What changed in this filing

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Item 7. Management’s Discussion and Analysis

2020-09-28 compared with 2019-09-30 · 240 added, 232 removed, 406 unchanged (54% of the section changed)

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CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K for the fiscal year ended July 31, 2019 , 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).

This Annual Report on Form 10-K for the fiscal year ended July 31, 2020, 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.

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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.

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 is an existing fact, with whatever fuel technology and efficiency it was designed and built to have, and the substantial carbon emissions associated with the vehicle’s manufacture are already sunk costs.

However, upon our receipt of an existing vehicle, we help decrease its total environmental impact by extending its useful life and thereby avoiding the carbon emissions associated with the alternative of new vehicle and auto parts manufacturing.

For example, many of the cars we process and remarket are subsequently restored to drivable condition, reducing the new vehicle manufacturing burden the world would otherwise face.

Many of our cars are purchased by dismantlers, who recycle and refurbish parts for vehicle repairs, again reducing new and aftermarket parts manufacturing.

And finally, some of our vehicles are returned to their raw material inputs through scrapping, reducing the need for further de novo resource extraction.

In each case, our business has reduced the carbon and other environmental footprint of the global transportation industry.

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.

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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.

Secondly, because of the special role we play in responding to catastrophic weather events, we believe we contribute to disaster recovery and resilience in the communities we serve.

For example, we mobilized our people, entered into emergency leases, and engaged with a multitude of service providers to timely retrieve, store, and remarket tens of thousands of flood-damaged vehicles in the Houston, Texas metropolitan area in the wake of Hurricane Harvey in the summer of 2017.

We provide vehicle sellers with a full range of services to process and sell vehicles primarily over the internet through our Virtual Bidding Third Generation internet auction-style sales technology, which we refer to as VB3.

Vehicle sellers consist primarily of insurance companies, but also include banks, finance companies, charities, fleet operators, dealers and vehicles sourced directly from individual owners .

We sell the vehicles principally to licensed vehicle dismantlers, rebuilders, repair licensees, used vehicle dealers and exporters and, at certain locations, to the general public.

Vehicle sellers consist primarily of insurance companies, but also include banks, finance companies, charities, fleet operators, dealers and from individuals.

We sell the vehicles principally to licensed vehicle dismantlers, rebuilders, repair licensees, used vehicle dealers, exporters, and in some jurisdictions, to the general public.

The majority of the vehicles sold on behalf of insurance companies are either damaged vehicles deemed a total loss;

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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, Bahrain, and Spain, 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.

and Germany, 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 the U.S., Canada, Brazil, the Republic of Ireland, Finland, the U.A.E., Oman, and Bahrain, we sell vehicles primarily as an agent and derive revenue primarily from auction and auction related sales transaction fees charged for vehicle remarketing services as well as fees for services subsequent to the auction, such as delivery and storage.

In the U.K., Germany, and Spain we operate both as an agent and on a principal basis, in some cases purchasing salvage vehicles outright and reselling the vehicles for our own account.

In Germany and Spain, we also derive revenue from listing vehicles on behalf of insurance companies and insurance experts to determine the vehicle’s residual value and/or to facilitate a sale for the insured.

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Vehicle auction selling prices are driven primarily by:

(i) 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;

(i) market demand for rebuildable, drivable vehicles;

(ii) used car pricing, which we also believe has an impact on total loss frequency;

(iii) the mix of cars sold;

and (iv) changes in the U.S.

dollar exchange rate to foreign currencies, which we believe has an impact on auction participation by international buyers.

(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.

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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.

The increase in total loss frequency may have been driven by the change in used car values and repair costs, which we believe are generally trending upward.

Changes in used car prices and repair costs, may impact total loss frequency and affect our growth rate.

Used car values are determined by many factors, including used car supply, which is tied directly to new car sales, and the average age of cars on the road.

The average age of cars on the road continued to increase, growing from 9.6 years in 2002 to 11.9 years in 2020.

Repair costs are generally based on damage severity, vehicle complexity, repair parts availability, repair parts costs, labor costs, and repair shop lead times.

The factors that can influence repair costs, used car pricing, and auction returns are many and varied and we cannot predict their movements.

Accordingly, we cannot predict future trends in total loss frequency.

Beginning in March 2020, our business and operations began to experience the impact of the worldwide COVID-19 pandemic, first within our European operations and as the month progressed throughout the balance of our global operations.

In materially all of our jurisdictions, we have been deemed by local authorities an essential business because our operations ensure the removal of vehicles from repair shops, impound yards, and streets and highways, enabling the critical function of road infrastructure.

As a result, we have continued to operate our facilities as well as our online-only auctions, while following appropriate health and safety protocols to ensure safe working conditions for our employees as well as for our sellers, buyers, and other business partners with whom we come in contact.

From a financial perspective, our operating results were adversely affected by lower processed vehicle volume during the last five months of the year ended July 31, 2020.

We saw substantial declines in vehicle assignments, which we attribute principally to reduced accident volume as miles driven dramatically declined in response to shelter-in-place orders across the globe.

As we do not recognize the majority of our transactional revenues until the completion of our auctions, a substantial portion of the declines in assignments we experienced in the most recent quarter will be reflected in future quarters.

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.

To the extent that the pandemic results in temporary or longer-term declines in the number of vehicles we process, our business and operating results could be adversely affected.

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.

We expect the pandemic to have an adverse effect on our quarterly revenues in future quarters, with the magnitude and timing of these effects dependent upon the extent and duration of suspended economic activity across our markets.

The longer-term impact on our business will depend on potential adverse operational impacts from outbreaks of COVID-19 at any of our locations;

“second wave” outbreaks of COVID-19 in one or more of our geographic markets;

a reduction in miles driven due to one or more factors relating to the COVID-19 pandemic;

any further government actions in response to COVID-19 outbreaks that restrict business activity or travel;

disruptions of governmental administrative operations due to COVID-19 outbreaks that adversely impact our core business activities, such as vehicle title processing;

and deteriorating economic conditions generally, and the potential availability, among other things, of vaccines or treatments, none of which we can predict.

For a further discussion of risks to our business and operating results arising from the pandemic, please see the section of this Annual Report on Form 10-K captioned “Risk Factors.”

On March 20, 2020, we filed a Current Report on Form 8-K to announce our draw down of funds under our available credit facilities in order to ensure financial flexibility given current uncertainties;

we subsequently repaid all outstanding borrowings under these facilities.

As of July 31, 2020, we had cash, cash equivalents, and restricted cash of $477.7 million, an increase of $384.2 million over January 31, 2020, and had $1.5 billion of liquidity.

These incremental available cash equivalents may be used for investments in land, technology, acquisitions, working capital, share repurchases, or general corporate purposes as permitted by the applicable credit agreements.

Operating Costs and Expenses:

Yard operations expenses consist primarily of operating personnel (which includes yard management, clerical and yard employees), rent, contract vehicle transportation, insurance, fuel, equipment maintenance and repair, and costs of vehicles sold under the purchase contracts.

General and administrative expenses consist primarily of executive management, accounting, data processing, sales personnel, human resources, professional fees, information technology, and marketing expenses.

Yard operations expenses consist primarily of operating personnel (which includes yard management, clerical, and yard employees);

vehicle transportation;

property related taxes;

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;

data processing;

sales personnel;

professional services;

marketing expenses;

and system maintenance and enhancements.

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 income primarily includes foreign exchange rate gains and losses, and gains and losses from the disposal of assets, which will fluctuate based on the nature of these activities each period.

Other expense consists primarily of interest expense on long-term debt.

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(v) total loss frequency;

(vi) increased volume from our existing suppliers;

(vi) volume from our existing suppliers;

(vii) commodity pricing;

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(xi) contract mix to the extent applicable;

and (xii) our capital expenditures.

(xii) our capital expenditures;

and 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 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.

Potential internal sources of additional working capital and liquidity are the sale of assets or the issuance of shares through option exercises and shares issued under our Employee Stock Purchase Plan.

A potential external source of additional working capital and liquidity is the issuance of additional debt with new lenders and equity.

However, we cannot predict if these sources will be available in the future or on commercially acceptable terms.

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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, 2017 through July 31, 2020:

United States Locations

Brighton, Colorado (Denver)

Sun Valley, California (Los Angeles)

November 2016

Casper, Wyoming

Littleton, Colorado (Denver)

Apopka, Florida (Orlando)

Alorton, Illinois (St.

February 2017

Okeechobee, Florida

Ogden, Utah (Salt Lake City)

Wilmington, California (Long Beach)

Andrews, Texas (Midland)

Exeter, Rhode Island

Lumberton, North Carolina

Spartanburg, South Carolina

Madison, Wisconsin

September 2018

Harleyville, South Carolina

Macon, Georgia

Mocksville, North Carolina

Antelope, California

Sacramento, California

Fredericksburg, Virginia

West Mifflin, Pennsylvania

Hartford, Connecticut

Buffalo, New York

International Locations

Geographic Service Area

Bad Fallingbostel, Germany (Hanover)

September 2016

Newbury, United Kingdom

United Kingdom

September 2016

Betim, Minas Gerais

Nobitz, Thuringia (Leipzig)

Belfast, Northern Ireland

United Kingdom

Curitiba, Paraná

September 2018

Mannheim, Rhineland-Palatinate

Stuttgart, Baden-Württemberg

November 2018

Hessen, Frankfurt

November 2018

Schleswig-Holstein (Hamburg)

November 2018

Furth, Bavaria (Nuremberg)

November 2018

Massen, Brandenburg (Berlin)

November 2018

Friesack, Brandenburg (Berlin)

December 2018

United States Locations Date

Andrews, Texas (Midland) August 2017

Exeter, Rhode Island October 2017

Lumberton, North Carolina June 2018

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

International Locations Geographic Service Area Date

Nobitz, Thuringia (Leipzig) Germany April 2018

Belfast, Northern Ireland United Kingdom April 2018

Curitiba, Paraná Brazil September 2018

Mannheim, Rhineland-Palatinate Germany October 2018

Stuttgart, Baden-Württemberg Germany November 2018

Frankfurt, Hessen Germany November 2018

Itzehoe, Schleswig-Holstein (Hamburg) Germany November 2018

Furth, Bavaria (Nuremberg) Germany November 2018

Massen, Brandenburg (Berlin) Germany November 2018

Friesack, Brandenburg (Berlin) Germany December 2018

Niederlehme, Brandenburg (Berlin) Germany November 2019

Pilsting, Bavaria (Munich) Germany December 2019

São Paulo, São Paulo Brazil May 2020

The following table sets forth operational facilities obtained through business acquisitions from August 1, 2017 through July 31, 2020:

Geographic Service Area

Cycle Express, LLC (1)

United States

Greenville, Kentucky

United States

Espoo, Finland

Pirkkala, Finland

Oulu, Finland

Turku, Finland

Cycle Express, LLC conducts business primarily as National Powersport Auctions (NPA), a leading non-salvage auction platform for motorcycles, snowmobiles, watercraft and other powersports vehicles.

NPA has facilities in San Diego, California;

Philadelphia, Pennsylvania;

Dallas, Texas;

Cincinnati, Ohio;

Atlanta, Georgia;

Littleton, Colorado;

Madison, Wisconsin;

Portland, Oregon;

and Sacramento, California.

Locations Geographic Service Area Date

Greenville, Kentucky United States March 2019

Espoo, Finland Finland March 2018

Pirkkala, Finland Finland March 2018

Oulu, Finland Finland March 2018

Turku, Finland Finland March 2018

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;

(ii) pursuing global, national and regional vehicle seller agreements;

(iii) increasing our service offerings;

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Income tax expense 4 % 5 % 8 %

Net income 32 % 29 % 23 %

Comparison of Fiscal Years ended July 31, 2020 and 2019 and 2018

The following table presents a comparison of service revenues for fiscal 2020, 2019 and 2018:

Year Ended July 31,

(In thousands)

Year Ended July 31, 2020 vs.

2019 2019 vs.

(In thousands) 2020 2019 2018 Change % Change Change % Change

Service revenues

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The increase 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, and partially offset by (iii) Hurricane Harvey, as the storm produced an extraordinary volume of flood damaged vehicles in the prior year.

was driven primarily by (i) increased volume and (ii) an increase in revenue per car due to higher average auction selling prices.

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 $12.0 million due to changes in foreign currency exchange rates, primarily from the change in the British pound, Brazilian real and European Union euro to U.S.

dollar exchange rates, the increase in International of $37.0 million was driven primarily by increased volume and an increase in revenue per car.

Excluding the detrimental impact of $6.9 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 increase in International of $21.1 million was driven primarily by increased revenue per car.

The following table presents a comparison of vehicle sales for fiscal 2020, 2019 and 2018:

Year Ended July 31,

(In thousands)

Year Ended July 31, 2020 vs.

2019 2019 vs.

(In thousands) 2020 2019 2018 Change % Change Change % Change

Vehicle sales

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Vehicle Sales.

The increase in vehicle sales for fiscal 2019 of $59.1 million , or 26.0% as compared to fiscal 2018 came from (i) an increase in International of $45.7 million and (ii) an increase in the U.S.

The decrease in vehicle sales for fiscal 2020 of $27.8 million, or 9.7% as compared to fiscal 2019 came from (i) a decrease in International of $54.6 million partially offset by (ii) an increase in the U.S.

of $26.8 million.

Excluding a detrimental impact of $2.4 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 growth in International of $54.6 million was primarily the result of higher average auction selling prices and an increase in volume.

dollar exchange rates, the decline in International of $52.2 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 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.

was primarily the result of increased volume and higher average auction selling prices, which we believe was due to a change in the mix of vehicles sold and increased demand.

The following table presents a comparison of yard operations expense for fiscal 2020, 2019 and 2018:

Year Ended July 31,

(In thousands)

Year Ended July 31, 2020 vs.

2019 2019 vs.

(In thousands) 2020 2019 2018 Change % Change Change % Change

Yard operations expenses

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The increase in yard operations expenses for fiscal 2020 of $84.4 million, or 9.5% as compared to fiscal 2019 resulted from (i) an increase in the U.S.

of $20.8 million , primarily from growth in volume and a $6.8 million increase in depreciation;

and (ii) an increase in International of $20.5 million related primarily to growth in volume;

partially offset by the beneficial impact of $7.2 million due to changes in foreign currency exchange rates, primarily from changes in the British pound, Brazilian real and European Union euro to U.S.

of $76.1 million, primarily from growth in volume, an increase in the cost to process each car, and a $13.5 million increase in depreciation;

and (ii) an increase in International of $8.2 million related primarily from an increase in the cost to process each car partially offset by the beneficial impact of $4.1 million due to changes in foreign currency exchange rates, primarily from changes in the British pound, Brazilian real and European Union euro to U.S.

dollar exchange rate.

The increase in the cost to process each car in fiscal 2018 in the U.S.

relates to the negative impact of abnormal costs of $68.6 million for temporary storage facilities;

abnormally high costs for subhaulers;

increased labor costs due to overtime;

travel and lodging due to the reassignment of employees;

and equipment lease expenses to handle the increased volume associated with Hurricane Harvey, as the storm produced extraordinary volumes of flood damaged vehicles.

These costs did not include normal expenses associated with the increased unit volume created by the hurricane, which are deferred until the sale of the units and are recognized as vehicle pooling costs on the balance sheet.

Included in yard operations expenses were depreciation and amortization expenses.

The increase in yard operations depreciation and amortization expenses resulted primarily from depreciating new and expanded facilities placed into service in the U.S.

The following table presents a comparison of cost of vehicle sales for fiscal 2020, 2019 and 2018:

Year Ended July 31,

(In thousands)

Year Ended July 31, 2020 vs.

2019 2019 vs.

(In thousands) 2020 2019 2018 Change % Change Change % Change

Cost of vehicle sales

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Cost of Vehicle Sales .

The increase in cost of vehicle sales for fiscal 2019 of $59.0 million , or 30.1% as compared to fiscal 2018 was the result of (i) an increase in International of $47.9 million and (ii) an increase in the U.S.

The decrease in cost of vehicle sales for fiscal 2020 of $30.2 million, or 11.8% as compared to fiscal 2019 was the result of (i) a decrease in International of $53.0 million and (ii) an increase in the U.S.

of $22.8 million.

Excluding the beneficial impact of $1.9 million due to changes in foreign currency exchange rates, primarily from changes in the British pound and European euro to U.S.

dollar exchange rate, the increase in International of $55.7 million was primarily the result of higher purchase prices and increased volume.

dollar exchange rate, the decrease in International of $54.9 million was primarily the result of decreased volume driven by contractual shifts from purchase contracts to fee based service contracts and a change in the mix of vehicles sold.

The increase in the U.S.

was primarily the result of increased volume and higher average purchase prices, which we believe is due to a change in the mix of vehicles sold.

was primarily the result of increased volume and higher average purchase prices, which we believe is due to a change in the mix of vehicles sold and increased demand.

The following table presents a comparison of general and administrative expenses for fiscal 2020, 2019 and 2018:

Year Ended July 31,

(In thousands)

Year Ended July 31, 2020 vs.

2019 2019 vs.

(In thousands) 2020 2019 2018 Change % Change Change % Change

General and administrative expenses

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General and Administrative Expenses.

The increase in general and administrative expenses for fiscal 2019 of $5.0 million , or 2.8% as compared to fiscal 2018 came primarily from an increase in the U.S.

of $7.7 million , partially offset by a decrease in International of $2.7 million , primarily from the fiscal 2018 impact of payroll taxes from the exercise of employee stock options.

Excluding depreciation and amortization, the increase in the U.S.

of $7.1 million resulted primarily from supporting our continued growth initiatives, as well as certain litigation costs and payroll taxes from the exercise of employee stock options.

The increase in general and administrative expenses for fiscal 2020 of $9.8 million, or 5.4% as compared to fiscal 2019 came primarily from an increase in International of $12.7 million, partially offset by a decrease in the U.S.

of $2.8 million.

Excluding depreciation and amortization, the increase in International of $12.0 million resulted primarily from our international growth strategy through the expansion of our European businesses partially offset by the beneficial impact of $1.7 million due to changes in foreign currency exchange rates, primarily from the change in the British pound, Brazilian real and European Union euro to U.S.

dollar exchange rate.

Excluding depreciation and amortization, the decrease in the U.S.

of $4.9 million resulted primarily from decreases in legal and travel costs and higher capitalizable software development, partially offset by increases in payroll taxes from the exercise of employee stock options and by supporting our continued growth initiatives.

The following table summarizes impairment, total other expenses and income taxes for fiscal 2020, 2019 and 2018:

Year Ended July 31,

(In thousands)

Year Ended July 31, 2020 vs.

2019 2019 vs.

(In thousands) 2020 2019 2018 Change % Change Change % Change

Impairment $ — $ — $ 1,131 $ — — % $ (1,131) (100.0) %

Total other expenses (15,260) (11,524) (21,834) (3,736) (32.4) % 10,310 47.2 %

During fiscal 2018, we recognized a $1.1 million charge primarily related to fully impairing a supply contract in the International segment.

During fiscal 2017, we recognized a $19.4 million charge primarily related to fully impairing costs previously capitalized in connection with the development of business operating software.

Other (Expense) Income.

The decrease in total other expense for fiscal 2019 of $10.3 million , or 47.2% as compared to fiscal 2018 was primarily due to gains on the disposal of certain non-operating assets in the current year and an increase in currency gains, primarily due to the change in the British pound to U.S.

dollar exchange rate, partially offset by losses on the disposal of certain non-operating assets in the prior year.

Income taxes 100,932 113,258 144,504 (12,326) (10.9) % (31,246) (21.6) %

Other Expenses.

The increase in total other expenses for fiscal 2020 of $3.7 million, or 32.4% as compared to fiscal 2019 was primarily due to lower gains on the disposal of certain non-operating assets in the current year and losses of unconsolidated affiliates, partially offset by an increase in currency gains, primarily due to the change in the British pound to U.S.

dollar exchange rate.

Income Taxes.

Our effective income tax rates were 12.6%, 16.1%, and 25.7% for fiscal 2020, 2019 and 2018, respectively.

The current year’s effective tax rate was computed based on the U.S.

federal statutory tax rate of 21.0% for the fiscal year ending July 31, 2020 and was negatively impacted by $1.7 million of discrete tax items related to amending previously filed income tax returns.

The prior year’s effective tax rate was computed based on the U.S.

federal statutory tax rate of 21.0% for the fiscal year ending July 31, 2019 and was favorably impacted by $10.2 million of discrete tax items related to amending previously filed income tax returns.

The prior year’s effective tax rate was computed based on the reduced blended U.S.

federal statutory tax rate of 26.9% for the fiscal year ending July 31, 2018 and included the effects of the Tax Cuts and Jobs Act (the “Act”).

See Note 10 — Income Taxes for a detailed discussion of the Act.

The effective tax rates in the current and prior years were also impacted from the result of recognizing excess tax benefits from the exercise of employee stock options of $92.5 million, $46.1 million, and $21.3 million for fiscal years 2020, 2019 and 2018, respectively.

Discussion of Fiscal Year ended July 31, 2019 compared to Fiscal Year ended July 31, 2018

For a discussion of fiscal 2018 as compared to fiscal 2017 , 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, 2018 , filed with the Securities and Exchange Commission on October 1, 2018 .

For a discussion of fiscal 2019 as compared to fiscal 2018, 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, 2019, filed with the SEC on September 30, 2019 .

Liquidity and Capital Resources

The following table presents a comparison of key components of our liquidity and capital resources for fiscal 2020, 2019 and 2018, excluding additional funds available to us through our Revolving Loan Facility:

(In thousands)

Cash and cash equivalents

July 31, 2020 vs.

2019 2019 vs.

(In thousands) 2020 2019 2018 Change % Change Change % Change

Cash, cash equivalents, and restricted cash $ 477,718 $ 186,319 $ 274,520 $ 291,399 156.4 % $ (88,201) (32.1) %

Working capital 607,715 405,163 431,860 202,552 50.0 % (26,697) (6.2) %

Year Ended July 31,

(In thousands)

Year Ended July 31, 2020 vs.

2019 2019 vs.

(In thousands) 2020 2019 2018 Change % Change Change % Change

Operating cash flows $ 917,885 $ 646,646 $ 535,069 $ 271,239 41.9 % $ 111,577 20.9 %

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Net repayments on revolving loan facility — — (231,000) — — % 231,000 100.0 %

Cash and cash equivalents and working capital decreased $88.2 million and $26.7 million at July 31, 2019 , respectively, as compared July 31, 2018 primarily due to repurchases of common stock as part of our stock repurchase program, capital expenditures, and payments for employee stock-based tax withholdings, partially offset by cash generated from operations and a decline in cash used for acquisitions.

Cash, cash equivalents, and restricted cash and working capital increased $291.4 million and $202.6 million at July 31, 2020, respectively, as compared July 31, 2019.

Cash and cash equivalents increased primarily due to cash generated from operations and proceeds from stock option exercises, partially offset by payments for employee stock-based tax withholdings and capital expenditures.

Working capital increased primarily from cash generated from operations and timing of cash receipts and payments partially offset by capital expenditures, our operating lease liabilities, certain income tax benefits related to stock option exercises and timing of cash payments.

Cash equivalents consisted of bank deposits, domestic certificates of deposit, and funds invested in money market accounts, which bear interest at variable rates.

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As of July 31, 2020, $124.8 million of the $477.7 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 related to the U.S.

Tax Reform and the mandatory Transition Tax, which is imposed on the post-1986 undistributed foreign earnings and profits.

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.

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.

Net cash used in operating activities increased for fiscal 2019 as compared to fiscal 2018 due to improved cash operating results from an increase in service and vehicle sales revenues and lower asset impairments, partially offset by an increase in yard operations and general and administrative expenses, and changes in operating assets and liabilities.

The change in operating assets and liabilities was primarily the result of an increase in income taxes payable of $13.8 million offset by a decrease in funds used to pay accounts payable of $42.2 million, decrease in funds received on accounts receivable of $20.5 million and an increase in vehicle pooling costs deferred of $13.1 million, primarily from the adoption of ASC 606, as we began deferring the inbound transportation costs and titling fees directly associated with the vehicles during fiscal 2019.

Net cash used in investing activities increased for fiscal 2019 as compared to fiscal 2018 due primarily to increases in capital expenditures partially offset by proceeds from the sale of assets and a decrease in acquisitions.

Our capital expenditures are primarily related to lease buyouts of certain facilities, opening and improving facilities, software development, and acquiring yard equipment.

We continue to expand and invest in new and existing facilities and standardize the appearance of existing locations.

We have no material non-cancelable commitments for future capital expenditures as of July 31, 2019 .

Included in capital expenditures were capitalized software development costs for new software for internal use and major software enhancements to existing software.

Net cash used in operating activities increased for fiscal 2020 as compared to fiscal 2019 due to improved cash operating results from an increase in service revenues, partially offset by an increase in yard operations and general and administrative expenses, and changes in operating assets and liabilities.

The change in operating assets and liabilities was primarily the result of an increase of funds received on accounts receivables of $76.8 million, decreases in funds used to pay accounts payable of $30.5 million, cash generated from the sale of inventory of $25.1 million, decreases in funds primarily used to pay land acquisition deposits of of $12.4 million, and partially offset by net income taxes receivable of $3.6 million primarily related to excess tax benefits from stock option exercises.

Net cash used in investing activities increased for fiscal 2020 as compared to fiscal 2019 due primarily to increases in capital expenditures and acquisitions, partially offset by proceeds from the sale of assets.

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.

As of July 31, 2020, we have no material non-cancelable commitments for future capital expenditures.

Capitalized software development costs were $13.2 million, $8.4 million and $7.4 million for fiscal 2020, 2019 and 2018, 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.

Additionally, during fiscal 2017, we recognized a $19.4 million charge primarily related to fully impairing costs previously capitalized in connection with the development of business operating software.

See Notes to Consolidated Financial Statements, Capitalized Software Costs in Note 1 — Summary of Significant Accounting Policies.

Net cash used in financing activities increased in fiscal 2019 as compared to fiscal 2018 primarily due to repurchases of our common stock as part of our stock repurchase program as discussed in further detail under the subheading “ Stock Repurchases ”, an increase in payments for employee stock-based tax withholdings and a decrease in proceeds from the exercise of stock options, partially offset by net repayments on our revolving loan facility.

For further detail, see Notes to Consolidated Financial Statements, Note 9 — Stockholders’ Equity .

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 2019 , we repurchased 7,635,596 shares of our common stock under the program at a weighted average price of $47.81 per share totaling $365.0 million .

For fiscal 2018 and 2017 , we did not repurchase any shares of our common stock under the program.

As of July 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 our program.

During fiscal 2018 and 2017 , certain executive officers and members of our Board of Directors exercised stock options through cashless exercises.

During fiscal 2019 , our former President exercised all of his vested stock options through a cashless exercise.

A portion of the options exercised were net settled in satisfaction of the exercise price.

We remitted $45.6 million , no amounts and $134.6 million for the years ended July 31, 2019 , 2018 and 2017 , respectively, to the proper taxing authorities in satisfaction of the employees’ statutory withholding requirements.

The exercised stock options, utilizing a cashless exercise, are summarized in the following table:

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)

Shares withheld for taxes are treated as a repurchase of shares for accounting purposes but do not count against our stock repurchase program.

Net cash used in financing activities decreased in fiscal 2020 as compared to fiscal 2019 due primarily to lower repurchases of our common stock as part of our stock repurchase program as discussed in further detail under the subheading “ Stock Repurchases ”, and an increase in proceeds from the exercise of stock options, partially offset by payments for employee stock-based tax withholdings as discussed in further detail under the subheading “ Stock Repurchases ”and the Notes to Consolidated Financial Statements, Note 11 — Stockholders’ Equity, debt issuance costs for the restructuring of our revolving loan facility as discussed in further detail under the subheading Credit Agreement , and payments on .

Contractual Obligations

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Payments Due by Fiscal Year

(In thousands)

(In thousands) Less than

1 year 1–3 Years 3–5 Years More than

5 Years Other Total

Contractual Obligations

Long-term debt, revolving loan facility, including current portion (1)

$ — $ — $ 100,000 $ 300,000 $ — $ 400,000

Interest payments on long-term debt, revolving loan facility, including current portion (1)

19,426 38,788 31,007 34,354 — 123,575

Operating leases (2)

Capital leases (2)

27,718 41,974 25,136 45,807 — 140,635

Finance leases (2)

768 558 13 — — 1,339

Tax liabilities (3)

— — — — 44,965 44,965

Total contractual obligations $ 47,912 $ 81,320 $ 156,156 $ 380,161 $ 44,965 $ 710,514

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Commercial Commitments (4)

1 year 1–3 Years 3–5 Years More than

5 Years Other Total

Letters of Credit $ 24,590 $ — $ — $ — $ — $ 24,590

(1) Revolving loan facility payments of zero and related interest payments reflect management’s intent for the use of the Revolving Loan Facility, which may change on a quarter by quarter basis.

Contractual obligations consist of future non-cancelable minimum lease payments under capital and operating leases, used in the normal course of business.

(2) Contractual obligations consist of future non-cancelable minimum lease payments under finance and operating leases, used in the normal course of business.

(3) Tax liabilities include the long-term liabilities in the consolidated balance sheet for unrecognized tax positions.

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(4) Commercial commitments consist primarily of letters of credit provided for insurance programs and certain business transactions including cash collateralized bank guarantees.

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 2020 and 2018, we did not repurchase any shares of our common stock under the program.

For fiscal 2019, we repurchased 7,635,596 shares of our common stock under the program at a weighted average price of $47.81 per share totaling $365.0 million.

As of July 31, 2020, 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.

In fiscal 2018, certain members of our Board of Directors exercised stock options through cashless exercises.

During 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.

A portion of the options exercised were net settled in satisfaction of the exercise price.

We remitted $101.3 million, $45.6 million and no amounts for the years ended July 31, 2020, 2019 and 2018, respectively, to the proper taxing authorities in satisfaction of the employees’ statutory withholding requirements.

The exercised stock options, utilizing a cashless exercise, are summarized in the following table:

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 2018—Q2 80,000 $ 6.54 11,996 — 68,004 $ 43.60 $ —

FY 2019—Q3 3,000,000 17.81 945,162 806,039 1,248,799 56.53 45,565

FY 2020—Q1 4,000,000 17.81 865,719 1,231,595 1,902,686 82.29 101,348

(1) Shares withheld for taxes are treated as a repurchase of shares for accounting purposes but do not count against our stock repurchase program.

Credit Agreement

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The Second Amendment to Credit Agreement reduced the pricing levels under the Credit Agreement to a range of 0.125% to 0.20% in the case of the commitment fee, 1.00% to 1.75% in the case of the applicable margin for LIBOR loans, and 0.0% to 0.75% in the case of the applicable margin for base rate loans, in each case depending on our consolidated total net leverage ratio during the preceding fiscal quarter.

On July 21, 2020, we entered into a First Amended and Restated Credit Agreement with Wells Fargo Bank, National Association, Truist Bank (as successor by merger to Suntrust Bank), BMO Harris Bank N.A., Santander Bank, N.A., and Bank of America, N.A., as administrative agent.

The First Amended and Restated Credit Agreement 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, as amended by the Second Amendment to Credit Agreement, dated as July 21, 2016.

The First Amended and Restated Credit Agreement provides for, among other things, (a) an increase in the secured revolving credit commitments by $200.0 million, bringing the aggregate principal amount of the revolving credit commitments under the Credit Agreement to $1,050.0 million, and (b) an extension of the termination date of the revolving credit facility under the Credit Agreement from July 21, 2021 to July 21, 2023.

The First Amended and Restated Credit Agreement additionally increased the pricing levels under the Credit Agreement to a range of 0.25% to 0.35% in the case of the commitment fee, 1.50% to 2.25% in the case of the applicable margin for Eurodollar Rate Loans, and 0.50% to 1.25% in the case of the applicable margin for base rate loans, in each case depending on our consolidated total net leverage ratio during the preceding fiscal quarter.

The principal purposes of these financing transactions were to increase the size and availability under our Revolving Loan Facility and to provide additional long-term financing.

The proceeds are being used for general corporate purposes, including working capital and capital expenditures, potential share repurchases, acquisitions, or other investments relating to our expansion strategies in domestic and international markets.

The proceeds may be used for general corporate purposes, including working capital and capital expenditures, potential share repurchases, acquisitions, or other investments relating to our expansion strategies in domestic and international markets.

The Revolving Loan Facility under the Credit Agreement bears interest, at our election, at either (a) the Base Rate, which is defined as a fluctuating rate per annum equal to the greatest of (i) the Prime Rate in effect on such day;

(ii) the Federal Funds Rate in effect on such date plus 0.50%;

or (iii) the LIBOR rate plus 1.0% , in each case plus an applicable margin ranging from 0.0% to 0.75% based on our consolidated total net leverage ratio during the preceding fiscal quarter;

or (b) the LIBOR rate plus an applicable margin ranging from 1.00% to 1.75% depending on our consolidated total net leverage ratio during the preceding fiscal quarter.

Interest is due and payable quarterly, in arrears, for loans bearing interest at the Base Rate, and at the end of an interest period (or at each three month interval in the case of loans with interest periods greater than three months) in the case of loans bearing interest at the LIBOR rate.

The interest rate as of July 31, 2019 on our Revolving Loan Facility was the one month LIBOR rate of 2.22% plus an applicable margin of 1.00% .

or (iii) the Eurodollar Rate plus 1.0%, subject to an interest rate floor of 0.75%, in each case plus an applicable margin ranging from 0.50% to 1.25% based on our consolidated total net leverage ratio during the preceding fiscal quarter;

or (b) the Eurodollar Rate plus an applicable margin ranging from 1.50% to 2.25% depending on our consolidated total net leverage ratio during the preceding fiscal quarter.

Interest is due and payable in arrears, at the end of each calendar quarter for loans bearing interest at the Base Rate, and at the end of an interest period (or at each three month interval in the case of loans with interest periods greater than three months) in the case of Eurodollar Rate Loans.

The interest rate as of July 31, 2020 on our Revolving Loan Facility was the Eurodollar Rate of 0.75% plus an applicable margin of 1.50%.

The carrying amount of the Credit Agreement is comprised of borrowings under which interest accrues under a fluctuating interest rate structure.

Accordingly, the carrying value approximates fair value at July 31, 2019 , and was classified within Level II of the fair value hierarchy.

Accordingly, the carrying value approximated fair value at July 31, 2020, and was classified within Level II of the fair value hierarchy.

Amounts borrowed under the Revolving Loan Facility may be repaid and reborrowed until the maturity date of July 21, 2023.

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Our obligations under the Credit Agreement are guaranteed by certain of our domestic subsidiaries meeting materiality thresholds set forth in the Credit Agreement.

Such obligations, including the guaranties, are secured by substantially all of our assets and the assets of the subsidiary guarantors pursuant to a Security Agreement as part of the Second Amendment to Credit Agreement, dated July 21, 2016 , among us, the subsidiary guarantors from time to time party thereto, and Bank of America, N.A., as collateral agent.

Such obligations, including the guaranties, are secured by substantially all of our assets and the assets of the subsidiary guarantors pursuant to a Security Agreement as part of the First Amended and Restated Credit Agreement, dated July 21, 2020, among us, the subsidiary guarantors from time to time party thereto, and Bank of America, N.A., as collateral agent.

The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict us and our subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into transactions with affiliates, pay dividends, or make distributions on and repurchase stock, in each case subject to certain exceptions.

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We were in compliance with all covenants related to the Credit Agreement as of July 31, 2020.

Related to the execution of the First Amended and Restated Credit Agreement, we incurred $2.8 million in costs, which was capitalized as debt issuance fees.

The debt discount is amortized to interest expense over the term of the respective debt instruments and are classified as reductions of the outstanding liability.

Note Purchase Agreement

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We are in compliance with all covenants related to the Note Purchase Agreement as of July 31, 2020.

Related to the execution of the Credit Agreement, First Amendment to Credit Agreement, Second Amendment to Credit Agreement, and the Note Purchase Agreement, we 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.

Off-Balance Sheet Arrangements

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Revenue Recognition

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (ASC 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition .

ASU 2014-09 is 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.

ASU 2014-09 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.

ASU 2014-09 was effective for annual and interim periods within those annual reporting periods beginning after December 15, 2017 and was effective for us beginning with the first quarter of fiscal year 2019.

ASU 2014-09 allows adoption with either retrospective application to each period presented, or modified retrospective application, with the cumulative effect recognized as of the date of initial application.

We used the modified retrospective application with the cumulative effect as our transition method.

Upon adoption, service revenue and vehicle sales revenue are recognized at the date the vehicles are sold at auction.

This timing of revenue recognition under ASU 2014-09 is consistent with our previous policy under ASC 605 for most service and vehicle sales revenue.

However, the adoption represents a change in the timing of revenue recognition for certain service revenues, such as inbound transportation and titling fees, which were previously recognized under ASC 605 when the services were performed, which generally occurred prior to auction.

Related costs to prepare the vehicles for auction, including inbound transportation and titling, are deferred and recognized at the time of revenue recognition.

This change resulted in a decrease to beginning retained earnings as of August 1, 2018, of $23.0 million as a result of the initial application of the standard and did not have a material impact to earnings.

This retained earnings adjustment related to adjustments to accounts receivable, vehicle pooling costs and deferred taxes upon adoption of the standard.

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.

There were no contract liabilities on the consolidated balance sheets at July 31, 2020.

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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 identified a separate performance obligation related to providing access to our online auction platform.

We also charge members an annual registration fee for the right to participate in our online auctions and access our 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.

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 bad debt expense in the case of non-performance by our buyers or sellers.

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Certain vehicles are purchased and remarketed on our own behalf.

We 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.

We have a single performance obligation related to the sale of these vehicles, which is the completion of the online auction process.

Vehicle sales revenue is recognized on the auction date.

As we act as a principal in vehicle sales transactions, the gross sales price at auction is recorded as revenue.

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The primary expenses allocated and deferred are inbound transportation costs, titling fees, certain facility costs, labor, and vehicle processing.

Upon the adoption of ASC 606, we began deferring the inbound transportation costs and titling fees directly associated with the vehicles within our vehicle pooling costs.

If the allocation factors change, then yard operation expenses could increase or decrease correspondingly in the future.

These costs are expensed as vehicles are sold in subsequent periods on an average cost basis.

These costs are expensed into yard operations expenses as vehicles are sold in subsequent periods on an average cost basis.

Fair Value of Financial Instruments

We record our financial assets and liabilities at fair value in accordance with the framework for measuring fair value in U.S.

In accordance with ASC 820, Fair Value Measurements and Disclosures , as amended by Accounting Standards Update 2011-04, we consider 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.

In accordance with Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures , as amended by Accounting Standards Update (“ASU”) 2011-04, we consider 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:

Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets.

Inputs other than quoted prices included within Level I that are observable for the asset or liability, either directly or indirectly.

Inputs that are generally unobservable.

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.

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During the year ended July 31, 2018, we retired fully amortized capitalized software of $15.5 million, which were no longer being utilized.

Valuation of Goodwill

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industry and market considerations;

overall financial performance and relevant entity-specific events.

overall financial performance;

the impact of the COVID-19 pandemic;

and relevant entity-specific events.

Management considered the above factors noting none involved significant uncertainty.

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Income Taxes and Deferred Tax Assets

We account for income tax exposures as required under ASC 740, Income Taxes .

We are subject to income taxes in the U.S., Canada, the U.K., Brazil, Spain, Germany, and other emerging markets around the world.

We account for income tax exposures as required under ASC 740, Income Taxes (“ASC 740”).

We are subject to income taxes in the U.S., Canada, the U.K., Brazil, Spain, Finland, Germany, and other emerging markets around the world.

In arriving at a provision of income taxes, we first calculate taxes payable in accordance with the prevailing tax laws in the jurisdictions in which we operate.

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federal income and foreign withholding tax on these earnings.

Based on our results for the year ended July 31, 2019 , a one percentage adverse change in our provision for income taxes as a percentage of income before taxes would have resulted in an increase in the income tax expense of $7.0 million .

We recognize and measure uncertain tax positions in accordance with ASC740, Income Taxes, pursuant to which we only recognize 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.

We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return.

ASC740 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.

We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

We file 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.

We recognize and measure uncertain tax positions in accordance with ASC 740 , pursuant to which we only recognize 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.

We report 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.

We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

We believe that our reserves for income taxes reflect the most likely outcome.

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Stock-based Compensation

We account for our stock-based awards to employees and non-employees using the fair value method as required by ASC 718, Compensation—Stock Compensation (ASC 718), which requires the measurement and recognition of compensation expense for all stock-based awards made to employees, consultants and directors based on estimated fair value.

We account for stock-based awards to employees and non-employees using the fair value method as required by ASC 718, Compensation—Stock Compensation (“ASC 718”), which requires the measurement and recognition of compensation expense for all stock-based awards made to employees, consultants and directors based on estimated fair value.

ASC 718 requires companies to estimate the fair value of stock-based awards on the measurement date using an option-pricing model.

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ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The fair value of each option was estimated on the measurement date using the Black-Scholes Merton (BSM) option-pricing model utilizing subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated fair value on the measurement date.

The fair value of each option, without a market-based condition, was estimated on the measurement date using the Black-Scholes Merton (“BSM”) option-pricing model.

For options that included a market-based condition, the Monte Carlo simulation model was used.

The BSM option pricing model utilizes assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated fair value on the measurement date.

If actual results are not consistent with our assumptions and judgments used in estimating the key assumptions, we may be required to record additional compensation or income tax expense, which could have a material impact on our consolidated results of operations and financial position.

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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 our foreign subsidiaries, as they are the primary currencies within the economic environment in which each subsidiary operates.

The British pound, Canadian dollar, Brazilian real, European Union euro, U.A.E.

dirham, Omani rial, and Bahraini dinar are the functional currencies of our 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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis