What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-09-27 compared with 2020-09-28 · 134 added, 289 removed, 357 unchanged (54% of the section changed)

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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.

Each vehicle that enters our business operations already exists, with whatever fuel technology and efficiency it was designed and built to have, and the substantial carbon emissions associated with the vehicle’s manufacture have already occurred.

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

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

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.

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

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

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;

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Vehicle auction selling prices are driven primarily by:

(i) market demand for rebuildable, drivable vehicles;

(i) market demand for rebuildable, driveable vehicles;

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

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(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;

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

(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.

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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.

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.

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.

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.

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;

The pandemic may have an adverse effect on our future revenues, with the magnitude and timing of these effects dependent upon the extent and duration of suspended economic activity across our markets.

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

additional outbreaks of COVID-19 in one or more of our geographic markets;

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

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

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;

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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:

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and system maintenance and enhancements.

Other Income and Expense:

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.

See Notes to Consolidated Financial Statements, Note 8 — Long-Term Debt.

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:

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(xii) our capital expenditures;

and other macroeconomic factors such as COVID-19.

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 with new lenders and equity.

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.

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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:

The following tables set forth operational facilities that we have opened and are now operational from August 1, 2018 through July 31, 2021:

United States Locations Date

Andrews, Texas (Midland) August 2017

Exeter, Rhode Island October 2017

Lumberton, North Carolina June 2018

Spartanburg, South Carolina August 2018

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Salt Lake City, Utah May 2020

Redding, California August 2020

Dothan, Alabama August 2020

Jacksonville, Florida August 2020

Milwaukee, Wisconsin September 2020

Houston, Texas December 2020

Knightdale, North Carolina March 2021

Gastonia, North Carolina May 2021

Bismarck, North Dakota June 2021

Fairburn, Georgia July 2021

Dyer, Indiana July 2021

International Locations Geographic Service Area Date

Nobitz, Thuringia (Leipzig) Germany April 2018

Belfast, Northern Ireland United Kingdom April 2018

Curitiba, Paraná Brazil September 2018

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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:

Bruchmühlbach-Miesau, Rhineland-Palatinate (Mannheim) Germany February 2021

Mallorca, Balearic Islands Spain April 2021

The following table sets forth the operational facilities obtained through business acquisitions from August 1, 2018 through July 31, 2021:

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

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.

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General and administrative 8 % 9 % 9 %

Impairment of long-lived assets — % — % — %

Total operating expenses 58 % 63 % 65 %

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Net income 35 % 32 % 29 %

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

Comparison of Fiscal Years ended July 31, 2021, 2020 and 2019

The following table presents a comparison of service revenues for fiscal 2021, 2020 and 2019:

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of $302.8 million, and (ii) an increase in International of $41.9 million.

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.

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 $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 growth in the U.S.

was driven primarily by an increase in revenue per car, partially offset by a decrease in volume.

The decrease in volume in the U.S.

was driven by the COVID-19 pandemic, which reduced accident volume as miles driven declined.

Excluding the beneficial impact of $12.0 million due to changes in foreign currency exchange rates, primarily from the change in the British pound and Brazilian real to U.S.

dollar exchange rates, the growth in International of $29.9 million was driven primarily by increased revenue per car, partially offset by decreased volume driven by the COVID-19 pandemic, which reduced accident volume as miles driven decreased.

The following table presents a comparison of vehicle sales for fiscal 2021, 2020 and 2019:

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Vehicle Sales.

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 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 and increased demand.

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

dollar exchange rates, the increase in International of $23.4 million was primarily the result of higher average auction selling prices partially offset by decreased volume driven by contractual shifts from purchase contracts to fee based service contracts and COVID-19’s impact on volume, which reduced accident volume as miles driven declined.

The following table presents a comparison of yard operations expense for fiscal 2021, 2020 and 2019:

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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 $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.

of $21.0 million, primarily from a $20.0 million increase in depreciation and an increase in the cost to process each car partially offset by a decline in volume driven by the COVID-19 pandemic, which reduced accident volume as miles driven declined;

and (ii) an increase in International of $9.8 million related primarily from the detrimental impact of $7.6 million due to changes in foreign currency exchange rates, driven by changes in the British pound, Brazilian real, and European Union euro to U.S.

dollar exchange rate;

and an increase in the cost to process each car, partially offset by a decrease in volume driven by the COVID-19 pandemic.

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

and International locations.

The following table presents a comparison of cost of vehicle sales for fiscal 2021, 2020 and 2019:

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Cost of Vehicle Sales .

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 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 cost of vehicle sales for fiscal 2021 of $120.8 million, or 53.6% as compared to fiscal 2020 was the result of (i) an increase in the U.S.

of $92.3 million and (ii) an increase in International of $28.6 million.

The increase in the U.S.

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

was primarily the result of (i) increased volume and (ii) higher average purchase prices, which we believe was due to a change in the mix of vehicles sold;

increased demand;

and reduced supply.

Excluding the detrimental impact of $8.3 million due to changes in foreign currency exchange rates, driven by changes in the British pound and European euro to U.S.

dollar exchange rate, the increase in International of $20.3 million was primarily the result of higher average purchase prices partially offset by decreased volume driven by contractual shifts from purchase contracts to fee based service contracts and COVID-19’s impact on volume, which reduced accident volume as miles driven declined.

The following table presents a comparison of general and administrative expenses for fiscal 2021, 2020 and 2019:

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General and Administrative Expenses.

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:

The increase in general and administrative expenses for fiscal 2021 of $15.0 million, or 7.8% as compared to fiscal 2020 came primarily from (i) an increase in the U.S.

of $17.8 million, partially offset by (ii) a decrease in International of $2.8 million.

Excluding depreciation and amortization, the decrease in International of $2.5 million resulted primarily from the detrimental impact of $1.4 million due to changes in foreign currency exchange rates, primarily from the change in the British pound, Brazilian real, and European Union euro to U.S.

dollar exchange rate and lower current period costs including decreased travel costs and the nonrecurrence of certain legal costs incurred in fiscal 2020.

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

of $20.8 million resulted primarily from increases in stock compensation and increased legal costs, partially offset by decreased payroll taxes from the exercise of employee stock options and travel costs.

The decrease in depreciation and amortization expenses resulted primarily from fully depreciating certain intangible and technology assets in the U.S.

and International locations.

The following table summarizes total other expenses and income taxes for fiscal 2021, 2020 and 2019:

Year Ended July 31, 2021 vs.

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(In thousands) 2021 2020 2019 Change % Change Change % Change

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

Total other expenses (14,580) (15,260) (11,524) 680 4.5 % (3,736) (32.4) %

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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.

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 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 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.

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

federal statutory tax rate of 21.0%.

The effective tax rate for fiscal year ending July 31, 2021 was favorably impacted by $19.8 million of discrete tax adjustments made in connection with finalizing our fiscal year 2020 tax return.

The effective tax rate for fiscal year ending July 31, 2020 was negatively impacted by $1.7 million of discrete tax items related to amending previously filed income tax returns.

The effective tax rates in the current and prior year were also impacted by the recognition of excess tax benefits from the exercise of employee stock options of $29.8 million and $92.5 million for fiscal years 2021 and 2020, respectively.

Discussion of Fiscal Year ended July 31, 2020 compared to Fiscal Year ended July 31, 2019

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Acquisitions, net of cash acquired (5,000) (11,702) (745) 6,702 57.3 % (10,957) (1,470.7) %

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

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.

Cash, cash equivalents, and restricted cash and working capital increased $570.5 million and $673.9 million at July 31, 2021, respectively, as compared to July 31, 2020.

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

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

Cash equivalents consisted of bank deposits, certificates of deposit, U.S.

Treasury Bills, and funds invested in money market accounts, which bear interest at variable rates.

Historically, we have financed our growth through cash generated from operations, public offerings of common stock, equity issued in conjunction with certain acquisitions, and debt financing.

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During the winter months, most of our facilities process 5% to 20% more vehicles than at other times of the year.

This increased volume requires the increased use of our cash to pay out advances and handling costs of the additional business.

We believe that our currently available cash and cash equivalents and cash generated from operations will be sufficient to satisfy our operating and working capital requirements for at least the next 12 months.

Severe weather events, including but not limited to tornadoes, floods, hurricanes, and hailstorms, can also impact our volumes.

These increased volumes require the increased use of our cash to pay out advances and handling costs of the additional business.

The COVID-19 pandemic may also impact our liquidity, with the magnitude and timing of these effects dependent upon the extent and duration of suspended economic activity across our markets.

The COVID-19 pandemic may impact our processed vehicle volume and corresponding vehicle average selling prices.

We expect to acquire or develop additional locations and expand some of our current facilities in the foreseeable future.

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Costs to develop a new yard can range from $3.0 to $50.0 million, depending on size, location and developmental infrastructure requirements.

As of July 31, 2020, $124.8 million of the $477.7 million of cash and cash equivalents was held by our foreign subsidiaries.

As of July 31, 2021, $159.5 million of the $1.0 billion of cash, cash equivalents, and restricted cash was held by our foreign subsidiaries.

If these funds are needed for our operations in the U.S., the repatriation of these funds could still be subject to the foreign withholding tax following the U.S.

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and our current plans do not require repatriation to fund our U.S.

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.

Net cash provided by operating activities increased for fiscal 2021 as compared to fiscal 2020 due to improved cash operating results primarily from an increase in service and vehicle sales revenues, partially offset by an increase in yard operations and general and administrative expenses, and changes in operating assets and liabilities.

The change in operating assets and liabilities was primarily the result of a decrease in funds received in accounts receivable of $143.5 million and a decrease in cash generated from the sale of inventory of $49.0 million, partially offset by net income taxes receivable of $12.9 million primarily related to excess tax benefits from stock option exercises, decreases in funds primarily used to pay land acquisition deposits of of $6.9 million, and decreases in funds used to pay accounts payable of $2.9 million.

Net cash used in investing activities decreased for fiscal 2021 as compared to fiscal 2020 due primarily to decreases in capital expenditures and acquisitions and proceeds from the sale of assets.

Our capital expenditures are primarily related to acquiring land, opening and improving facilities, capitalized software development costs for new software for internal use and major software enhancements, acquiring yard equipment, and lease buyouts of certain facilities.

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

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

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 .

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 .

Contractual Obligations

We lease certain domestic and foreign facilities, and certain equipment under non-cancelable operating leases.

In addition to the minimum future lease commitments presented, the leases generally require us to pay property taxes, insurance, maintenance and repair costs which are not included in the table because we have determined these items are not material.

The following table summarizes our significant contractual obligations and commercial commitments as of July 31, 2020:

Payments Due by Fiscal Year

(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)

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

Amount of Commitment Expiration Per Period

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.

(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.

At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the timing of tax audit outcomes.

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

Stock Repurchases

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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.

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 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 $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.

We remitted $3.8 million, $101.3 million, and $45.6 million during the years ended July 31, 2021, 2020 and 2019, respectively, to the proper taxing authorities in satisfaction of the employees’ statutory withholding requirements.

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

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Credit Agreement

On December 3, 2014, we entered into a Credit Agreement (as amended from time to time, the “Credit Amendment”) with Wells Fargo Bank, National Association, as administrative agent, and Bank of America, N.A., as syndication agent.

The Credit Agreement provided for (a) a secured revolving loan facility in an aggregate principal amount of up to $300.0 million (the “Revolving Loan Facility”), and (b) a secured term loan facility in an aggregate principal amount of $300.0 million (the “Term Loan”), which was fully drawn at closing.

The Term Loan amortized $18.8 million per quarter.

On March 15, 2016, we entered into a First Amendment to Credit Agreement (the “Amendment to Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent and Bank of America, N.A.

The Amendment to Credit Agreement amended certain terms of the Credit Agreement, dated as of December 3, 2014.

The Amendment to Credit Agreement provided for (a) an increase in the secured revolving credit commitments by $50.0 million, bringing the aggregate principal amount of the revolving credit commitments under the Credit Agreement to $350.0 million, (b) a new secured term loan (the “Incremental Term Loan”) in the aggregate principal amount of $93.8 million having a maturity date of March 15, 2021, and (c) an extension of the termination date of the Revolving Loan Facility and the maturity date of the Term Loan from December 3, 2019 to March 15, 2021.

The Amendment to Credit Agreement extended the amortization period for the Term Loan and decreased the quarterly amortization payments for that loan to $7.5 million per quarter.

The Amendment to Credit Agreement additionally reduced the pricing levels under the Credit Agreement to a range of 0.15% to 0.30% in the case of the commitment fee, 1.125% to 2.0% in the case of the applicable margin for LIBOR loans, and 0.125% to 1.0% in the case of the applicable margin for base rate loans, based on our consolidated total net leverage ratio during the preceding fiscal quarter.

We borrowed the entire $93.8 million principal amount of the Incremental Term Loan concurrent with the closing of the Amendment to Credit Agreement.

On July 21, 2016, we entered into a Second Amendment to Credit Agreement (the “Second Amendment to Credit Agreement”) with Wells Fargo Bank, National Association, SunTrust Bank, and Bank of America, N.A., as administrative agent (as successor in interest to Wells Fargo Bank).

The Second Amendment to Credit Agreement amends certain terms of the Credit Agreement, dated as of December 3, 2014 as amended by the Amendment to Credit Agreement, dated as of March 15, 2016.

The Second Amendment to Credit Agreement provides for, among other things, (a) an increase in the secured revolving credit commitments by $500.0 million, bringing the aggregate principal amount of the revolving credit commitments under the Credit Agreement to $850.0 million, (b) the repayment of existing term loans outstanding under the Credit Agreement, (c) an extension of the termination date of the revolving credit facility under the Credit Agreement from March 15, 2021 to July 21, 2021, and (d) increased covenant flexibility.

Concurrent with the closing of the Second Amendment to Credit Agreement, we prepaid in full the outstanding $242.5 million principal amount of the Term Loan and Incremental Term Loan under the Credit Agreement without premium or penalty.

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.

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 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 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%.

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 (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, 2021 on our Revolving Loan Facility was the Eurodollar Rate of 0.75% plus an applicable margin of 1.50%.

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

We are obligated to pay a commitment fee on the unused portion of the Revolving Loan Facility.

The commitment fee rate ranges from 0.25% to 0.35%, depending on our consolidated total net leverage ratio during the preceding fiscal quarter, on the average daily unused portion of the revolving credit commitment under the Credit Agreement.

We had no outstanding borrowings under the Revolving Loan Facility as of July 31, 2020 and 2019.

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

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

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

We are also required to maintain compliance, measured at the end of each fiscal quarter, with a consolidated total net leverage ratio and a consolidated interest coverage ratio.

The Credit Agreement contains no restrictions on the payment of dividends and other restricted payments, as defined, as long as (1) the consolidated total net leverage ratio, as defined, both before and after giving effect to any such dividend or restricted payment on a pro forma basis, is less than 3.25:1, in an unlimited amount, (2) if clause (1) is not available, so long as the consolidated total net leverage ratio both before and after giving effect to any such dividend on a pro forma basis is less than 3.50:1, in an aggregate amount not to exceed the available amount, as defined, and (3) if clauses (1) and (2) are not available, in an aggregate amount not to exceed $50.0 million;

provided, that, minimum liquidity, as defined, shall be not less than $75.0 million both before and after giving effect to any such dividend or restricted payment.

As of July 31, 2020, the consolidated total net leverage ratio was (0.03):1.

Minimum liquidity as of July 31, 2020 was $1.5 billion.

Accordingly, we do not believe that the provisions of the Credit Agreement represent a significant restriction to our ability to pay dividends or to the successful future operations of the business.

We have not paid a cash dividend since becoming a public company in 1994.

We were in compliance with all covenants related to the Credit Agreement as of 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.

We had no outstanding borrowings under the Revolving Loan Facility as of July 31, 2021 or 2020.

The Credit Agreement contains customary affirmative and negative covenants and we were in compliance with all covenants related to the Credit Agreement as of July 31, 2021.

Note Purchase Agreement

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Interest is due and payable quarterly, in arrears, on each of the Senior Notes.

Proceeds from the Note Purchase Agreement are being used for general corporate purposes.

On July 21, 2016, we entered into Amendment No.

1 to Note Purchase Agreement (the “First Amendment to Note Purchase Agreement”) which amended certain terms of the Note Purchase Agreement, including providing for increased flexibility substantially consistent with the changes included in the Second Amendment to Credit Agreement, including among other things increased covenant flexibility.

We may prepay the Senior Notes, in whole or in part, at any time, subject to certain conditions, including minimum amounts and payment of a make-whole amount equal to the discounted value of the remaining scheduled interest payments under the Senior Notes.

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

Such obligations, including the guaranties, are secured by substantially all of our assets and the assets of the subsidiary guarantors.

Our obligations and our subsidiary guarantors under the Note Purchase Agreement will be treated on a pari passu basis with the obligations of those entities under the Credit Agreement as well as any additional debt that we may obtain.

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

We are also required to maintain compliance, measured at the end of each fiscal quarter, with a consolidated total net leverage ratio and a consolidated interest coverage ratio.

The Note Purchase Agreement contains no restrictions on the payment of dividends and other restricted payments, as defined, as long as (1) the consolidated total net leverage ratio, as defined, both before and after giving effect to any such dividend or restricted payment on a pro forma basis, is less than 3.25:1, in an unlimited amount, (2) if clause (1) is not available, so long as the consolidated total net leverage ratio both before and after giving effect to any such dividend on a pro forma basis is less than 3.50:1, in an aggregate amount not to exceed the available amount, as defined, and (3) if clauses (1) and (2) are not available, in an aggregate amount not to exceed $50.0 million;

provided, that, minimum liquidity, as defined, shall be not less than $75.0 million both before and after giving effect to any such dividend or restricted payment on a pro forma basis.

As of July 31, 2020, the consolidated total net leverage ratio was (0.03):1.

Minimum liquidity as of July 31, 2020 was $1.5 billion.

Accordingly, we do not believe that the provisions of the Note Purchase Agreement represent a significant restriction to our ability to pay dividends or to the successful future operations of the business.

We have not paid a cash dividend since becoming a public company in 1994.

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

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 detail on both the Credit Agreement and Note Purchase Agreement, see Notes to Consolidated Financial Statements, Note 8 — Long-Term Debt .

Off-Balance Sheet Arrangements

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Critical Accounting Policies and Estimates

The preparation of consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.

Estimates include, but are not limited to, vehicle pooling costs;

income taxes;

stock-based compensation;

purchase price allocations;

and contingencies.

We base our estimates on historical experience and on various other judgments that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates.

Management has discussed the selection of critical accounting policies and estimates with the Audit Committee of the Board of Directors and the Audit Committee has reviewed our disclosure relating to critical accounting policies and estimates in this Annual Report on Form 10-K.

Our significant accounting policies are described in the Notes to Consolidated Financial Statements, Note 1 — Summary of Significant Accounting Policies .

The following is a summary of the more significant judgments and estimates included in our critical accounting policies used in the preparation of our consolidated financial statements.

We discuss, where appropriate, sensitivity to change based on other outcomes reasonably likely to occur.

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 related Notes in Part I., Item I., “Financial Statements.”

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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.

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.

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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.

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,

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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 statements of income.

Vehicle Pooling Costs

We defer costs that relate directly to the fulfillment of our contracts associated with vehicles consigned to and received by us, but not sold as of the end of the period.

We quantify the deferred costs using a calculation that includes the number of vehicles at our facilities at the beginning and end of the period, the number of vehicles sold during the period and an allocation of certain yard operation costs of the period.

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

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

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

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 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:

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

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

Level III Inputs that are generally unobservable.

These inputs may be used with internally developed methodologies that result in management’s best estimate.

The amounts recorded for financial instruments in our consolidated financial statements, which included cash, accounts receivable, accounts payable, accrued liabilities and Revolving Loan Facility approximated their fair values for fiscal 2020 and 2019 due to the short-term nature of those instruments and are classified within Level II of the fair value hierarchy.

Cash equivalents are classified within Level II of the fair value hierarchy because they are valued using quoted market prices of the underlying investments.

See Notes to Consolidated Financial Statements, Note 8 — Long-Term Debt and Note 9 – Fair Value Measures .

Capitalized Software Costs

We capitalize system development costs and website development costs related to our enterprise computing services during the application development stage.

Costs related to preliminary project activities and post implementation activities are expensed as incurred.

Internal-use software is amortized on a straight-line basis over its estimated useful life, generally three to seven years.

Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that impact the recoverability of these assets.

Total gross capitalized software as of July 31, 2020 and 2019 was $52.6 million and $39.4 million, respectively.

Accumulated amortization expense related to software as of July 31, 2020 and 2019 totaled $33.5 million and $23.6 million, respectively.

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

We evaluate the impairment of goodwill for our reporting units annually or on an interim basis if certain indicators are present, either through a quantitative or qualitative analysis.

The annual goodwill impairment analysis, which was performed qualitatively during the fourth quarter of fiscal 2020, considered all relevant factors specific to our reporting units, including macroeconomic conditions;

industry and market considerations;

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.

In addition, the industry in which we operate improved over the observable period, and our calculated fair value exceeded carrying value for each reporting unit by a substantial amount in our prior year quantitative analysis, indicating no material risk as of July 31, 2020, with respect to potential goodwill impairments.

Income Taxes and Deferred Tax Assets

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.

Then we analyze the timing differences between the financial reporting and tax basis of our assets and liabilities, such as various accruals, depreciation and amortization.

The tax effects of the timing difference are presented as deferred tax assets and liabilities in the consolidated balance sheets.

We consider the need to maintain a valuation allowance on deferred tax assets based on management’s assessment of whether it is more likely than not that we would realize those deferred tax assets based on future reversals of existing taxable temporary differences and the ability to generate sufficient taxable income within the carryforward period available under the applicable tax law.

As of July 31, 2020, we have $15.4 million of valuation allowance arising from both our U.S.

and International operations.

To the extent we establish a valuation allowance or change the amount of valuation allowance in a period, we reflect the change with a corresponding increase or decrease in our income tax provision in the consolidated statements of income.

Historically, our income tax provision has been sufficient to cover our actual income tax liabilities among the jurisdictions in which we operate.

Nonetheless, our future effective tax rate could still be adversely affected by several factors, including (i) the geographical allocation of our future earnings;

(ii) the change in tax laws or our interpretation of tax laws;

(iii) the changes in governing regulations and accounting principles;

(iv) the changes in the valuation of our deferred tax assets and liabilities;

and (v) the outcome of the income tax examinations.

We routinely assess the possibilities of material changes resulting from the aforementioned factors to determine the adequacy of our income tax provision.

The repatriation of our accumulated foreign earnings could also affect our effective tax rate, nevertheless, we intend to indefinitely reinvest these earnings in our foreign operations and do not anticipate the need for any of our foreign subsidiaries’ cash in the U.S.

Accordingly, we do not provide for U.S.

federal income and foreign withholding tax on these earnings.

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.

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;

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;

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.

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

We adjust these reserves, as well as the related interest, where appropriate in light of changing facts and circumstances.

Settlement of any particular position could require the use of cash.

Stock-based Compensation

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.

The value of the portion of the award that is ultimately expected to vest is recognized in expense over the requisite service periods.

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, 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.

Foreign Currency Translation

We record foreign currency translation adjustments from the process of translating the functional currency of the financial statements of our foreign subsidiaries into the U.S.

dollar reporting currency.

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.

Assets and liabilities of the respective subsidiary’s operations are translated into U.S.

dollars at period-end exchange rates, and revenues and expenses are translated into U.S.

dollars at average exchange rates in effect during each reporting period.

Adjustments resulting from the translation of each subsidiary’s financial statements are reported in other comprehensive income.

Accounting for Acquisitions

We recognize and measure identifiable assets acquired and liabilities assumed in acquired entities in accordance with ASC 805, Business Combinations .

The allocation of the purchase consideration for acquisitions can require extensive use of accounting estimates and judgments to allocate the purchase consideration to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values.

The excess of the fair value of purchase consideration over the values of the identifiable assets and liabilities is recorded as goodwill.

Critical estimates in valuing certain identifiable assets include but are not limited to expected long-term revenues;

future expected operating expenses;

cost of capital;

appropriate attrition;

and discount rates.

Segment Reporting

and International regions are considered two separate operating segments and are disclosed as two reportable segments.

The segments represent geographic areas and reflect how the chief operating decision maker allocates resources and measures results, including total revenues and operating income.

Our revenues for the year ended July 31, 2020 were distributed as follows:

84.4% and International 15.6%.

Geographic information as well as comparative segment revenues and related financial information pertaining to the U.S.

and International segments for the years ended July 31, 2020, 2019 and 2018 are presented in the tables in Note 13 — Segments and Other Geographic Reporting , to the Notes to Consolidated Financial Statements, which are included in Part II, Item 8 of this Form 10-K.

Recently Issued Accounting Standards

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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