per share totaling $365.0 million. As of July 31, 2021, the total number of shares repurchased under the program was 114,549,198 and 81,450,802 shares were available for repurchase under our program. 42 -------------------------------------------------------------------------------- Table of Contents In fiscal 2019, our former President exercised all of his vested stock options through a cashless exercise. In fiscal 2020, our Chief Executive Officer exercised all of his vested stock options through a cashless exercise. In fiscal 2021, certain employees exercised stock options through a cashless exercise. A portion of the options exercised were net settled in satisfaction of the exercise price. We remitted $3.8 million, $101.3 million, and $45.6 millionduring the years ended July 31, 2021, 2020 and 2019, respectively, to the proper taxing authorities in satisfaction of the employees' statutory withholding requirements.
The stock options exercised, using a cashless exercise, are summarized in the following table:
Weighted Weighted Average Employee Stock-Based Average Shares Net Settled Shares Withheld for Taxes Share Price for Tax Withholding (in Period Options Exercised Exercise Price for Exercise (1)
Net Sharesto Employees Withholding 000s) FY 2019-Q3 3,000,000 $ 17.81945,162 806,039 1,248,799 $ 56.53 $ 45,565 FY 2020-Q1 4,000,000 17.81 865,719 1,231,595 1,902,686 82.29 101,348 FY 2021-Q4 90,000 17.73 12,366 29,349 48,285 129.01 3,786
(1) Shares withheld for tax are treated as a share buyback for accounting purposes but are not included in our share buyback program.
July 21, 2020, we entered into a First Amended and Restated Credit Agreement with Wells Fargo Bank, National Association, Truist Bank(as successor by merger to Suntrust Bank), BMO Harris Bank N.A., Santander Bank, N.A., and Bank of America, N.A., as administrative agent (as amended from time to time, the "Credit Amendment"), bringing the aggregate principal amount of the revolving credit commitments under the Credit Agreement ( the "Revolving Loan Facility") to $1,050.0 million. The carrying amount of the Credit Agreement is comprised of borrowings under which interest accrues under a fluctuating interest rate structure. Accordingly, the carrying value approximated fair value at July 31, 2021, and was classified within Level II of the fair value hierarchy. The interest rate as of July 31, 2021on our Revolving Loan Facility was the Eurodollar Rate of 0.75% plus an applicable margin of 1.50%. Amounts borrowed under the Revolving Loan Facility may be repaid and reborrowed until the maturity date of July 21, 2023. We had no outstanding borrowings under the Revolving Loan Facility as of July 31, 2021or 2020. The Credit Agreement contains customary affirmative and negative covenants and we were in compliance with all covenants related to the Credit Agreement as of July 31, 2021.
Note Purchase contract
December 3, 2014, we entered into a Note Purchase Agreement and sold to certain purchasers (collectively, the "Purchasers") $400.0 millionin aggregate principal amount of senior secured notes (the "Senior Notes") consisting of (i) $100.0 millionaggregate principal amount of 4.07% Senior Notes, Series A, due December 3, 2024; (ii) $100.0 millionaggregate principal amount of 4.19% Senior Notes, Series B, due December 3, 2026; (iii) $100.0 millionaggregate principal amount of 4.25% Senior Notes, Series C, due December 3, 2027; and (iv) $100.0 millionaggregate 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. We may prepay the Senior Notes, in whole or in part, at any time, subject to certain conditions, including minimum amounts and payment of a make-whole amount equal to the discounted value of the remaining scheduled interest payments under the Senior Notes. The Note Purchase Agreement contains customary affirmative and negative covenants and we were in compliance with all covenants related to the Note Purchase Agreement as of July 31, 2021.
For further details on the Credit Agreement and the Note Purchase Agreement, see the Notes to Consolidated Financial Statements, Note 8 – Long Term Debt.
Off-balance sheet provisions
July 31, 2021, we had no off-balance sheet arrangements pursuant to Item 303(a)(4) of Regulation S-K promulgated under the Securities Exchange Act of 1934, as amended. 43 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S.The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities as of the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions. We consider the following policies to be the most critical to understanding the judgments that are involved and the uncertainties that could impact our results of operations, financial condition, and cash flows. For additional information, see Note 1 - Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements.
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the accompanying notes in Part I., Section I., âFinancial Statementsâ.
Our primary performance obligation is the auctioning of consigned vehicles through an online auction process. Service revenue and vehicle sales revenue are recognized at the date the vehicles are sold at auction, excluding annual registration fees. Costs to prepare the vehicles for auction, including inbound transportation costs and titling fees, are deferred and recognized at the time of revenue recognition at auction. Our disaggregation between service revenues and vehicle sales at the segment level reflects how the nature, timing, amount, and uncertainty of our revenues and cash flows are impacted by economic factors. We report sales taxes on relevant transactions on a net basis in our consolidated results of operations, and therefore do not include sales taxes in revenues or costs.
Our service revenue consists of auction and auction related sales transaction fees charged for vehicle remarketing services. Within this revenue category, our primary performance obligation is the auctioning of consigned vehicles through an online auction process. These auction and auction related services may include a combination of vehicle purchasing fees, vehicle listing fees, and vehicle selling fees that can be based on a predetermined percentage of the vehicle sales price, tiered vehicle sales price driven fees, or at a fixed fee based on the sale of each vehicle regardless of the selling price of the vehicle; transportation fees for the cost of transporting the vehicle to or from our facility; title processing and preparation fees; vehicle storage fees; bidding fees; and vehicle loading fees. These services are not distinct within the context of the contract. Accordingly, revenue for these services is recognized when the single performance obligation is satisfied at the completion of the auction process. We do not take ownership of these consigned vehicles, which are stored at our facilities located throughout 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. We have a separate performance obligation related to providing access to our online auction platform. We charge members an annual registration fee for the right to participate in our online auctions and access our bidding platform. This fee is recognized ratably over the term of the arrangement, generally one year, as each day of access to the online auction platform represents the best depiction of the transfer of the service. No provision for returns has been established, as all sales are final with no right of return or warranty, although we provide for credit loss expense in the case of non-performance by our buyers or sellers. Year Ended July 31, (In thousands) 2021 2020 2019 Service revenues United States $ 2,017,504 $ 1,714,724 $ 1,537,431International 274,363 232,416 218,263 Total service revenues $ 2,291,867 $ 1,947,140 $ 1,755,69444
-------------------------------------------------------------------------------- Table of Contents Vehicle sales
Some vehicles are purchased and re-marketed on our behalf. We have only one performance obligation related to the sale of these vehicles, which is the completion of the online auction process. Turnover from vehicle sales is recorded on the date of the auction. As we act as principal in vehicle sales transactions, the gross sale price at auction is recorded as revenue.
Year Ended July 31, (In thousands) 2021 2020 2019 Vehicle sales United States
$ 254,568 $ 145,962 $ 119,138International 146,076 112,481 167,125 Total vehicle sales $ 400,644 $ 258,443 $ 286,263Contract assets We capitalize certain contract assets related to obtaining a contract, where the amortization period for the related asset is greater than one year. These assets are amortized over the expected life of the customer relationship. Contract assets are classified as current or long-term other assets, based on the timing of when we expect to recognize the related revenues and are amortized as an offset to the associated revenues on a straight-line basis. We assess these costs for impairment at least quarterly and as "triggering" events occur that indicate it is more likely than not that an impairment exists. The contract asset costs where the amortization period for the related asset is one year or less are expensed as incurred and recorded within general and administrative expenses in the accompanying consolidated statements of income.
Uncertain tax positions
In determining net income for financial statement purposes, we must make certain estimates and judgments in the calculation of tax provisions and the resultant tax liabilities. In the ordinary course of global business, there may be transactions and calculations where the ultimate tax outcome is uncertain. In addition, our actual and forecasted earnings are subject to change due to economic, political and other conditions, such as new COVID-19 variants. Our effective tax rates could be affected by numerous factors such as changes in our business operations; acquisitions; investments; entry into new businesses and geographies; intercompany transactions; the relative amount of our foreign earnings, including earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates; losses incurred in jurisdictions for which we are not able to realize related tax benefits; the applicability of special tax regimes; changes in foreign currency exchange rates; changes in our stock price; changes to our forecasts of income and loss and the mix of jurisdictions to which they relate; changes in our deferred tax assets and liabilities and their valuation; changes in the laws, regulations, administrative practices, principles, and interpretations related to tax, including changes to the global tax framework; competition; and other laws and accounting rules in various jurisdictions. In addition, a number of countries have enacted or are actively pursuing changes to their tax laws applicable to corporate multinationals. The calculation of tax liabilities involves dealing with uncertainties in the interpretation and application of complex tax laws, and significant judgment is necessary to (i) determine whether, based on the technical merits, a tax position is more likely than not to be sustained and (ii) measure the amount of tax benefit that qualifies for recognition. Development in an audit, investigation, or other tax controversy could have a material effect on our operating results or cash flows in the period or periods for which that development occurs, as well as for prior and subsequent periods. We recognize potential liabilities for anticipated tax audit issues in the
U.S.and other tax jurisdictions based on an estimate of the ultimate resolution of whether, and the extent to which, additional taxes will be due. Although we believe the estimates are reasonable, no assurance can be given that the final outcome of these matters will not be different from what is reflected in the historical income tax provisions and accruals. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Recently published accounting standards
For a description of the new accounting standards that affect us, see the notes to the consolidated financial statements, note 1 – Summary of significant accounting policies.
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