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Management's Discussion of Results of Operations (Excerpts)

For purposes of readability, Zenith attempts to strip out all tables in excerpts from the Management Discussion. That information is contained elsewhere in our articles. The idea of this summary is simply to review how well we believe Management does its reporting. Also, this highlights what Management believes is important.

In our Decision Matrix at the end of each article, a company with 0 to 2 gets a "-1", and 3 to 5 gets a "+1."

On a scale of 0 to 5, 5 being best, Zenith rates this company's Management's Discussion as a 4.


Overview

We are a leading provider of online auctions and vehicle remarketing services 
with operations in the United States (U.S.), Canada, the United Kingdom (U.K.), 
Brazil, the Republic of Ireland, Germany, Finland, the United Arab Emirates 
(U.A.E.), Oman, Bahrain, and Spain.

Our goals are to generate sustainable profits for our stockholders, while also 
providing environmental and social benefits for the world around us. With 
respect to our environmental stewardship, we believe our business is a critical 
enabler for the global re-use and recycling of vehicles, parts, and raw 
materials. Many of the cars we process and remarket are subsequently restored 
to drivable condition, reducing the new vehicle manufacturing burden the world 
would otherwise face. Many of our cars are purchased by dismantlers, who 
recycle and refurbish parts for vehicle repairs, again reducing new and 
aftermarket parts manufacturing. And finally, some of our vehicles are returned 
to their raw material inputs through scrapping, reducing the need for further 
de novo resource extraction. In each case, our business has reduced the carbon 
and other environmental footprint of the global transportation industry.

Beyond our environmental stewardship, we also support the world’s communities 
in two important ways. First, we believe that we contribute to economic 
development and well-being by enabling more affordable access to mobility 
around the world. For example, many of the automobiles sold through our auction 
platform are purchased for use in developing countries where affordable 
transportation is a critical enabler of education, health care, and well-being 
more generally. In addition, because of the special role we play in responding 
to catastrophic weather events, we believe we contribute to disaster recovery 
and resilience in the communities we serve. For example, we mobilized our 
people, entered into emergency leases, and engaged with a multitude of service 
providers to timely retrieve, store, and remarket tens of thousands of 
flood-damaged vehicles in the Houston, Texas metropolitan area in the wake of 
Hurricane Harvey in the summer of 2017.

We provide vehicle sellers with a full range of services to process and sell 
vehicles primarily over the internet through our Virtual Bidding Third 
Generation internet auction-style sales technology, which we refer to as VB3. 
Vehicle sellers consist primarily of insurance companies, but also include 
banks, finance companies, charities, fleet operators, dealers and vehicles 
sourced directly from individual owners. We sell the vehicles principally to 
licensed vehicle dismantlers, rebuilders, repair licensees, used vehicle 
dealers and exporters and, at certain locations, to the general public. The 
majority of the vehicles sold on behalf of insurance companies are either 
damaged vehicles deemed a total loss; not economically repairable by the 
insurance companies; or are recovered stolen vehicles for which an insurance 
settlement with the vehicle owner has already been made.

We offer vehicle sellers a full range of services that help expedite each stage 
of the vehicle sales process, minimize administrative and processing costs, and 
maximize the ultimate sales price through the online auction process.

In the U.S., Canada, Brazil, the Republic of Ireland, Finland, the U.A.E., 
Oman, 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. In the U.K. 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 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.

We monitor and analyze a number of key financial performance indicators in 
order to manage our business and evaluate our financial and operating 
performance. Such indicators include:

Service and Vehicle Sales Revenue: Our service revenue consists of auction and 
auction related sales transaction fees charged for vehicle remarketing 
services. These auction and auction related services may include a combination 
of vehicle purchasing fees, vehicle listing fees, and vehicle selling fees that 
can be based on a predetermined percentage of the vehicle sales price, tiered 
vehicle sales price driven fees, or at a fixed fee based on the sale of each 
vehicle regardless of the selling price of the vehicle; transportation fees for 
the cost of transporting the vehicle to or from our facility; title processing 
and preparation fees; vehicle storage fees; bidding fees; and vehicle loading 
fees. These fees are recognized as net revenue (not gross vehicle selling 
price) at the time of auction in the amount of such fees charged. Purchased 
vehicle revenue includes the gross sales price of the vehicles which we have 
purchased or are otherwise considered to own. We have certain contracts with 
insurance companies, primarily in the U.K., in which we act as a principal, 
purchasing vehicles and reselling them for our own account. We also purchase 
vehicles in the open market, primarily from individuals, and resell them for 
our own account.

Our revenue is impacted by several factors, including total loss frequency and 
the average vehicle auction selling price, as a significant amount of our 
service revenue is associated in some manner with the ultimate selling price of 
the vehicle. Vehicle auction selling prices are driven primarily by: (i) 
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; (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. We cannot specifically quantify the financial impact that 
commodity pricing, used car pricing, and product sales mix has on the selling 
price of vehicles, our service revenues or financial results. Total loss 
frequency is the percentage of cars involved in accidents that insurance 
companies salvage rather than repair and is driven by the relationship between 
repair costs, used car values, and auction returns. Over the last several 
years, we believe there has been an increase in overall growth in the salvage 
market driven by an increase in total loss frequency. The increase in total 
loss frequency may have been driven by the decline in used car values relative 
to repair costs, which we believe are generally trending upward. Conversely, 
increases in used car prices, such as occurred during the most recent 
recession, may decrease total loss frequency and adversely affect our growth 
rate. Used car values are determined by many factors, including used car 
supply, which is tied directly to new car sales, and the average age of cars on 
the road. The average age of cars on the road continued to increase, growing 
from 9.6 years in 2002 to 11.8 years in 2019. The factors that can influence 
repair costs, used car pricing, and auction returns are many and varied and we 
cannot predict their movements. Accordingly, we cannot predict future trends in 
total loss frequency.

Operating Costs and Expenses: Yard operations expenses consist primarily of 
operating personnel (which includes yard management, clerical and yard 
employees), rent, contract vehicle transportation, insurance, fuel, equipment 
maintenance and repair, and costs of vehicles sold under the purchase 
contracts. General and administrative expenses consist primarily of executive 
management, accounting, data processing, sales personnel, human resources, 
professional fees, information technology, and marketing expenses.

Other Income and Expense: Other income primarily includes income from the 
rental of certain real property, foreign exchange rate gains and losses, and 
gains and losses from the disposal of assets, which will fluctuate based on the 
nature of these activities each period. Other expense consists primarily of 
interest expense on long-term debt. See Notes to Consolidated Financial 
Statements, Note 7 — Long-Term Debt.

Liquidity and Cash Flows: Our primary source of working capital is cash 
operating results and debt financing. The primary source of our liquidity is 
our cash and cash equivalents and Revolving Loan Facility. The primary factors 
affecting cash operating results are: (i) seasonality; (ii) market wins and 
losses; (iii) supplier mix; (iv) accident frequency; (v) total loss frequency; 
(vi) increased volume from our existing suppliers; (vii) commodity pricing; 
(viii) used car pricing; (ix) foreign currency exchange rates; (x) product mix; 
(xi) contract mix to the extent applicable; and (xii) our capital expenditures. 
These factors are further discussed in the Results of Operations and Risk 
Factors sections of this 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. 
However, we cannot predict if these sources will be available in the future or 
on commercially acceptable terms.

Acquisitions and New Operations

As part of our overall expansion strategy of offering integrated services to 
vehicle sellers, we anticipate acquiring and developing facilities in new 
regions, as well as the regions currently served by our facilities. We believe 
that these acquisitions and openings will strengthen our coverage, as we have 
facilities located in the U.S., Canada, the U.K., Brazil, the Republic of 
Ireland, Germany, Finland, the U.A.E., Oman, Bahrain, and Spain with the 
intention of providing national coverage for our sellers. All of these 
acquisitions have been accounted for using the purchase method of accounting.

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.

The period-to-period comparability of our consolidated operating results and 
financial position is affected by business acquisitions, new openings, weather 
and product introductions during such periods.

In addition to growth through business acquisitions, we seek to increase 
revenues and profitability by, among other things, (i) acquiring and developing 
additional vehicle storage facilities in key markets; (ii) pursuing national 
and regional vehicle seller agreements; (iii) increasing our service offerings; 
and (iv) expanding the application of VB3 into new markets. In addition, we 
implement our pricing structure and auction procedures, and attempt to 
introduce cost efficiencies at each of our acquired facilities by implementing 
our operational procedures, integrating our management information systems, and 
redeploying personnel, when necessary.

Results of Operations

Service Revenues. The increase in service revenues for fiscal 2019 of $177.2 
million, or 11.2% as compared to fiscal 2018 came from (i) an increase in the 
U.S. of $152.2 million and (ii) an increase in International of $25.0 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, 
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. 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.

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. of $13.4 million. Excluding a 
detrimental impact of $8.9 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. 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.

Yard Operations Expenses. The increase in yard operations expenses for fiscal 
2019 of $41.2 million, or 4.9% as compared to fiscal 2018 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. 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.

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. of 
$11.1 million. Excluding the beneficial impact of $7.8 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. 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.

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.

Impairment. 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. Our effective income tax rates were 16.1%, 25.7%, and 10.4% for 
fiscal 2019, 2018, and 2017, 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, 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 $46.1 
million, $21.3 million, and $107.6 million for fiscal years 2019, 2018, and 
2017, respectively.

Discussion of Fiscal Year ended July 31, 2018 compared to Fiscal Year ended 
July 31, 2017

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.

Liquidity and Capital Resources

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

Historically, we have financed our growth through cash generated from 
operations, public offerings of common stock, equity issued in conjunction with 
certain acquisitions and debt financing. Our primary source of cash generated 
by operations is from the collection of service fees and reimbursable advances 
from the proceeds of vehicle sales. We expect to continue to use cash flows 
from operations to finance our working capital needs and to develop and grow 
our business. In addition to our stock repurchase program, we are considering a 
variety of alternative potential uses for our remaining cash balances and our 
cash flows from operations. These alternative potential uses include additional 
stock repurchases, repayments of long-term debt, the payment of dividends, and 
acquisitions.

Our business is seasonal as inclement weather during the winter months 
increases the frequency of accidents and consequently, the number of cars 
involved in accidents which the insurance companies salvage rather than repair. 
During the winter months, most of our facilities process 5% to 20% more 
vehicles than at other times of the year. This increased volume requires the 
increased use of our cash to pay out advances and handling costs of the 
additional business.

We believe that our currently available cash and cash equivalents and cash 
generated from operations will be sufficient to satisfy our operating and 
working capital requirements for at least the next 12 months. We expect to 
acquire or develop additional locations and expand some of our current 
facilities in the foreseeable future. We may be required to raise additional 
cash through drawdowns on our Revolving Loan Facility or issuance of additional 
equity to fund this expansion. Although the timing and magnitude of growth 
through expansion and acquisitions are not predictable, the opening of new 
greenfield yards is contingent upon our ability to locate property that (i) is 
in an area in which we have a need for more capacity; (ii) has adequate size 
given the capacity needs; (iii) has the appropriate shape and topography for 
our operations; (iv) is reasonably close to a major road or highway; and (v) 
most importantly, has the appropriate zoning for our business. Costs to develop 
a new yard can range from $3.0 to $50.0 million, depending on size, location 
and developmental infrastructure requirements.

As of July 31, 2019, $75.3 million of the $186.3 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. However, our intent is to permanently reinvest 
these funds outside of the U.S. and our current plans do not require 
repatriation to fund our U.S. operations.

Net cash 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. Capitalized software development costs were $6.1 million, $7.4 
million and $7.1 million for fiscal 2019, 2018 and 2017, 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.

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.

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

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, 2019:


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 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 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%. 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.

Amounts borrowed under the Revolving Loan Facility may be repaid and reborrowed 
until the maturity date of July 21, 2021. We are obligated to pay a commitment 
fee on the unused portion of the Revolving Loan Facility. The commitment fee 
rate ranges from 0.125% to 0.20%, depending on 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, 2019 
and 2018.

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.

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, 2019, the consolidated total net leverage ratio was 
0.30:1. Minimum liquidity as of July 31, 2019 was $1.0 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, 2019.

Note Purchase Agreement

On December 3, 2014, we entered into a Note Purchase Agreement and sold to 
certain purchasers (collectively, the “Purchasers”) $400.0 million in aggregate 
principal amount of senior secured notes (the “Senior Notes”) consisting of (i) 
$100.0 million aggregate principal amount of 4.07% Senior Notes, Series A, due 
December 3, 2024; (ii) $100.0 million aggregate principal amount of 4.19% 
Senior Notes, Series B, due December 3, 2026; (iii) $100.0 million aggregate 
principal amount of 4.25% Senior Notes, Series C, due December 3, 2027; and 
(iv) $100.0 million aggregate principal amount of 4.35% Senior Notes, Series D, 
due December 3, 2029. Interest is due and payable quarterly, in arrears, on 
each of the Senior Notes. Proceeds from the Note Purchase Agreement are being 
used for general corporate purposes.

On July 21, 2016, 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, 2019, the 
consolidated total net leverage ratio was 0.30:1. Minimum liquidity as of July 
31, 2019 was $1.0 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, 2019.

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

As of July 31, 2019, we had no off-balance sheet arrangements pursuant to Item 
303(a)(4) of Regulation S-K promulgated under the Securities Exchange Act of 
1934, as amended.

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.

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.

There were no contract liabilities on the consolidated balance sheets at July 
31, 2019. Our disaggregation between service revenues and vehicle sales at the 
segment level reflects how the nature, timing, amount and uncertainty of our 
revenues and cash flows are impacted by economic factors. We report sales taxes 
on relevant transactions on a net basis in our consolidated results of 
operations, and therefore do not include sales taxes in revenues or costs.

Service revenues

Our service revenue consists of auction and auction related sales transaction 
fees charged for vehicle remarketing services. Within this revenue category, 
our primary performance obligation is the auctioning of consigned vehicles 
through an online auction process. These auction and auction related services 
may include a combination of vehicle purchasing fees, vehicle listing fees, and 
vehicle selling fees that can be based on a predetermined percentage of the 
vehicle sales price, tiered vehicle sales price driven fees, or at a fixed fee 
based on the sale of each vehicle regardless of the selling price of the 
vehicle; transportation fees for the cost of transporting the vehicle to or 
from our facility; title processing and preparation fees; vehicle storage fees; 
bidding fees; and vehicle loading fees. These services are not distinct within 
the context of the contract. Accordingly, revenue for these services is 
recognized when the single performance obligation is satisfied at the 
completion of the auction process. We do not take ownership of these consigned 
vehicles, which are stored at our facilities located throughout the U.S. and at 
its international locations. These fees are recognized as net revenue (not 
gross vehicle selling price) at the time of auction in the amount of such fees 
charged.

We 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.

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.

Vehicle sales

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

Contract assets

We capitalize certain contract assets related to obtaining a contract, where 
the amortization period for the related asset is greater than one year. These 
assets are amortized over the expected life of the customer relationship. 
Contract assets are classified as current or long-term other assets, based on 
the timing of when we expect to recognize the related revenues and are 
amortized as an offset to the associated revenues on a straight-line basis. We 
assess these costs for impairment at least quarterly and as “triggering” events 
occur that indicate it is more likely than not that an impairment exists. The 
contract asset costs where the amortization period for the related asset is one 
year or less are expensed as incurred and recorded within general and 
administrative expenses in the accompanying 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. 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.

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. GAAP. 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. 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 2019 and 2018 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 7 — Long-Term Debt and Note 8 – 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, 2019 and 2018 was $39.4 million and $30.7 million, respectively. 
Accumulated amortization expense related to software as of July 31, 2019 and 
2018 totaled $23.6 million and $16.0 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. 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.

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 2019, 
considered all relevant factors specific to our reporting units, including 
macroeconomic conditions; industry and market considerations; overall financial 
performance 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, 2019, 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. We 
are subject to income taxes in the U.S., Canada, the U.K., Brazil, Spain, 
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, 2019, we have $8.6 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. operations. Accordingly, we do not provide for U.S. 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 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 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. 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 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. 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 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 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

Our U.S. and International regions are considered two separate operating 
segments and are disclosed as two reportable segments. The segments represent 
geographic areas and reflect how the chief operating decision maker allocates 
resources and measures results, including total revenues and operating income. 
Our revenues for the year ended July 31, 2019 were distributed as follows: U.S. 
81.1% and International 18.9%.


Quantitative and Qualitative Disclosures About Market Risk

Our principal exposures to financial market risk are interest rate risk, 
foreign currency risk and translation risk. We do not hold or issue financial 
instruments for trading purposes.

Interest Income Risk

The primary objective of our investment activities is to preserve principal 
while secondarily maximizing yields without significantly increasing risk. To 
achieve this objective in the current uncertain global financial markets, all 
cash and cash equivalents were held in bank deposits and money market funds as 
of July 31, 2019. As the interest rates on a material portion of our cash and 
cash equivalents are variable, a change in interest rates earned on our 
investment portfolio would impact interest income along with cash flows but 
would not materially impact the fair market value of the related underlying 
instruments. As of July 31, 2019, we held no direct investments in auction rate 
securities, collateralized debt obligations, structured investment vehicles or 
mortgaged-backed securities. Based on the average cash balance held for fiscal 
2019, a hypothetical 10% adverse change in our interest yield would not have 
materially affected our operating results.

Interest Expense Risk

Our total borrowings under the Revolving Loan Facility under the Credit 
Agreement were zero as of July 31, 2019. 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 adjusted LIBOR rate. If interest 
rates were to increase by 10%, our interest expense would increase by $2.0 
million.

Foreign Currency and Translation Exposure

Fluctuations in foreign currencies create volatility in our reported results of 
operations because we are required to consolidate the results of operations of 
our foreign currency denominated subsidiaries. International net revenues are 
typically denominated in the local currency of each country and result from 
transactions by our operations in Canada, the U.K., Brazil, the Republic of 
Ireland, Germany, Finland, the U.A.E., Oman, Bahrain, and Spain. These 
operations also incur a majority of their expenses in the local currency, the 
Canadian dollar, British pound, Brazilian real, European Union euro, U.A.E. 
dirham, Omani rial, and Bahraini dinar. Our international operations are 
subject to risks associated with foreign exchange rate volatility, which could 
have a material and adverse impact on our future results. A hypothetical 10% 
adverse change in the value of the U.S. dollar relative to the Canadian dollar, 
British pound, Brazilian real, European Union euro, U.A.E. dirham, Omani rial, 
and Bahraini dinar would have resulted in a decrease in operating income of 
$7.9 million for fiscal 2019.

On June 23, 2016, the U.K. held a referendum in which voters approved an exit 
from the European Union, commonly referred to as “Brexit.” In February 2017, 
the British Parliament voted in favor of allowing the British government to 
begin negotiating the terms of the U.K.’s withdrawal from the European Union 
and discussions with the European Union began in March 2017. The ultimate 
effects of Brexit on us are difficult to predict, but adverse consequences 
concerning Brexit or the European Union could include deterioration in global 
economic conditions, instability in global financial markets, political 
uncertainty, volatility in currency exchange rates, or adverse changes in the 
cross-border agreements currently in place, any of which could have an adverse 
impact on our financial results in the future. The ultimate effects of Brexit 
on us will also depend on the terms of agreements, if any, that the U.K. and 
the European Union make to retain access to each other’s respective markets 
either during a transitional period or more permanently.

Fluctuations in foreign currencies also create volatility in our consolidated 
financial position because we are required to remeasure substantially all 
assets and liabilities held by our foreign subsidiaries at the current exchange 
rate at the close of the accounting period. At July 31, 2019, the cumulative 
effect of foreign exchange rate fluctuations on our consolidated financial 
position was a net translation loss of $132.5 million. This loss was recognized 
as an adjustment to stockholders’ equity through accumulated other 
comprehensive income. A hypothetical 10% adverse change in the value of the 
U.S. dollar relative to the Canadian dollar, British pound, Brazilian real, 
European Union euro, U.A.E. dirham, Omani rial, Bahraini dinar, and Indian 
rupee would not have materially affected our consolidated financial position.

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation of the effectiveness of the design and operation of 
our disclosure controls and procedures (as defined in Rules 13a-15(e) and 
15d-15(e) under the Exchange Act), or Disclosure Controls, as of the end of the 
period covered by this Annual Report on Form 10-K. This evaluation, or Controls 
Evaluation, was performed under the supervision and with the participation of 
management, including our Chief Executive Officer (CEO) and our Chief Financial 
Officer (CFO). Disclosure Controls are controls and procedures designed to 
provide reasonable assurance that information required to be disclosed in our 
reports filed under the Exchange Act, such as this Annual Report, is recorded, 
processed, summarized and reported within the time periods specified in the 
SEC’s rules and forms. Disclosure Controls include, without limitation, 
controls and procedures designed to provide reasonable assurance that 
information required to be disclosed in our reports filed under the Exchange 
Act is accumulated and communicated to our management, including our CEO and 
CFO, or persons performing similar functions, as appropriate, to allow timely 
decisions regarding required disclosure. Our Disclosure Controls include some, 
but not all, components of our internal control over financial reporting.

Based upon the Controls Evaluation, our CEO and CFO have concluded that, as of 
the end of the period covered by this Annual Report on Form 10-K, our 
Disclosure Controls were effective to provide reasonable assurance that 
information required to be disclosed in our Exchange Act reports is accumulated 
and communicated to management, including the CEO and CFO, to allow timely 
decisions regarding required disclosure, and that such information is recorded, 
processed, summarized and reported within the time periods specified by the 
Securities and Exchange Commission.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate 
internal control over financial reporting (as defined in Rules 13a-15(f) and 
15d-15(f)) to provide reasonable assurance regarding the reliability of our 
financial reporting and the preparation of consolidated financial statements 
for external purposes in accordance with generally accepted accounting 
principles. Internal control over financial reporting includes those policies 
and procedures that (1) pertain to the maintenance of records that, in 
reasonable detail, accurately and fairly reflect the transactions and 
dispositions of our assets; (2) provide reasonable assurance that transactions 
are recorded as necessary to permit preparation of consolidated financial 
statements in accordance with generally accepted accounting principles, and 
that our receipts and expenditures are being made only in accordance with 
authorizations of our management and directors; and (3) provide reasonable 
assurance regarding prevention or timely detection of unauthorized acquisition, 
use or disposition of our assets that could have a material effect on the 
consolidated financial statements.

Management assessed our internal control over financial reporting for the 
fiscal year ended July 31, 2019. Management based its assessment on criteria 
established in Internal Control — Integrated Framework issued by the Committee 
of Sponsoring Organizations of the Treadway Commission (2013 framework). 
Management’s assessment included evaluation of such elements as the design and 
operating effectiveness of key financial reporting controls, process 
documentation, accounting policies, and our overall control environment. This 
assessment is supported by testing and monitoring performed by our Finance 
department.

During our most recent fiscal quarter, management identified and remediated a 
material weakness related to ineffective information technology general 
controls (ITGCs) in the area of change-management over certain information 
technology (IT) systems that support our financial reporting processes. The 
material weakness did not result in any identified misstatements to the 
financial statements, and there were no changes to previously released 
financial results. Further, based on our assessment, management has concluded 
that our internal control over financial reporting was effective as of the end 
of the fiscal year to provide reasonable assurance regarding the reliability of 
financial reporting and the preparation of consolidated financial statements 
for external reporting purposes in accordance with generally accepted 
accounting principles. The certifications of our principal executive officer 
and principal financial officer attached as Exhibits 31.1 and 31.2 to this 
Annual Report on Form 10-K include, in paragraph 4 of such certifications, 
information concerning our disclosure controls and procedures and internal 
controls over financial reporting. We reviewed the results of management’s 
assessment with the Audit Committee of our Board of Directors.

Our independent registered public accounting firm, Ernst & Young LLP, 
independently assessed the effectiveness of our internal control over financial 
reporting as of July 31, 2019.