Item 15. Exhibits, Financial Statement Schedules

The following documents are filed as part of this Form 10-K:

(a)	Financial statements:

Our consolidated financial statements at July 31, 2018 and 2017 and for each of the three years in the period ended July 31, 2018 and the notes thereto, together with the report of the independent registered public accounting firm on those consolidated financial statements are hereby filed as part of this annual report on Form 10-K.

(b)	Financial statement schedules:

No financial statement schedules are presented since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.

(c)	Exhibits:

Exhibits are filed as part of this Report and are hereby incorporated by reference. Refer to Exhibit Index included herein.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Registrant
	COPART, INC.
	By:		/s/ A. JAYSON ADAIR
			A. Jayson Adair Chief Executive Officer (Principal Executive Officer and Director)

Date: October 1, 2018

	COPART, INC.
	By:		/s/ JEFFREY LIAW
			Jeffrey Liaw, Chief Financial Officer (Principle Financial and Accounting Officer and duly Authorized Officer)

Date: October 1, 2018

POWER OF ATTORNEY

KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints A. Jayson Adair and Jeffrey Liaw, and each of them, as his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature		Capacity in Which Signed		Date
/s/ A. JAYSON ADAIR		Chief Executive Officer (Principal Executive Officer and Director)		October 1, 2018
A. Jayson Adair
/s/ Jeffrey Liaw		Chief Financial Officer (Principal Financial and Accounting Officer)		October 1, 2018
Jeffrey Liaw
/s/ WILLIS J. JOHNSON		Chairman of the Board		October 1, 2018
Willis J. Johnson
/s/ VINCENT W. MITZ		President and Director		October 1, 2018
Vincent W. Mitz
/s/ JAMES E. MEEKS		Director		October 1, 2018
James E. Meeks
/s/ STEVEN D. COHAN		Director		October 1, 2018
Steven D. Cohan
/s/ DANIEL ENGLANDER		Director		October 1, 2018
Daniel Englander
/s/ THOMAS N. TRYFOROS		Director		October 1, 2018
Thomas N. Tryforos
/s/ MATT BLUNT		Director		October 1, 2018
Matt Blunt

Copart, Inc.

Index to Consolidated Financial Statements

and Financial Statement Schedule

Consolidated Financial Statements		Page Number
Report of Independent Registered Public Accounting Firm		58
Consolidated Balance Sheets as of July 31, 2018 and 2017		59
Consolidated Statements of Income for the years ended July 31, 2018, 2017 and 2016		60
Consolidated Statements of Comprehensive Income for the years ended July 31, 2018, 2017 and 2016		61
Consolidated Statements of Stockholder’s Equity for the years ended July 31, 2018, 2017 and 2016		62
Consolidated Statements of Cash Flows for the years ended July 31, 2018, 2017 and 2016		63
Notes to Consolidated Financial Statements		64

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Copart, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Copart, Inc. (the Company) as of July 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended July 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at July 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of July 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated October 1, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since fiscal year 2006.

Dallas, Texas

October 1, 2018

COPART, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

		July 31,
		2018				2017
ASSETS
Current assets:
Cash and cash equivalents		$	274,520			$	210,100
Accounts receivable, net		351,601				311,846
Vehicle pooling costs		34,284				31,118
Inventories		16,734				10,163
Income taxes receivable		15,312				6,418
Prepaid expenses and other assets		16,665				17,616
Total current assets		709,116				587,261
Property and equipment, net		1,163,425				944,056
Intangibles, net		64,892				75,938
Goodwill		337,235				340,243
Deferred income taxes		470				1,287
Other assets		32,560				33,716
Total assets		$	2,307,698			$	1,982,501
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	270,944			$	208,415
Deferred revenue		4,488				5,019
Income taxes payable		673				6,472
Deferred income taxes		—				92
Current portion of revolving loan facility and capital lease obligations		1,151				82,155
Total current liabilities		277,256				302,153
Deferred income taxes		19,733				3,192
Income taxes payable		27,277				24,573
Long-term debt, revolving loan facility, and capital lease obligations, net of discount		398,747				550,883
Other liabilities		3,586				3,100
Total liabilities		726,599				883,901
Commitments and contingencies
Stockholders’ equity:
Preferred stock: $0.0001 par value—5,000,000 shares authorized; none issued		—				—
Common stock: $0.0001 par value—400,000,000 shares authorized; 233,898,841 and 230,488,296 shares issued and outstanding, respectively		23				23
Additional paid-in capital		526,858				453,349
Accumulated other comprehensive loss		(107,928		)		(100,676		)
Retained earnings		1,162,146				745,370
Noncontrolling interest		—				534
Total stockholders’ equity		1,581,099				1,098,600
Total liabilities and stockholders’ equity		$	2,307,698			$	1,982,501

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

COPART, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

		Year Ended July 31,
		2018				2017				2016
Service revenues and vehicle sales:
Service revenues		$	1,578,502			$	1,286,252			$	1,104,379
Vehicle sales		227,193				161,729				164,070
Total service revenues and vehicle sales		1,805,695				1,447,981				1,268,449
Operating expenses:
Yard operations		846,868				678,401				582,904
Cost of vehicle sales		196,461				137,552				140,959
General and administrative		176,890				151,364				138,116
Impairment of long-lived assets		1,131				19,365				—
Total operating expenses		1,221,350				986,682				861,979
Operating income		584,345				461,299				406,470
Other (expense) income:
Interest expense		(20,368		)		(23,779		)		(23,606		)
Interest income		1,293				1,406				1,449
Other income (expense), net		(2,759		)		1,174				11,552
Total other expense		(21,834		)		(21,199		)		(10,605		)
Income before income tax expense		562,511				440,100				395,865
Income tax expense		144,504				45,839				125,505
Net income		418,007				394,261				270,360
Net income attributable to noncontrolling interest		140				34				—
Net income attributable to Copart, Inc.		$	417,867			$	394,227			$	270,360
Basic net income per common share		$	1.80			$	1.72			$	1.18
Weighted average common shares outstanding		231,793				228,686				228,846
Diluted net income per common share		$	1.73			$	1.66			$	1.11
Diluted weighted average common shares outstanding		241,877				237,019				244,295

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

COPART, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

		Year Ended July 31,
		2018				2017				2016
Comprehensive income, net of tax:
Net income		$	418,007			$	394,261			$	270,360
Other comprehensive income:
Unrealized gain on interest rate swaps, net (a)		—				—				603
Reclassification adjustment of interest rate swaps, net (b)		—				—				(320		)
Foreign currency translation adjustments		(7,252		)		8,518				(40,684		)
Comprehensive income		410,755				402,779				229,959
Comprehensive income attributable to noncontrolling interest		140				34				—
Comprehensive income attributable to Copart, Inc.		$	410,615			$	402,745			$	229,959

(a)	Net of tax effect of $(342) for the year ended July 31, 2016.

(b)	Net of tax effect of $178 for the year ended July 31, 2016.

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

COPART, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

		Common Stock											Accumulated Other Comprehensive Income (Loss)
			Additional Paid in Capital
		Outstanding Shares			Amount						Retained Earnings				Noncontrolling Interest				Stockholders’ Equity
Balances at July 31, 2015		240,312,680			$	24			$	407,796			$	(68,793	)		$	625,437			$	—			$	964,464
Net income		—			—				—				—				270,360				—				270,360
Currency translation adjustment		—			—				—				(40,684		)		—				—				(40,684		)
Interest rate swaps, net of tax effects		—			—				—				283				—				—				283
Exercise of stock options, net of repurchased shares		2,258,880			—				(372		)		—				(742		)		—				(1,114		)
Employee stock-based payment compensation and related tax benefit		—			—				20,631				—				—				—				20,631
Shares issued for Employee Stock Purchase Plan		216,264			—				3,369				—				—				—				3,369
Shares repurchased		(22,543,704	)		(2		)		(38,990		)		—				(403,861		)		—				(442,853		)
Balances at July 31, 2016		220,244,120			22				392,434				(109,194		)		491,194				—				774,456
Net income		—			—				—				—				394,227				34				394,261
Currency translation adjustment		—			—				—				8,518				—				—				8,518
Acquisition of noncontrolling interest		—			—				—				—				—				500				500
Exercise of stock options, net of repurchased shares		10,053,463			1				35,805				—				(140,051		)		—				(104,245		)
Employee stock-based payment compensation and related tax benefit		—			—				20,840				—				—				—				20,840
Shares issued for Employee Stock Purchase Plan		190,713			—				4,270				—				—				—				4,270
Balances at July 31, 2017		230,488,296			23				453,349				(100,676		)		745,370				534				1,098,600
Net income		—			—				—				—				417,867				140				418,007
Currency translation adjustment		—			—				—				(7,252		)		—				—				(7,252		)
Distribution to noncontrolling interest		—			—				—				—				—				(235		)		(235		)
Sale of majority-owned subsidiary		—			—				—				—				—				(439		)		(439		)
Exercise of stock options, net of repurchased shares		3,225,377			—				44,459				—				(1,115		)		—				43,344
Employee stock-based payment compensation		—			—				23,197				—				24				—				23,221
Shares issued for Employee Stock Purchase Plan		185,168			—				5,853				—				—				—				5,853
Balances at July 31, 2018		233,898,841			$	23			$	526,858			$	(107,928	)		$	1,162,146			$	—			$	1,581,099

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

COPART, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

		Year Ended July 31,
		2018				2017				2016
Cash flows from operating activities:
Net income		$	418,007			$	394,261			$	270,360
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, including debt cost		79,040				57,441				49,643
Allowance for doubtful accounts		1,142				187				1,175
Impairment of long-lived assets		1,157				19,365				—
Equity in losses of unconsolidated affiliates		750				671				895
Stock-based payment compensation		23,221				20,840				20,864
Loss (gain) on sale of property and equipment		3,240				184				(54		)
Deferred income taxes		16,717				19,901				5,740
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable		(40,335		)		(38,542		)		(54,213		)
Vehicle pooling costs		(3,353		)		(1,915		)		(4,137		)
Inventories		(3,959		)		1,294				(2,509		)
Prepaid expenses and other current assets		(776		)		1,760				(738		)
Other assets		70				1,085				4,164
Accounts payable and accrued liabilities		53,320				4,269				48,347
Deferred revenue		(520		)		392				983
Income taxes receivable		(8,916		)		12,343				(12,649		)
Income taxes payable		(3,149		)		(333		)		2,788
Other liabilities		(587		)		(1,145		)		1,839
Net cash provided by operating activities		535,069				492,058				332,498
Cash flows from investing activities:
Purchases of property and equipment		(287,910		)		(172,178		)		(173,917		)
Purchases of assets and liabilities in connection with acquisitions, net of cash acquired		(8,787		)		(160,812		)		—
Proceeds from sale of property and equipment		6,425				765				662
Proceeds from sale of majority-owned subsidiary		1,796				—				—
Investment in unconsolidated affiliate		—				(3,566		)		—
Purchases of marketable securities		—				—				(21,119		)
Proceeds from sale of marketable securities		—				—				21,498
Net cash used in investing activities		(288,476		)		(335,791		)		(172,876		)
Cash flows from financing activities:
Proceeds from the exercise of stock options		44,459				31,188				13,240
Proceeds from the issuance of Employee Stock Purchase Plan shares		5,853				4,270				3,369
Repurchases of common stock		—				—				(442,855		)
Payments for employee stock-based tax withholdings		(1,115		)		(135,433		)		(15,039		)
Proceeds from the issuance of long-term debt, net of discount		—				—				93,468
Net (repayments) proceeds on revolving loan facility		(231,000		)		(7,000		)		238,000
Debt offering costs		—				—				(1,179		)
Principal payments on long-term debt		—				—				(337,500		)
Distributions to noncontrolling interest		(235		)		—				—
Net cash used in financing activities		(182,038		)		(106,975		)		(448,496		)
Effect of foreign currency translation		(135		)		4,959				(11,289		)
Net increase (decrease) in cash and cash equivalents		64,420				54,251				(300,163		)
Cash and cash equivalents at beginning of period		210,100				155,849				456,012
Cash and cash equivalents at end of period		$	274,520			$	210,100			$	155,849
Supplemental disclosure of cash flow information:
Interest paid		$	20,343			$	23,221			$	23,606
Income taxes paid, net of refunds		$	142,161			$	14,011			$	127,981

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

COPART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JULY 31, 2018

NOTE 1 — Summary of Significant Accounting Policies

Basis of Presentation and Description of Business

Copart, Inc. was incorporated under the laws of the State of California in 1982. In January 2012, the Company changed the state in which it is incorporated (the “Reincorporation”), and is now incorporated under the laws of the State of Delaware. All references to “we,” “us,” “our,” or “the Company” herein refer to the California corporation prior to the date of the Reincorporation, and to the Delaware corporation on and after the date of the Reincorporation.

The consolidated financial statements of the Company include the accounts of the parent company and its wholly-owned subsidiaries, including its foreign wholly-owned subsidiaries. The Company also had a 59.5% voting interest in a company, which was acquired as part of the Cycle Express, LLC acquisition (“majority-owned subsidiary”), which provided various repossession services for the powersports auction industry. Noncontrolling interest consisted of a 40.5% outside voting interest in the majority-owned subsidiary. Net income or loss of the majority-owned subsidiary was allocated to the members’ interests in accordance with the operating agreement. During the year ended July 31, 2018, the Company sold the majority-owned subsidiary and disposed of its related goodwill. The proceeds from the sale of the majority-owned subsidiary were $1.8 million resulting in a realized gain of $0.9 million recorded in other income. Significant intercompany transactions and balances have been eliminated in consolidation.

The Company provides vehicle sellers with a full range of services to process and sell vehicles over the internet through the Company’s Virtual Bidding Third Generation (VB3) internet auction-style sales technology. Sellers are primarily insurance companies but also include banks, finance companies, charities, fleet operators, dealers and vehicles sourced directly from individual owners. The Company sells principally to licensed vehicle dismantlers, rebuilders, repair licensees, used vehicle dealers and exporters; however, at certain locations, the Company sells directly to the general public. The majority of vehicles sold on behalf of insurance companies are either damaged vehicles deemed a total loss or not economically repairable by the insurance companies or are recovered stolen vehicles for which an insurance settlement with the vehicle owner has already been made. The Company offers vehicle sellers a full range of services that expedite each stage of the vehicle sales process, minimize administrative and processing costs and maximize the ultimate sales price. In the United States (U.S.), Canada, Brazil, the Republic of Ireland, Germany, Finland, the United Arab Emirates (U.A.E.), Oman, Bahrain, and Spain, the Company sells vehicles primarily as an agent and derives revenue primarily from fees paid by vehicle sellers and vehicle buyers as well as related fees for services, such as towing and storage. In the United Kingdom (U.K.) and Germany, the Company operates both as an agent and on a principal basis, in some cases purchasing salvage vehicles outright and reselling the vehicles for its own account. In Germany and Spain, the Company also derives revenue from listing vehicles on behalf of insurance companies and insurance experts to determine the vehicle’s residual value and/or to facilitate a sale for the insured.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions 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; self-insured reserves; allowance for doubtful accounts; income taxes; revenue recognition; stock-based payment compensation; purchase price allocations; long-lived asset and goodwill impairment calculations; and contingencies. Actual results could differ from these estimates.

Revenue Recognition

The Company provides a portfolio of services to its sellers and buyers that facilitate the sale and delivery of a vehicle from seller to buyer. These services include the ability to use the Company’s internet sales technology and vehicle delivery, loading, title processing, preparation and storage. The Company evaluates multiple-element arrangements relative to its member and seller agreements.

The services provided to the seller of a vehicle involve disposing of a vehicle on the seller’s behalf and, under most of the Company’s current contracts, collecting the proceeds from the member. The Company applies Accounting Standard Update 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (ASU 2009-13) for revenue

recognition. Pre-sale services, including towing, title processing, preparation and storage, as well as sale fees and other enhancement services meet the criteria for separate units of accounting. Revenue associated with each service is recognized upon completion of the respective service, net of applicable rebates or allowances. For certain sellers who are charged a proportionate fee based on the high bid of the vehicle, the revenue associated with the pre-sale services is recognized upon completion of the sale when the total arrangement is fixed and determinable. The estimated selling price of each service is determined based on management’s best estimate and allotted based on the relative selling price method.

Vehicle sales, where vehicles are purchased and remarketed on the Company’s own behalf, are recognized on the sale date, which is typically the point of high bid acceptance. Upon high bid acceptance, a legally binding contract is formed with the member, and the gross sales price is recorded as revenue.

The Company also provides a number of services to the buyer of the vehicle, charging a separate fee for each service. Each of these services has been assessed to determine whether the requirements have been met to separate them into units of accounting within a multiple-element arrangement. The Company has concluded that the sale and the post-sale services are separate units of accounting. The fees for sale services are recognized upon completion of the sale, and the fees for the post-sale services are recognized upon successful completion of those services using the relative selling price method. The Company reports sales taxes on relevant transactions on a net basis in the Company’s consolidated results of operations, and therefore does not include sales taxes in revenues or costs.

The Company also charges members an annual registration fee for the right to participate in its vehicle sales program, which is recognized ratably over the term of the arrangement, and relist and late-payment fees, which are recognized upon receipt of payment by the member. No provision for returns has been established, as all sales are final with no right of return, although the Company provides for bad debt expense in the case of non-performance by its members or sellers.

The Company allocates arrangement consideration based upon management’s best estimate of the selling price of the separate units of accounting contained within arrangements including multiple deliverables. Significant inputs in the Company’s estimates of the selling price of separate units of accounting include market and pricing trends, pricing customization and practices, and profit objectives for the services.

Vehicle Pooling Costs

The Company defers in vehicle pooling costs certain yard operation expenses associated with vehicles consigned to and received by the Company, but not sold as of the end of the period. The Company quantifies the deferred costs using a calculation that includes the number of vehicles at its facilities at the beginning and end of the period, the number of vehicles sold during the period and an allocation of certain yard operation costs of the period. The primary expenses allocated and deferred are certain facility costs, labor, transportation, and vehicle processing. 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. Given the fixed cost nature of the Company’s business, there are no direct correlations for increases in expenses or units processed on vehicle pooling costs.

The Company applies the provisions of accounting guidance for subsequent measurement of inventory to its vehicle pooling costs. The provision requires that items such as idle facility expenses, double freight and rehandling costs be recognized as current period charges regardless of whether they meet the criteria of “abnormal” as provided in the guidance. In addition, the guidance requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of production facilities.

In August 2017, Hurricane Harvey hit the Texas Gulf Coast. As a result of the extensive flooding that it caused, the Company expended $68.6 million in additional costs for the year ended July 31, 2018, for (i) temporary storage facilities, (ii) premiums for subhaulers, (iii) labor costs incurred for overtime, (iv) travel and lodging due to the reassignment of employees to the affected region, and (v) equipment lease expenses to handle the increased volume. These costs, which are characterized as "abnormal" under ASC 330, Inventory, were expensed as incurred and not included in vehicle pooling costs. As of July 31, 2018, substantially all of the incremental salvage vehicles received as a result of Hurricane Harvey have been sold.

Foreign Currency Translation

The Company records foreign currency translation adjustments from the process of translating the functional currency of the financial statements of its foreign subsidiaries into the U.S. dollar reporting currency. The Canadian dollar, British pound, Brazilian real, European Union euro, U.A.E. dirham, Omani rial, Bahraini dinar, and Indian rupee are the functional currencies of the Company’s foreign subsidiaries as they are the primary currencies within the economic environment in which each subsidiary operates. The original equity investment in the respective subsidiaries is translated at historical rates. Assets and liabilities of the respective subsidiary’s operations are translated into U.S. dollars at period-end exchange rates, and revenues and expenses are translated into U.S. dollars at average exchange rates in effect during each reporting period. Adjustments resulting from the translation of each subsidiary’s financial statements are reported in other comprehensive income.

The cumulative effects of foreign currency exchange rate fluctuations were as follows (in thousands):

Cumulative loss on foreign currency translation as of July 31, 2016		$	(109,194	)
Gain on foreign currency translation		8,518
Cumulative loss on foreign currency translation as of July 31, 2017		$	(100,676	)
Loss on foreign currency translation		(7,252		)
Cumulative loss on foreign currency translation as of July 31, 2018		$	(107,928	)

Fair Value of Financial Instruments

The Company records its financial assets and liabilities at fair value in accordance with the framework for measuring fair value in U.S. GAAP. In accordance with ASC 820, Fair Value Measurements and Disclosures, as amended by Accounting Standards Update 2011-04, the Company considers fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants under current market conditions. This framework establishes a fair value hierarchy that prioritizes the inputs used to measure fair value:

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

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

Level III	Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate.

The amounts recorded for financial instruments in the Company’s consolidated financial statements, which included cash, accounts receivable, accounts payable, accrued liabilities and Revolving Loan Facility approximated their fair values as of July 31, 2018 and 2017, due to the short-term nature of those instruments, and are classified within Level II of the fair value hierarchy. Cash equivalents are classified within Level II of the fair value hierarchy because they are valued using quoted market prices of the underlying investments. See Note 8 — Long-Term Debt, Note 10 – Fair Value Measures, and Note 10 – Fair Value Measures.

Cost of Vehicle Sales

Cost of vehicle sales includes the purchase price of vehicles sold for the Company’s own account.

Yard Operations

Yard operations consists primarily of operating personnel (which includes yard management, clerical and yard employees), rent, contract vehicle towing, insurance, fuel and equipment maintenance and repair. The Company recognizes the costs of pre-sale services, including towing, title processing, and preparation and storage within yard operation expenses at the time the related services are provided.

General and Administrative Expenses

General and administrative expenses consist primarily of executive, accounting and data processing, sales personnel, professional services, system maintenance and enhancements and marketing expenses.

Advertising

All advertising costs are expensed as incurred and are included in general and administrative expenses on the consolidated statements of income. Advertising expenses were $5.9 million, $5.6 million, and $6.8 million for the years ended July 31, 2018, 2017 and 2016, respectively.

Other (Expense) Income

Other (expense) income consists primarily of interest expense, interest income, gains and losses from the disposal of fixed assets, rental income, earnings from unconsolidated affiliates, and currency related gains and losses.

Income Taxes and Deferred Tax Assets

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, their respective tax basis, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Excess tax benefits and deficiencies related to exercises of stock options are recognized as expense or benefit in the income statement as discrete items in the reporting period in which they occur.

In accordance with the provisions of ASC 740, Income Taxes, a two-step approach is applied to the recognition and measurement of uncertain tax positions taken or expected to be taken in a tax return. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained in an audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax position as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company recognizes interest and penalties related to uncertain tax positions in the provision for income taxes on its consolidated statements of income.

Net Income Per Share

Basic net income per share amounts were computed by dividing consolidated net income by the weighted average number of common shares outstanding during the period. Diluted net income per share amounts were computed by dividing consolidated net income by the weighted average number of common shares outstanding plus dilutive potential common shares calculated for stock options outstanding during the period using the treasury stock method.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents include cash held in checking, domestic certificates of deposit, and money market accounts. The Company periodically invests its excess cash in money market funds and U.S. Treasury Bills. The Company’s cash and cash equivalents are placed with high credit quality financial institutions.

Marketable Securities

Marketable securities consist of marketable equity securities and are classified as available-for-sale and stated at fair value. The cost basis of the marketable securities is based on the specific identification method. Unrealized gains or losses relating to available-for-sale securities are recorded in accumulated other comprehensive income, net of income taxes. Reclassification adjustments out of accumulated other comprehensive income resulting from realized gains or losses from the sale of available-for-sale securities are included in other income. During the year ended July 31, 2016, the Company sold all of its marketable securities. The cost basis of the marketable securities was $21.1 million and proceeds from the sale of the marketable securities were $21.5 million resulting in a realized gain of $0.4 million recorded in other income.

Inventory

Inventories of purchased vehicles are stated at the lower of cost or estimated realizable value. Cost includes the Company’s cost of acquiring ownership of the vehicle. The cost of vehicles sold is charged to cost of vehicle sales as sold on a specific identification basis.

Accounts Receivable

Accounts receivable, which consist primarily of advance charges due from insurance companies and the gross sales price of the vehicle due from members, are recorded when billed, advanced or accrued and represent claims against third parties that will be settled in cash.

Concentration of Credit Risk

Financial instruments, which subject the Company to potential credit risk, consist of its cash and cash equivalents, short-term investments and accounts receivable. The Company adheres to its investment policy when placing investments. The investment policy has established guidelines to limit the Company’s exposure to credit risk by placing investments with high credit quality financial institutions, diversifying its investment portfolio, limiting investments in any one issuer or pooled fund and placing investments with maturities that maintain safety and liquidity. The Company places its cash and cash equivalents with high credit quality financial institutions. Deposits with these financial institutions may exceed the amount of insurance provided; however, these deposits typically are redeemable upon demand and, therefore, the Company believes that the financial risks associated with these financial instruments are minimal.

The Company generally does not require collateral on its accounts receivable. The Company estimates its allowances for doubtful accounts based on historical collection trends, the age of outstanding receivables and existing economic conditions. If events or changes in circumstances indicate that specific receivable balances may be impaired, further consideration is given to the collectability of those balances and the allowance is adjusted accordingly. Past-due account balances are written off when the Company’s internal collection efforts have been unsuccessful in collecting the amounts due. The Company does not have off-balance sheet credit exposure related to its customers and to date, the Company has not experienced significant credit-related losses.

No single customer accounted for more than 10% of total revenues for the years ended July 31, 2018, 2017 and 2016. As of July 31, 2018 and 2017, no customer accounted for more than 10% of the Company’s accounts receivable.

Property and Equipment

Property and equipment is stated at cost, less accumulated depreciation and amortization. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful lives of the respective improvements, which is between seven and ten years. Significant improvements which substantially extend the useful lives of assets are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives: three to seven years for internally developed or purchased software; three to twenty years for transportation and other equipment; three to five years for office furniture and equipment; and 7 to 40 years or the lease term, whichever is shorter, for buildings and improvements. Amortization of equipment under capital leases is included in depreciation expense.

In the fourth quarter of 2018, the Company modified its estimate of the useful life of its land improvements to better reflect the estimated periods during which these assets will remain in service. The change in estimate was accounted for prospectively as of the first day of the fourth quarter, and this change will not have a material effect on future periods.

Goodwill

In accordance with ASC 350-30-35, Intangibles—Goodwill and Other, goodwill is not amortized but is tested for potential impairment, at a minimum on an annual basis, or when indications of potential impairment exist. The Company assesses goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, referred to as a reporting unit. The Company has identified two reporting units, which are consistent with its two operating and reportable segments, U.S. and International. The Company has historically evaluated goodwill for impairment annually as of the end of the fourth quarter, or when an indicator of impairment exists. During the year ended July 31, 2017, the Company voluntarily changed the date of its annual goodwill impairment assessment for its reporting units from the end of fiscal fourth quarter, July 31, to the beginning of fiscal fourth quarter, May 1. This voluntary change in the annual goodwill assessment date was a change in accounting principle, which the Company concluded was preferable as it more closely aligns the timing of the annual goodwill impairment assessment date with the most current information from the Company’s planning and forecasting process and also provides management with additional time to complete the annual assessment in advance of the Company’s year-end reporting.

The Company’s annual goodwill impairment analysis, which was performed qualitatively during the fourth quarter of fiscal 2018 and 2017, did not result in an impairment charge. This qualitative analysis, which is referred to as step zero under ASC 350, considered all relevant factors specific to the reporting units, including macroeconomic conditions; industry and market considerations; overall financial performance and relevant entity-specific events.

Segments and Other Geographic Reporting

The Company’s U.S. and International regions are considered two separate operating segments and are disclosed as two reportable segments. The segments represent geographic areas and reflect how the chief operating decision maker allocates resources and measures results, including total revenues, operating income and income before income taxes. The segments continue to share similar business models, services and economic characteristics.

Capitalized Software Costs

The Company capitalizes system development costs and website development costs related to the enterprise computing services during the application development stage. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life, generally three years. The Company evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that impact the recoverability of these assets. Total gross capitalized software as of July 31, 2018 and 2017 was $30.7 million and $38.5 million, respectively. Accumulated amortization expense related to software as of July 31, 2018 and 2017 totaled $16.0 million and $25.7 million, respectively. During the year ended July 31, 2018 and 2016, the Company retired fully amortized capitalized software of $15.5 million and $29.8 million, respectively, which were no longer being utilized. Additionally, during the year ended July 31, 2017, the Company recognized a $19.4 million charge primarily related to fully impairing costs previously capitalized in connection with the development of business operating software.

Stock-Based Payment Compensation

The Company accounts 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 payment awards made to employees, consultants and directors based on estimated fair value. ASC 718 requires companies to estimate the fair value of stock-based payment 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.

Option valuation models require the input of subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options and because changes in the input assumptions can materially affect their fair value estimate, it is the Company’s opinion that the existing models do not necessarily provide a reliable single measure of the fair value of the employee stock options.

The fair value of each option was estimated on the measurement date using the Black-Scholes Merton (BSM) option-pricing model utilizing the following assumptions:

		July 31,
		2018				2017				2016
Expected life (in years)		5.3 – 6.9				5.5 – 7.4				5.3 – 7.2
Risk-free interest rate		1.88 – 2.62				1.20 – 2.07				1.16 – 2.06
Estimated volatility		20 – 21				20 – 23				21 – 26
Expected dividends		—		%		—		%		—		%
Weighted average fair value at measurement date		$	8.88			$	7.05			$	5.04

Expected life—The Company’s expected life represents the period that the Company’s stock-based payment awards are expected to be outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based payment awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based payment awards.

Estimated volatility—The Company uses the trading history of its common stock in determining an estimated volatility factor when using the BSM option-pricing model to determine the fair value of options granted.

Expected dividend—The Company has not declared dividends. Therefore, the Company uses a zero value for the expected dividend value factor when using the BSM option-pricing model to determine the fair value of options granted.

Risk-free interest rate—The Company bases the risk-free interest rate used in the BSM option-pricing model on the implied yield currently available on U.S. Treasury zero-coupon issues with the same or substantially equivalent expected life.

Estimated forfeitures—When estimating forfeitures, the Company considers voluntary and involuntary termination behavior as well as analysis of actual option forfeitures.

During the year ended July 31, 2016, the Company adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which impacted the accounting for share-based payments, including income tax consequences, classification of awards and the classification on the consolidated statements of cash flows. As a result of the adoption, the Company recognized excess tax benefits of $14.7 million as a reduction to tax expense in the consolidated statements of income, as though ASU 2016-09 had been in effect since the beginning of fiscal 2016, instead of reflected in stockholders’ equity.

Net cash proceeds from the exercise of stock options were $44.5 million, $31.2 million and $13.2 million for the years ended July 31, 2018, 2017 and 2016, respectively. In accordance with ASC 718, the Company presents excess tax benefits from disqualifying dispositions of the exercise of incentive stock options, vested prior to August 1, 2005, if any, as financing cash flows rather than operating cash flows.

Comprehensive Income

Comprehensive income includes all changes in stockholders’ equity during a period from non-stockholder sources. For the years ended July 31, 2018, 2017 and 2016, accumulated other comprehensive income (loss) was the effect of foreign currency translation adjustments and the effective portion of the interest rate swaps’ change in fair value. Deferred taxes are not provided on cumulative translation adjustments where the Company expects earnings of a foreign subsidiary to be indefinitely reinvested.

Acquisitions

The Company recognizes and measures identifiable assets acquired and liabilities assumed in acquired entities in accordance with ASC 805, Business Combinations. The allocation of the purchase consideration for acquisitions can require extensive use of accounting estimates and judgments to allocate the purchase consideration to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values. The excess of the fair value of purchase consideration over the values of the identifiable assets and liabilities is recorded as goodwill. Critical estimates in valuing certain identifiable assets include but are not limited to expected long-term revenues; future expected operating expenses; cost of capital; appropriate attrition; and discount rates.

Recently Issued Accounting Pronouncements

Adopted

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which requires companies to classify all deferred tax assets and liabilities as non-current on the balance sheet, rather than separating deferred taxes into current and non-current amounts. This ASU is effective for annual and interim periods within those annual reporting periods beginning after December 15, 2016 and can be adopted prospectively or retrospectively; however, early adoption is permitted. The Company’s adoption of ASU 2015-17 on a prospective basis did not have a material impact on the Company’s consolidated results of operations and financial position.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which amends the scope of modification accounting for stock-based payment arrangements and provides guidance on the types of changes to the terms or conditions of stock-based payment awards to which an entity would be required to apply modification accounting under ASC 718. For all entities, this ASU is effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The Company’s adoption of ASU 2017-09 did not have a material impact on the Company’s consolidated results of operations and financial position.

Pending

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The current standard, ASC Topic 740 - Income Taxes, requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. This includes the tax effects of items in accumulated other comprehensive income ("AOCI") that were originally recognized in other comprehensive income, subsequently creating stranded tax effects. ASU 2018-02 allows a reclassification from AOCI to retained earnings for stranded tax effects specifically resulting from the U.S. federal government's recently enacted tax bill, the Tax Cuts and Jobs Act. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those periods. Early adoption is permitted. The adoption of ASU 2018-02 will result in a reclassification from AOCI to retained earnings and will have no impact on the Company’s consolidated results of operations, financial position or cash flows.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350). ASU 2017-04 amends the requirement that entities compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, entities should perform their annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment if the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 is effective for annual periods beginning after December 15, 2019. The Company’s adoption of ASU 2017-04 will not have a material impact on the Company’s consolidated results of operations and financial position.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset, other than inventory. This ASU is effective for annual and interim periods within those annual periods beginning after December 15, 2017, and is required to be adopted using a modified retrospective approach; however early adoption is permitted. The Company is continuing its assessment of the impact of ASU 2016-16 may have on the Company’s consolidated results of operations and financial position.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. The guidance is required to be applied on a retrospective basis. The Company’s adoption of ASU 2016-15 will not have a material impact on the Company’s consolidated results of operations and financial position.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), that supersedes all existing guidance on accounting for leases in ASC Topic 840. ASU 2016-02 is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. ASU 2016-02 will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income. ASU 2016-02 is effective for annual and interim periods within those annual reporting periods beginning after December 15, 2018 and adoption is to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical expedients; however early adoption is permitted. Based on a preliminary assessment, the Company expects that most of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in a significant increase in the assets and liabilities on the Company’s consolidated balance sheets. The Company is continuing its assessment, which may identify additional impacts ASU 2016-02 may have on the Company’s consolidated results of operations, financial position, and related disclosures.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 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 is effective for annual and interim periods within those annual reporting periods beginning after December 15, 2017 and will be effective for the Company 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. The Company will use the modified retrospective application with the cumulative effect as its transition method.

Upon adoption, service revenue (revenue from buyers and sellers) and vehicle sales revenue will generally be recognized at the date the vehicles are sold at auction. This timing of revenue recognition under ASU 2014-09 is consistent with the Company’s current policy under ASC 605 for buyer and vehicle sales revenue. However, the adoption represents a change in the timing of revenue recognition for certain seller revenues, such as inbound tow and titling fees, which are currently recognized under ASC 605 when the services are performed. Related costs to prepare the vehicles for auction, including inbound tow and titling, will be deferred and recognized at the time of revenue recognition. The Company has evaluated the impact the adoption will have on the consolidated financial statements, and is finalizing the calculation of its cumulative effect adjustment. This change will result in a decrease to beginning retained earnings as of August 1, 2018, within a range of $10.0 million to $15.0 million as a result of the initial application of the standard and will not have a material impact to earnings.

NOTE 2 — Acquisitions

Fiscal 2018 Transactions

During the year ended July 31, 2018, the Company acquired 100% of the voting stock of Autovahinkokeskus Oy (AVK), a salvage auto auction company based in Finland. AVK currently operates facilities in the municipalities of Espoo; Pirkkala; Oulu; and Turku, Finland. The aggregate purchase price of this acquisition totaled $8.9 million, net of cash acquired.

The purchase price allocation for AVK is not final for property and equipment, intangible assets and deferred taxes on acquired intangible assets, and other liabilities, pending the final valuation by the Company. The Company believes any potential changes to its preliminary purchase price allocations will not have a material impact on the Company’s consolidated financial position and results of operations.

Fiscal 2017 Transactions

During the year ended July 31, 2017, the Company acquired 100% of the voting stock of Cycle Express, LLC, which conducts business primarily as National Powersport Auctions (NPA), a leading non-salvage auction platform for motorcycles, snowmobiles, watercraft and other powersports vehicles. NPA currently operates facilities in Atlanta, Georgia; Cincinnati, Ohio; Dallas, Texas; Philadelphia, Pennsylvania; and San Diego, California. NPA predominantly auctions pre-owned powersports vehicles on behalf of financing companies, dealers and manufacturers. The Company also acquired the assets of an excavation company, which engages in earthwork, soil stabilization, equipment hauling, and erosion control commercial contractor services. The aggregate purchase price of these acquisitions totaled $160.7 million, net of cash acquired.

During the year ended July 31, 2018, the purchase price allocations for NPA and the acquisition of the assets of an excavation company were finalized. As a result, from the preliminary purchase price allocation as of July 31, 2017, goodwill decreased $1.3 million, primarily related to a $1.2 million increase in intangible assets and changes to deferred taxes on acquired intangible assets. In accordance with ASC 805, any adjustments to the fair value of acquired assets and liabilities that occur subsequent to the measurement period will be reflected in the Company’s results of operations.

The following table summarizes the purchase price allocation based on the estimated fair values of the assets acquired and liabilities assumed for these acquisitions (in thousands):

Allocation of the acquisition:
Accounts receivable and prepaid expenses		$	6,583
Vehicle pooling costs		571
Property and equipment		10,903
Inventory		1,067
Intangible assets		72,100
Goodwill		77,990
Liabilities assumed		(8,025		)
Noncontrolling interest		(500		)
Fair value of net assets and liabilities acquired		$	160,689

The NPA acquisition was undertaken because of its strategic fit, and the acquisition of certain excavation assets was undertaken to enhance the Company’s land development capabilities. These acquisitions have been accounted for using the purchase method in accordance with ASC 805, Business Combinations, which resulted in the recognition of goodwill in the Company’s consolidated financial statements. Goodwill arose because the purchase price of each acquisition reflected a number of factors, including their future earnings and cash flow potential; the comparable multiples of earnings, cash flow and other factors at which similar businesses have been purchased by other acquirers; the complementary tactical development capability and cost control over the development of the Company’s yard locations; and the complementary strategic fit and resulting synergies brought to existing operations. Goodwill is calculated as the excess of the consideration transferred over the fair value of the identifiable net assets acquired and is not amortized for financial reporting purposes.

The Company obtained a third party independent valuation to assist in the determination of the fair values of certain assets acquired. The valuation utilized the income approach (specifically the Multi-Period Excess Earnings Method (MPEEM) model and the Relief from Royalty model) to estimate the fair value of acquired supplier relationships and trade names, respectively. The valuation utilized the cost approach to estimate the fair value of acquired software. The valuation of these assets was performed using Level III inputs, as the calculated fair values are based on valuation models that utilize unobservable inputs that are significant to the overall fair value measurement. The unobservable inputs reflect the Company’s best estimate of what hypothetical market participants would use to determine the value of acquired assets based on the best information available in the circumstances. Intangible assets acquired include customer and supplier relationships, trade names, and software with a useful life ranging from three to eleven years. See Note - 6 — Intangibles, Net.

The purchase price allocation for NPA and the assets of an excavation company are not final for property and equipment, income taxes and intangible assets acquired, pending the final valuation by the Company. The Company believes any potential changes to its preliminary purchase price allocations will not have a material impact on the Company’s consolidated financial position and results of operations.

These acquisitions did not result in a significant change in the Company’s consolidated results of operations individually or in the aggregate; therefore, pro forma financial information has not been presented. The operating results have been included in the Company’s consolidated financial position and results of operations since the acquisition dates. The acquisition-related expenses incurred during the year ended July 31, 2017, were $1.9 million and were included in general and administrative expenses in the Company’s consolidated financial position and results of operations.

Fiscal 2016 Transactions

The Company made no acquisitions during the year ended July 31, 2016.

NOTE 3 — Accounts Receivable, Net

Accounts receivable, net consisted of:

		July 31,
(In thousands)		2018				2017
Advance charges receivable		$	230,092			$	204,097
Trade accounts receivable		125,255				110,189
Other receivables		1,698				1,871
		357,045				316,157
Less: Allowance for doubtful accounts		(5,444		)		(4,311		)
Accounts receivable, net		$	351,601			$	311,846

Advance charges receivable represents unbilled amounts paid to third parties on behalf of insurance companies for which the Company will be reimbursed when the vehicle is sold. Trade accounts receivable includes fees and gross auction proceeds to be collected from insurance companies and members.

The movements in the allowance for doubtful accounts were as follows:

		July 31,
(In thousands)		2018				2017				2016
Balance at beginning of year		$	4,311			$	4,120			$	2,988
Charged to costs and expenses		4,255				2,928				3,646
Deductions to bad debt		(3,122		)		(2,737		)		(2,514		)
Balance at end of year		$	5,444			$	4,311			$	4,120

NOTE 4 — Property and Equipment, Net

Property and equipment, net consisted of the following:

		July 31,
(In thousands)		2018				2017
Transportation and other equipment		$	190,900			$	120,420
Office furniture and equipment		58,477				51,778
Software		30,680				38,501
Land		762,524				629,826
Buildings and leasehold improvements		610,964				555,525
		1,653,545				1,396,050
Less: Accumulated depreciation and amortization		(490,120		)		(451,994		)
Property and equipment, net		$	1,163,425			$	944,056

Depreciation expense on property and equipment was $58.8 million, $39.6 million and $34.2 million for the years ended July 31, 2018, 2017 and 2016, respectively. Amortization expense of software was $5.7 million, $10.6 million and $8.5 million for the years ended July 31, 2018, 2017 and 2016, respectively. During the year ended July 31, 2018 and 2016, the Company retired fully amortized capitalized software of $15.5 million and $29.8 million, respectively, which were no longer being utilized. Additionally, during the year ended July 31, 2017, the Company recognized a $19.4 million charge primarily related to fully impairing costs previously capitalized in connection with the development of business operating software.

NOTE 5 — Goodwill

The change in the carrying amount of goodwill was as follows:

		July 31,
(In thousands)		2018				2017
Beginning balance		$	340,243			$	260,198
Goodwill recorded during the period		(1,839		)		79,256
Effect of foreign currency exchange rates		(1,169		)		789
Ending balance		$	337,235			$	340,243

In accordance with the guidance in ASC 350, goodwill is tested for impairment on an annual basis or upon the occurrence of circumstances that indicate that goodwill may be impaired. The Company’s annual impairment tests were performed during the fourth quarter of fiscal 2018 and 2017 and goodwill was not impaired. As of July 31, 2018 and 2017, the cumulative amount of goodwill impairment losses recognized totaled $21.8 million.

NOTE 6 — Intangibles, Net

The following table sets forth amortizable intangible assets by major asset class:

		Gross Carrying Amount								Accumulated Amortization								Net Book Value								Weighted Average Remaining Useful Life (in years)
		July 31,								July 31,								July 31,								July 31,
(In thousands, except remaining useful life)		2018				2017				2018				2017				2018				2017				2018		2017
Amortized intangibles:
Covenants not to compete		$	1,666			$	1,702			$	(1,656	)		$	(1,389	)		$	10			$	313			0		1
Supply contracts and customer relationships		71,787				75,462				(29,601		)		(22,248		)		42,186				53,214				10		9
Trade names		24,173				23,859				(6,405		)		(4,989		)		17,768				18,870				1		2
Licenses and databases		9,291				5,385				(4,363		)		(1,844		)		4,928				3,541				2		3
Intangibles, net		$	106,917			$	106,408			$	(42,025	)		$	(30,470	)		$	64,892			$	75,938

Aggregate amortization expense on intangible assets was $14.0 million, $6.8 million and $5.8 million for the years ended July 31, 2018, 2017 and 2016, respectively. During the year ended July 31, 2018, the Company recognized a $1.1 million charge primarily related to fully impairing a supply contract in the International segment. Intangible amortization expense for the next five fiscal years based upon July 31, 2018 intangible assets is expected to be as follows:

(In thousands)
2019		$	10,455
2020		8,421
2021		5,997
2022		5,939
2023		5,868
Thereafter		28,212
Total future intangible amortization expense		$	64,892

NOTE 7 — Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consisted of the following:

		July 31,
(In thousands)		2018				2017
Trade accounts payable		$	65,057			$	20,626
Accounts payable to sellers		68,660				50,534
Buyer deposits and prepayments		62,443				50,603
Accrued compensation and benefits		37,218				31,173
Accrued insurance		4,376				5,263
Other accrued liabilities		33,190				50,216
Total accounts payable and accrued expenses		$	270,944			$	208,415

The Company is partially self-insured for certain losses related to general liability, workers’ compensation and auto liability. Accrued insurance liability represents an estimate of the ultimate cost of claims incurred as of the balance sheet date, including an estimate for reported and unreported claims. The estimated liability is not discounted and is established based upon analysis of historical data, including the severity of the Company’s frequency of claims, actuarial estimates and is reviewed periodically by management to ensure that the liability is appropriate.

NOTE 8 — Long-Term Debt

Credit Agreement

On December 3, 2014, the Company entered into a Credit Agreement (as amended from time to time, the “Credit Amendment”) with Wells Fargo Bank, National Association, as administrative agent, and Bank of America, N.A., as syndication agent. The Credit Agreement provided for (a) a secured revolving loan facility in an aggregate principal amount of up to $300.0 million (the “Revolving Loan Facility”), and (b) a secured term loan facility in an aggregate principal amount of $300.0 million (the “Term Loan”), which was fully drawn at closing. The Term Loan amortized $18.8 million per quarter.

On March 15, 2016, the Company entered into a First Amendment to Credit Agreement (the “Amendment to Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent and Bank of America, N.A. The Amendment to Credit Agreement amended certain terms of the Credit Agreement, dated as of December 3, 2014. The Amendment to Credit Agreement provided for (a) an increase in the secured revolving credit commitments by $50.0 million, bringing the aggregate principal amount of the revolving credit commitments under the Credit Agreement to $350.0 million, (b) a new secured term loan (the “Incremental Term Loan”) in the aggregate principal amount of $93.8 million having a maturity date of March 15, 2021, and (c) an extension of the termination date of the Revolving Loan Facility and the maturity date of the Term Loan from December 3, 2019 to March 15, 2021. The Amendment to Credit Agreement extended the amortization period for the Term Loan, and decreased the quarterly amortization payments for that loan to $7.5 million per quarter. The Amendment to Credit Agreement additionally reduced the pricing levels under the Credit Agreement to a range of 0.15% to 0.30% in the case of the commitment fee, 1.125% to 2.0% in the case of the applicable margin for LIBOR loans, and 0.125% to 1.0% in the case of the applicable margin for base rate loans, based on the Company’s consolidated total net leverage ratio during the preceding fiscal quarter. The Company borrowed the entire $93.8 million principal amount of the Incremental Term Loan concurrent with the closing of the Amendment to Credit Agreement.

On July 21, 2016, the Company entered into a Second Amendment to Credit Agreement (the “Second Amendment to Credit Agreement”) with Wells Fargo Bank, National Association, SunTrust Bank, and Bank of America, N.A., as administrative agent (as successor in interest to Wells Fargo Bank). The Second Amendment to Credit Agreement amends certain terms of the Credit Agreement, dated as of December 3, 2014 as amended by the Amendment to Credit Agreement, dated as of March 15, 2016. The Second Amendment to Credit Agreement provides for, among other things, (a) an increase in the secured revolving credit commitments by $500.0 million, bringing the aggregate principal amount of the revolving credit commitments under the Credit Agreement to $850.0 million, (b) the repayment of existing term loans outstanding under the Credit Agreement, (c) an extension of the termination date of the revolving credit facility under the Credit Agreement from March 15, 2021 to July 21, 2021, and (d) increased covenant flexibility.

Concurrent with the closing of the Second Amendment to Credit Agreement, the Company prepaid in full the outstanding $242.5 million principal amount of the Term Loan and Incremental Term Loan under the Credit Agreement without premium or penalty. The Second Amendment to Credit Agreement reduced the pricing levels under the Credit Agreement to a range of 0.125% to 0.20% in the case of the commitment fee, 1.00% to 1.75% in the case of the applicable margin for LIBOR loans, and 0.0% to 0.75% in the case of the applicable margin for base rate loans, in each case depending on the Company’s consolidated total net leverage ratio. The principal purposes of these financing transactions were to increase the size and availability under the Company’s Revolving Loan Facility and to provide additional long-term financing. The proceeds are being used for general corporate purposes, including working capital and capital expenditures, potential share repurchases, acquisitions, or other investments relating to the Company’s expansion strategies in domestic and international markets.

The Revolving Loan Facility under the Credit Agreement bears interest, at the election of the Company, at either (a) the Base Rate, which is defined as a fluctuating rate per annum equal to the greatest of (i) the Prime Rate in effect on such day; (ii) the Federal Funds Rate in effect on such date plus 0.50%; or (iii) an adjusted LIBOR rate determined on the basis of a one-month interest period plus 1.0%, in each case plus an applicable margin ranging from 0.0% to 0.75% based on the Company’s consolidated total net leverage ratio during the preceding fiscal quarter; or (b) an adjusted LIBOR rate plus an applicable margin ranging from 1.00% to 1.75% depending on the Company’s consolidated total net leverage ratio during the preceding fiscal quarter. Interest is due and payable quarterly, in arrears, for loans bearing interest at the Base Rate, and at the end of an interest period (or at each three month interval in the case of loans with interest periods greater than three months) in the case of loans bearing interest at the adjusted LIBOR rate. The interest rate as of July 31, 2018 on the Company’s Revolving Loan Facility was the one month LIBOR rate of 2.09% 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, 2018, and was classified within Level II of the fair value hierarchy.

Amounts borrowed under the Revolving Loan Facility may be repaid and reborrowed until the maturity date of July 21, 2021. The Company is obligated to pay a commitment fee on the unused portion of the Revolving Loan Facility. The commitment fee rate ranges from 0.125% to 0.20%, depending on the Company’s consolidated total net leverage ratio during the preceding fiscal quarter, on the average daily unused portion of the revolving credit commitment under the Credit Agreement. The Company had no outstanding borrowings under the Revolving Loan Facility as of July 31, 2018. The Company had $231.0 million of outstanding borrowings under the Revolving Loan Facility as of July 31, 2017.

The Company’s obligations under the Credit Agreement are guaranteed by certain of the Company’s domestic subsidiaries meeting materiality thresholds set forth in the Credit Agreement. Such obligations, including the guaranties, are secured by substantially all of the assets of the Company and the assets of the subsidiary guarantors pursuant to a Security Agreement, dated December 3, 2014, among the Company, the subsidiary guarantors from time to time party thereto, and Wells Fargo Bank, National Association, as collateral agent.

The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into transactions with affiliates, pay dividends, or make distributions on and repurchase stock, in each case subject to certain exceptions. The Company is also required to maintain compliance, measured at the end of each fiscal quarter, with a consolidated total net leverage ratio and a consolidated interest coverage ratio. The Credit Agreement contains no restrictions on the payment of dividends and other restricted payments, as defined, as long as (1) the consolidated total net leverage ratio, as defined, both before and after giving effect to any such dividend or restricted payment on a pro forma basis, is less than 3.25:1, in an unlimited amount, (2) if clause (1) is not available, so long as the consolidated total net leverage ratio both before and after giving effect to any such dividend on a pro forma basis is less than 3.50:1, in an aggregate amount not to exceed the available amount, as defined, and (3) if clauses (1) and (2) are not available, in an aggregate amount not to exceed $50.0 million; provided, that, minimum liquidity, as defined, shall be not less than $75.0 million both before and after giving effect to any such dividend or restricted payment. As of July 31, 2018, the consolidated total net leverage ratio was 0.21:1. Minimum liquidity as of July 31, 2018 was $1.1 billion. Accordingly, the Company does not believe that the provisions of the Credit Agreement represent a significant restriction to its ability to pay dividends or to the successful future operations of the business. The Company has not paid a cash dividend since becoming a public company in 1994. The Company was in compliance with all covenants related to the Credit Agreement as of July 31, 2018.

Note Purchase Agreement

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

On July 21, 2016, the Company entered into Amendment No. 1 to Note Purchase Agreement (the “First Amendment to Note Purchase Agreement”) which amended certain terms of the Note Purchase Agreement, including providing for increased flexibility substantially consistent with the changes included in the Second Amendment to Credit Agreement, including among other things increased covenant flexibility.

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

The Company’s obligations under the Note Purchase Agreement are guaranteed by certain of the Company’s domestic subsidiaries meeting materiality thresholds set forth in the Note Purchase Agreement. Such obligations, including the guaranties, are secured by substantially all of the assets of the Company and the subsidiary guarantors. The obligations of the Company and its subsidiary guarantors under the Note Purchase Agreement will be treated on a pari passu basis with the obligations of those entities under the Credit Agreement as well as any additional debt the Company may obtain.

The Note Purchase Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict the Company and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into transactions with affiliates, pay dividends, or make distributions and repurchase stock, in each case subject to certain exceptions. The Company is also required to maintain compliance, measured at the end of each fiscal quarter, with a consolidated total net leverage ratio and a consolidated interest coverage ratio. The Note Purchase Agreement contains no restrictions on the payment of dividends and other restricted payments, as defined, as long as (1) the consolidated total net leverage ratio, as defined, both before and after giving effect to any such dividend or restricted payment on a pro forma basis, is less than 3.25:1, in an unlimited amount, (2) if clause (1) is not available, so long as the consolidated total net leverage ratio both before and after giving effect to any such dividend on a pro forma basis is less than 3.50:1, in an aggregate amount not to exceed the available amount, as defined, and (3) if clauses (1) and (2) are not available, in an aggregate amount not to exceed $50.0 million; provided, that, minimum liquidity, as defined, shall be not less than $75.0 million both before and after giving effect to any such dividend or restricted payment. As of July 31, 2018, the consolidated total net leverage ratio was 0.21:1. Minimum liquidity as of July 31, 2018 was $1.1 billion. Accordingly, the Company does not believe that the provisions of the Note Purchase Agreement represent a significant restriction to its ability to pay dividends or to the successful future operations of the business. The Company has not paid a cash dividend since becoming a public company in 1994. The Company was in compliance with all covenants related to the Note Purchase Agreement as of July 31, 2018.

Related to the execution of the Credit Agreement, First Amendment to Credit Agreement, Second Amendment to Credit Agreement, and the Note Purchase Agreement, the Company incurred $3.4 million in costs, of which $2.0 million was capitalized as debt issuance fees and $1.4 million was recorded as a reduction of the long-term debt proceeds as a debt discount. During the year ended July 31, 2016, the Company recognized an expense of $0.6 million for prior capitalized costs into interest expense relating to the Second Amendment to Credit Agreement and payoff of the outstanding Term Loans. 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.

As of July 31, 2018, future payments on the Revolving Loan Facility and Note Purchase Agreement were as follows:

(In thousands)		July 31, (1)
2019		$	—
2020		—
2021		—
2022		—
2023		—
Thereafter		400,000
Total future payments		$	400,000

(1)	Currently there are no outstanding balances on the Revolving Loan Facility and none are currently expected based on management’s intent of the use of the Revolving Loan Facility, which may change on a quarter by quarter basis.

NOTE 9 — Derivatives and Hedging

The Company had entered into two interest rate swaps to exchange its variable interest rate payments commitment for fixed interest rate payments through December 2015. The swaps were designated effective cash flow hedges under ASC 815, Derivatives and Hedging. Each quarter, the Company measured hedge effectiveness using the “hypothetical derivative method” and recorded in earnings any hedge ineffectiveness with the effective portion of the change in fair value recorded in other comprehensive income or loss. The interest rate swaps expired in December 2015. The Company reclassified $0.5 million for the year ended July 31, 2016, out of other comprehensive income into interest expense.

The interest rate swaps were classified within Level II of the fair value hierarchy as the derivatives were valued using observable inputs. The Company determined fair value of the derivative utilizing observable market data of swap rates and basis rates. These inputs were placed into a pricing model using a discounted cash flow methodology in order to calculate the mark-to-market value of the interest rate swaps.

NOTE 10 – Fair Value Measures

The following table summarizes the fair value of the Company’s financial assets and liabilities measured and recorded at fair value on a recurring basis based on inputs used to derive their fair values:

	July 31, 2018								July 31, 2017
(In thousands)	Fair Value Total				Significant Observable Inputs (Level II)				Fair Value Total				Significant Observable Inputs (Level II)
Assets
Cash equivalents	$	130,769			$	130,769			$	3,498			$	3,498
Total Assets	$	130,769			$	130,769			$	3,498			$	3,498
Liabilities
Long-term fixed rate debt, including current portion	$	381,230			$	381,230			$	400,908			$	400,908
Revolving loan facility	—				—				231,000				231,000
Total Liabilities	$	381,230			$	381,230			$	631,908			$	631,908

During the year ended July 31, 2018, no transfers were made between any levels within the fair value hierarchy. See Note 1 — Summary of Significant Accounting Policies, Note 2 — Acquisitions, Note 8 — Long-Term Debt, and Note 9 — Derivatives and Hedging.

NOTE 11 — Stockholders’ Equity

General

The Company has authorized the issuance of 400 million shares of common stock, with a par value of $0.0001, of which 233,898,841 shares were issued and outstanding at July 31, 2018. As of July 31, 2018 and 2017, the Company had reserved 25,621,327 and 28,878,913 shares of common stock, respectively, for the issuance of options granted under the Company’s stock option plans and 1,603,741 and 1,788,909 shares of common stock, respectively, for the issuance of shares under the Copart, Inc. Employee Stock Purchase Plan (ESPP). The Company has authorized the issuance of five million shares of preferred stock, with a par value of $0.0001, none of which were issued or outstanding at July 31, 2018 or 2017, which have the rights and preferences as the Company’s Board of Directors shall determine, from time to time.

Stock Repurchases

On September 22, 2011, the Company’s Board of Directors approved an 80 million share increase in the stock repurchase program, bringing the total current authorization to 196 million shares. The repurchases may be effected through solicited or unsolicited transactions in the open market or in privately negotiated transactions. No time limit has been placed on the duration of the stock repurchase program. Subject to applicable securities laws, such repurchases will be made at such times and in such amounts as the we deem appropriate and may be discontinued at any time. For fiscal 2018 and 2017, the Company did not repurchase any shares of its common stock under the program. For fiscal 2016, the Company repurchased 5,877,038 shares of its common stock at a weighted average price of $20.065 per share totaling $117.9 million. As of July 31, 2018, the total number of shares repurchased under the program was 106,913,602, and 89,086,398 shares were available for repurchase under the program.

On December 30, 2015, the Company completed a modified “Dutch Auction” tender offer, or tender offer, to purchase up to 14,634,146 shares of its common stock at a price not greater than $20.50 nor less than $19.00 per share. In connection with the tender offer, the Company accepted for payment an aggregate of 16,666,666 shares of its common stock at a purchase price of $19.50 per share for a total value of $325.0 million. The Company’s directors and executive officers did not participate in the tender offers. The shares purchased as a result of the tender offers were not part of the Company’s stock repurchase program.

During fiscal 2018, 2017 and 2016, certain executive officers, members of the Company’s Board of Directors and other employees exercised stock options through cashless exercises. A portion of the options exercised were net settled in satisfaction of the exercise price and federal and state statutory tax withholding requirements. The Company remitted $134.6 million and $15.0 million for the years ended July 31, 2017 and 2016, respectively, to the proper taxing authorities in satisfaction of the employees’ statutory withholding requirements.

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

Period		Options Exercised			Weighted Average Exercise Price				Shares Net Settled for Exercise			Shares Withheld for Taxes (1)			Net Shares to Employees			Weighted Average Share Price for Withholding				Employee Stock Based Tax Withholding (in 000s)
FY 2016—Q4		2,260,000			$	9.32			821,296			586,304			852,400			$	25.65			$	15,039
FY 2017—Q1		18,000,000			7.70				5,408,972			5,255,322			7,335,706			25.62				134,615
FY 2018—Q2		80,000			6.54				11,996			—			68,004			43.60				—

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

Employee Stock Purchase Plan

The ESPP provides for the purchase of up to an aggregate of 10 million shares of common stock of the Company by employees pursuant to the terms of the ESPP. The Company’s ESPP was adopted by the Board of Directors and approved by the stockholders in 1994. The ESPP was amended and restated in 2003 and again approved by the stockholders. In 2014, a new ESPP was approved by the Board of Directors and approved by the stockholders. Under the ESPP, employees of the Company who elect to participate have the right to purchase common stock at a 15% discount from the lower of the market value of the common stock at the beginning or the end of each six month offering period. The ESPP permits an enrolled employee to make contributions to purchase shares of common stock by having withheld from their salary an amount up to 10% of their compensation (which amount may be increased from time to time by the Company but may not exceed 15% of compensation). No employee may purchase more than $25,000 worth of common stock (calculated at the time the purchase right is granted) in

any calendar year. The Compensation Committee of the Board of Directors administers the ESPP. The number of shares of common stock issued pursuant to the ESPP during the years ended July 31, 2018, 2017 and 2016 was 185,168; 190,713; and 216,264; respectively. As of July 31, 2018, there were 8,476,333 shares of common stock issued pursuant to the ESPP and 1,603,741 shares remain available for purchase under the ESPP.

Stock Options

In December 2007, the Company adopted the Copart, Inc. 2007 Equity Incentive Plan (Plan), presently covering an aggregate of 32.0 million shares of the Company’s common stock. The Plan provides for the grant of incentive stock options, restricted stock, restricted stock units and other equity-based awards to employees and non-qualified stock options, restricted stock, restricted stock units and other equity-based awards to employees, officers, directors and consultants at prices not less than 100% of the fair market value for incentive and non-qualified stock options, as determined by the Board of Directors at the grant date. Incentive and non-qualified stock options may have terms of up to ten years and vest over periods determined by the Board of Directors. Options generally vest ratably over a five-year period. The Plan replaced the Company’s 2001 Stock Option Plan. As of July 31, 2018, 7,823,728 shares were available for grant under the Plan.

In October 2013, the Compensation Committee of the Company’s Board of Directors, subject to stockholder approval (which was subsequently obtained at the December 16, 2013 annual meeting of stockholders), approved the grant to each of A. Jayson Adair, the Company’s Chief Executive Officer, and Vincent W. Mitz, the Company’s President, of nonqualified stock options to purchase 4,000,000 and 3,000,000 shares of the Company’s common stock, respectively, at an exercise price of $17.81 per share, which equaled the closing price of the Company’s common stock on December 16, 2013, the effective date of grant. Such grants were made in lieu of any cash salary or bonus compensation in excess of $1.00 per year or the grant of any additional equity incentives for a five-year period. Each option will become exercisable over five years, subject to continued service by Mr. Adair and Mr. Mitz, with 20% vesting on April 15, 2015 and December 16, 2014, respectively, and the balance vesting monthly over the subsequent four years. Each option will become fully vested, assuming continued service, on April 15, 2019 and December 16, 2018, respectively. If, prior to a change in control, either executive’s employment is terminated without cause, then 100% of the shares subject to that executive’s stock option will immediately vest. If, upon or following a change in control, either the Company or a successor entity terminates the executive’s service without cause, or the executive resigns for good reason (as defined in the option agreement), then 100% of the shares subject to his stock option will immediately vest. On June 2, 2015, the Compensation Committee of the Company’s Board of Directors approved the amendment of each of the stand-alone stock option agreements, by and between the Company and A. Jayson Adair and Vincent W. Mitz, respectively, to remove the provision providing at times prior to a “change in control” for the immediate vesting in full of the underlying option upon an involuntary termination of Mr. Adair or Mr. Mitz, as applicable, without “cause.” The fair value of each option at the date of grant using the Black-Scholes Merton option-pricing model was $5.72. The total estimated compensation expense to be recognized by the Company over the five year estimated service period for these options is $40.0 million. The Company recognized $7.2 million in compensation expenses for these grants in the year ended July 31, 2018 and $7.5 million for the years ended July 31, 2017 and 2016, respectively.

The following table details stock-based payment compensation expense included in the company’s consolidated statements of income:

		Year Ended July 31,
(In thousands)		2018				2017				2016
General and administrative		$	19,351			$	17,622			$	18,194
Yard operations		3,870				3,286				2,670
Total stock-based payment compensation		$	23,221			$	20,908			$	20,864

There were no material compensation costs capitalized as part of the cost of an asset as of July 31, 2018 and 2017.

A summary of the status of the Company’s non-vested shares and its activity during the year ended July 31, 2018 was as follows:

(In thousands, except per share amounts)		Number of Shares			Weighted Average Grant- date Fair Value
Non-vested shares at July 31, 2017		6,667			$	5.57
Grants of non-vested shares		2,383			8.88
Vested		(3,376	)		5.67
Forfeitures or expirations		(158	)		4.89
Non-vested shares at July 31, 2018		5,516			$	6.96

Stock option activity for the year ended July 31, 2018 was as follows:

(In thousands, except per share and term data)		Shares			Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (In years)		Aggregate Intrinsic Value
Outstanding as of July 31, 2017		18,774			$	17.14			6.48		$	269,449
Grants of options		2,383			36.78
Exercises		(3,202	)		14.05
Forfeitures or expirations		(158	)		20.93
Outstanding as of July 31, 2018		17,797			$	20.29			6.19		$	660,268
Exercisable as of July 31, 2018		12,281			$	17.41			5.51		$	490,951
Vested and expected to vest as of July 31, 2018		17,232			$	20.06			6.13		$	643,206

As required by ASC 718, Compensation — Stock Compensation, the Company made an estimate of expected forfeitures and recognized compensation cost only for those equity awards expected to vest.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between the Company’s closing stock price on the last trading day of the year ended July 31, 2018 and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their options on July 31, 2018. The aggregate intrinsic value of options exercised was $111.5 million, $366.7 million and $53.6 million in the years ended July 31, 2018, 2017 and 2016, respectively, and represents the difference between the exercise price of the option and the estimated fair value of the Company’s common stock on the dates exercised. As of July 31, 2018, the total compensation cost related to non-vested stock-based payment awards granted to employees under the Company’s stock option plans but not yet recognized was $30.1 million, net of estimated forfeitures. This cost will be amortized on a straight-line basis over a weighted average remaining term of 2.51 years and will be adjusted for subsequent changes in estimated forfeitures. The fair value of options vested for the years ended July 31, 2018, 2017 and 2016 was $19.1 million, $18.6 million and $21.0 million, respectively.

The following table summarizes stock options outstanding and exercisable as of July 31, 2018:

(In thousands, except per share amounts)		Options Outstanding									Options Exercisable
Range of Exercise Prices		Number			Weighted Average Remaining Contractual Life		Weighted Average Exercise Price				Number			Weighted Average Exercise Price
$8.19–$17.64		1,789			3.30		$	11.44			1,726			$	11.25
$17.73–$17.81		9,451			5.75		17.79				7,526			17.80
$18.06–$18.61		2,770			6.06		18.33				2,088			18.29
$18.84–$50.30		3,787			8.74		32.14				941			23.73
Outstanding and exercisable as of July 31, 2018		17,797			6.19		$	20.29			12,281			$	17.41

NOTE 12 — Income Taxes

Income before taxes consisted of the following:

		Year Ended July 31,
(In thousands)		2018				2017				2016
U.S.		$	501,961			$	385,526			$	339,013
International		60,550				54,574				56,852
Total income before taxes		$	562,511			$	440,100			$	395,865

Income tax expense (benefit) from continuing operations consisted of the following:

		Year Ended July 31,
(In thousands)		2018				2017				2016
Federal:
Current		$	109,804			$	12,752			$	103,127
Deferred		17,094				20,094				7,019
		126,898				32,846				110,146
State:
Current		9,100				1,659				5,347
Deferred		(111		)		499				151
		8,989				2,158				5,498
International:
Current		8,820				11,468				10,855
Deferred		(203		)		(633		)		(994		)
		8,617				10,835				9,861
Income tax expense		$	144,504			$	45,839			$	125,505

A reconciliation of the expected U.S. statutory tax rate to the actual effective income tax rate is as follows:

		Year Ended July 31,
(In thousands)		2018			2017			2016
Federal statutory rate		26.9	%		35.0	%		35.0	%
State income taxes, net of federal income tax benefit		1.3	%		1.3	%		0.9	%
International rate differential		(0.8	)%		(1.8	)%		(1.8	)%
Compensation and fringe benefits (1)		(3.5	)%		(24.3	)%		(3.6	)%
Provisional transition tax		2.2	%		—	%		—	%
Deferred tax remeasurement		(0.8	)%		—	%		—	%
Other differences		0.4	%		0.2	%		1.2	%
Effective tax rate		25.7	%		10.4	%		31.7	%

(1)

Included in the compensation and fringe benefits rate reconciliation is the impact of the Company’s adoption of ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. Under this standard, all excess tax benefits and tax deficiencies related to exercises of stock options are recognized as income tax expense or benefit in the income statement as discrete items in the reporting period in which they occur.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets (liabilities) are presented below:

		July 31,
(In thousands)		2018				2017
Deferred tax assets:
Allowance for doubtful accounts		$	1,068			$	1,177
Accrued compensation and benefits		17,704				26,621
State taxes		580				215
Accrued other		1,930				2,684
Deferred revenue		929				(371		)
Property and equipment		—				9,405
Losses carried forward		3,065				3,688
Federal tax benefit		6,441				10,542
Total gross deferred tax assets		31,717				53,961
Less: Valuation allowance		(4,592		)		(6,455		)
Net deferred tax assets		27,125				47,506
Deferred tax liabilities:
Vehicle pooling costs		(6,523		)		(9,590		)
Property and equipment		(14,147		)		—
Prepaid insurance		(708		)		(1,333		)
Intangibles and goodwill		(25,010		)		(38,580		)
Total gross deferred tax liabilities		(46,388		)		(49,503		)
Net deferred tax liabilities		$	(19,263	)		$	(1,997	)

The above net deferred tax assets and liabilities have been reflected in the accompanying consolidated balance sheets as follows:

		July 31,
(In thousands)		2018				2017
U.S. current liabilities		$	—			$	(92	)
U.S. non-current (liabilities) assets		(16,018		)		1,054
International non-current liabilities		(3,245		)		(2,959		)
Net deferred tax liabilities		$	(19,263	)		$	(1,997	)

As of July 31, 2018 and 2017, the Company had foreign operating losses and a U.S. federal tax credit carryforward of $3.8 million and $5.5 million, respectively. The foreign operating losses, subject to certain limitations, usually can be carried forward from a minimum of eight years to indefinitely. If not used, those foreign operating losses would start to expire after 2023. The U.S. federal related tax credit, if not used, would start to expire after 2026.

The Company’s ability to realize deferred tax assets is dependent on its ability to generate future taxable income. Accordingly, the Company has established a valuation allowance in taxable jurisdictions where the utilization of the tax assets is uncertain. Additional timing differences or future tax losses may occur which could warrant a need for establishing additional valuation allowances against certain deferred tax assets. The valuation allowance for the years ended July 31, 2018 and 2017 was $4.6 million and $6.5 million, respectively. The valuation allowance for deferred tax assets primarily related to operating losses in certain international jurisdictions and certain tax credits that are unlikely to be realized.

As of July 31, 2018 and 2017, if recognized, the portion of liabilities for unrecognized tax benefits that would favorably affect the Company’s effective tax rate was $16.0 million and $13.0 million, respectively. It is possible that the amount of unrecognized tax benefits will change in the next twelve months, due to tax legislation updates or future audit outcomes; however, an estimate of the range of the possible change cannot be made at this time.

The following table summarizes the activities related to the Company’s unrecognized tax benefits:

		July 31,
(In thousands)		2018				2017				2016
Beginning balance		$	19,269			$	20,715			$	17,428
Increases related to current year tax position		5,169				2,807				4,311
Prior year tax positions:
Prior year increase		554				2,694				1,120
Prior year decrease		(2,079		)		(3,605		)		—
Cash settlement		(519		)		(1,123		)		(412		)
Lapse of statute of limitations		(1,072		)		(2,219		)		(1,732		)
Ending balance		$	21,322			$	19,269			$	20,715

It is the Company’s continuing practice to recognize interest and penalties related to income tax matters in income tax expense. As of July 31, 2018, 2017 and 2016, the Company had accrued interest and penalties related to unrecognized tax benefits of $6.0 million, $5.3 million and $4.9 million, respectively.

The Company is currently under examination by certain taxing authorities in the U.S. for fiscal years 2013 to 2016. At this time, the Company does not believe that the outcome of any examination will have a material impact on the Company’s consolidated results of operations and financial position.

The Company’s effective income tax rates were 25.7%, 10.4%, and 31.7% for fiscal 2018, 2017 and 2016, respectively. The tax rates in the prior years were impacted primarily from the result of recognizing excess tax benefits from the exercise of employee stock options of $21.3 million, $107.6 million and $14.7 million, for the years ended July 31, 2018, 2017 and 2016, respectively. The effective tax rate was computed based on a reduced blended U.S. federal corporate tax rate of 26.9% for the fiscal year ending July 31, 2018, and included the effects of the Tax Cuts and Jobs Act.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Reform” or “Tax Act”). Tax Reform makes broad and complex changes to the U.S. tax code, including, but not limited to (i) reducing the U.S. federal corporate tax rate from 35.0% to 21.0%; (ii) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries (“Transition Tax”); (iii) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (iv) creating a new provision designed to tax global intangible low-taxed income (“GILTI”) which allows for the possibility of using foreign tax credits (“FTCs”) and a deduction of up to 50.0% to offset the income tax liability (subject to some limitations); (v) allowing for full expensing of qualified property through bonus depreciation; and (vi) creating limitations on the deductibility of certain executive compensation.

The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of Tax Reform. SAB 118 provides a measurement period that should not extend beyond one year from enactment for companies to complete the accounting under ASC 740, Income Taxes. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of Tax Reform for which the accounting under ASC 740 is complete in the financial statements. To the extent that a company’s accounting for certain income tax effects of Tax Reform is incomplete, but a reasonable estimate is able to be made, the company must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the tax laws that were in effect immediately before the enactment of Tax Reform.

The Company has not completed its accounting for the tax effects of the enactment of the Tax Act. Specifically, the amount recorded for the Transition Tax is a provisional amount based on the Company’s estimates. The Company expects to complete the accounting for these impacts of the Tax Act in the fiscal quarter ending January 31, 2019 as it finalizes its cumulative earnings and profits of its foreign subsidiaries and receives additional guidance from the IRS pertaining to the Tax Act. The impacts of additional guidance and changes in estimates related to the effects of the Tax Act, if any, will be recorded in the period the additional guidance or information is available. The Company recognized a provisional net tax charge of $10.6 million during the three months ended January 31, 2018. Subsequently it was raised to $12.4 million in the three months ended July 31, 2018, as more IRS guidance was released with respect to the calculation of the Transition Tax.

The Company re-measured deferred tax assets and liabilities based on the U.S. statutory income tax rate. In the three months ended January 31, 2018, a $0.6 million tax benefit was initially recorded. The tax benefit was further increased to $4.3 million in the three months ended July 31, 2018.

The Tax Act contains Global Intangible Low-Taxed Income (“GILTI”) rules, which first impact the Company in fiscal year 2019. Under the GILTI rules certain income earned by the Company's foreign subsidiaries is subject to current U.S. taxation. The Company is continuing to evaluate this provision of the Act and the application of ASC 740. Under U.S. GAAP, the Company is permitted to make an accounting policy election to either treat future U.S. tax generated by the GILTI rules as a current-period expense when incurred or to factor such amounts into the Company's measurement of its deferred taxes. The Company has not recorded any amounts related to potential GILTI tax in its financial statements and will make an accounting policy election after it completes its evaluation of the GILTI rules and the application of ASC 740.

The Tax Act eliminated any additional federal tax upon repatriation of outside basis difference primarily resulted from undistributed foreign earnings; however, those undistributed earnings may still be subject to foreign withholding taxes if they are repatriated. As of July 31, 2018, the Company's foreign subsidiaries have accumulated undistributed earnings of $160.0 million. No deferred tax liability has been recognized for the repatriation of these earnings or any residual outside basis difference as the Company intends to permanently reinvest them.

During the year ended July 31, 2018, the Company repatriated $93.9 million of earnings that will be considered previously taxed, from the U.K. to the U.S. and concluded that there were no material additional taxes incurred.

During the year ended July 31, 2016, the Company adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which impacted the accounting for share-based payments, including income tax consequences, classification of awards and the classification on the consolidated statements of cash flows. As of July 31, 2018, 2017 and 2016 the Company recognized excess tax benefits of $21.3 million, $107.6 million and $14.7 million, respectively, as a reduction to tax expense in the consolidated statements of income.

NOTE 13 — Net Income Per Share

The table below reconciles basic weighted shares outstanding to diluted weighted average shares outstanding:

		Year Ended July 31,
(In thousands)		2018			2017			2016
Weighted average common shares outstanding		231,793			228,686			228,846
Effect of dilutive securities — stock options		10,084			8,333			15,449
Weighted average common and dilutive potential common shares outstanding		241,877			237,019			244,295

There were no material adjustments to net income required in calculating diluted net income per share. Excluded from the dilutive earnings per share calculation were 4,788,004; 3,058,808; and 11,594,014 options to purchase the Company’s common stock for the years ended July 31, 2018, 2017 and 2016, respectively, because their inclusion would have been anti-dilutive. During the year ended July 31, 2016, the Company adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which caused an impact on dilutive potential common shares outstanding, as the Company excluded the excess tax benefits and deficiencies from the proceeds portion of the diluted earnings per share calculations as they are no longer recorded in equity, which caused dilutive potential common shares outstanding to increase for all periods in fiscal 2016.

NOTE 14 — Segments and Other Geographic Reporting

The Company’s U.S. and International regions are considered two separate operating segments and are disclosed as two reportable segments. The segments represent geographic areas and reflect how the chief operating decision maker allocates resources and measures results, including total revenues, operating income and income before income taxes. The segments continue to share similar business models, services and economic characteristics. Intercompany income (expense) primarily related to charges for services provided by the U.S. segment.

The following tables present financial information by segment:

		Year Ended July 31, 2018
(In thousands)		United States				International				Total
Total service revenues and vehicle sales		$	1,491,022			$	314,673			$	1,805,695
Yard operations		730,865				116,003				846,868
Cost of vehicle sales		101,130				95,331				196,461
General and administrative		144,140				32,750				176,890
Impairment of long-lived assets		—				1,131				1,131
Operating income		514,887				69,458				584,345
Interest (expense) income, net		(19,996		)		921				(19,075		)
Other income, net		(3,285		)		526				(2,759		)
Intercompany income (expense)		10,355				(10,355		)		—
Income before income tax expense		501,961				60,550				562,511
Income tax expense		136,136				8,368				144,504
Net income		$	365,825			$	52,182			$	418,007
Depreciation and amortization		$	67,779			$	10,819			$	78,598
Capital expenditures, including acquisitions		255,868				40,829				296,697
Total assets		1,856,058				451,640				2,307,698
Goodwill		256,434				80,801				337,235

		Year Ended July 31, 2017
(In thousands)		United States				International				Total
Total service revenues and vehicle sales		$	1,193,188			$	254,793			$	1,447,981
Yard operations		585,587				92,814				678,401
Cost of vehicle sales		61,484				76,068				137,552
General and administrative		130,392				20,972				151,364
Impairment of long-lived assets		19,365				—				19,365
Operating income		396,360				64,939				461,299
Interest (expense) income, net		(23,373		)		1,000				(22,373		)
Other income, net		(10		)		1,184				1,174
Intercompany income (expense)		12,549				(12,549		)		—
Income before income tax expense		385,526				54,574				440,100
Income tax expense		34,985				10,854				45,839
Net income		$	350,541			$	43,720			$	394,261
Depreciation and amortization		$	47,507			$	9,493			$	57,000
Capital expenditures, including acquisitions		317,646				15,344				332,990
Total assets		1,514,018				468,483				1,982,501
Goodwill		259,162				81,081				340,243

		Year Ended July 31, 2016
(In thousands)		United States				International				Total
Total service revenues and vehicle sales		$	1,016,036			$	252,413			$	1,268,449
Yard operations		494,146				88,758				582,904
Cost of vehicle sales		55,866				85,093				140,959
General and administrative		118,315				19,801				138,116
Operating income		347,709				58,761				406,470
Interest (expense) income, net		(23,178		)		1,021				(22,157		)
Other income, net		1,216				10,336				11,552
Intercompany income (expense)		13,266				(13,266		)		—
Income before income tax expense		339,013				56,852				395,865
Income tax expense		115,667				9,838				125,505
Net income		$	223,346			$	47,014			$	270,360
Depreciation and amortization		$	39,083			$	9,492			$	48,575
Capital expenditures, including acquisitions		153,451				20,466				173,917
Total assets		1,249,755				400,065				1,649,820
Goodwill		179,906				80,292				260,198

NOTE 15 — Commitments and Contingencies

Leases

The Company leases certain facilities and certain equipment under non-cancelable capital and operating leases. In addition to the minimum future lease commitments presented below, the leases generally require the Company to pay property taxes, insurance, maintenance and repair cost which are not included in the table because the Company has determined these items are not material. Certain leases provide the Company with either a right of first refusal to acquire or an option to purchase a facility at fair value. Certain leases also contain escalation clauses and renewal option clauses calling for increased rents. Where a lease

contains an escalation clause or a concession, such as a rent holiday or tenant improvement allowance, rent expense is recognized on a straight-line basis over the lease term in accordance with ASC 840, Operating Leases.

The future minimum lease commitments for the next five fiscal years, under non-cancelable capital and operating leases with initial or remaining lease terms in excess of one year were as follows:

Years Ending July 31, (In thousands)		Capital Leases				Operating Leases
2019		$	966			$	29,773
2020		30				22,471
2021		13				18,515
2022		—				13,782
2023		—				11,680
Thereafter		—				54,068
Subtotal		1,009				150,289
Less: Amount relating to interest		(29		)		—
Total		$	980			$	150,289

Facilities rental expense for the years ended July 31, 2018, 2017 and 2016 was $45.6 million, $26.8 million and $21.6 million, respectively. Yard operations equipment rental expense for the years ended July 31, 2018, 2017 and 2016 was $2.8 million, $2.9 million and $3.1 million, respectively.

Commitments

Letters of Credit

Under a letter of credit facility separate from our Revolving Loan Facility, the Company had outstanding letters of credit of $17.3 million at July 31, 2018, which are primarily used to secure certain insurance obligations.

Contingencies

Legal Proceedings

The Company is subject to threats of litigation and is involved in actual litigation and damage claims arising in the ordinary course of business, such as actions related to injuries, property damage, contract disputes, and handling or disposal of vehicles. The material pending legal proceedings to which the Company is a party, or of which any of the Company’s property is subject, include the following matters.

On November 1, 2013, the Company filed suit against Sparta Consulting, Inc. (now known as KPIT). The suit arose out of the Company’s September 17, 2013 decision to terminate the Implementation Services Agreement, under which KPIT was to design, implement, and deliver a customized replacement enterprise resource planning system for the Company. On January 8, 2014, KPIT filed suit against the Company in the United States District Court for the Eastern District of California, alleging breach of contract, promissory estoppel, breach of the implied covenant of good faith and fair dealing, account stated, quantum meruit, unjust enrichment, and declaratory relief. On June 8, 2016, the Company amended its complaint to include claims that KPIT stole certain intellectual property owned by the Company and acted negligently in its provision of services. The case was tried in April and May 2018. On May 22, 2018, the jury returned a verdict for the Company on its fraud claim against KPIT for $4.7 million, and on its professional negligence claim against KPIT for $16.3 million, and the jury found for KPIT on its implied covenant counterclaim against the Company for $4.9 million.

In a September 10, 2018, post-trial order, the Court reduced the Company’s professional negligence award to $9.1 million, found KPIT liable under California’s Unfair Competition Law (UCL) for fraudulent and unfair conduct and held that the Company could recover restitution of $6.3 million if the Company chooses to forego its fraud and professional negligence damages, found that the Company was not entitled to restitution on its unjust enrichment claim, and awarded KPIT prejudgment interest on its implied covenant counterclaim starting from December 26, 2016. Further post-trial proceedings are expected in this lawsuit, including the determination of the Company’s right to prejudgment interest on its successful claims.

The Company provides for costs relating to these matters when a loss is probable and the amount can be reasonably estimated. The effect of the outcome of these matters on the Company’s future consolidated results of operations and cash flows cannot be predicted because any such effect depends on future results of operations and the amount and timing of the resolution of such matters. The Company believes that any ultimate liability will not have a material effect on its consolidated results of operations, financial position or cash flows. However, the amount of the liabilities associated with these claims, if any, cannot be determined with certainty. The Company maintains insurance which may or may not provide coverage for claims made against the Company. There is no assurance that there will be insurance coverage available when and if needed. Additionally, the insurance that the Company carries requires that the Company pay for costs and/or claims exposure up to the amount of the insurance deductibles negotiated when the insurance is purchased.

Governmental Proceedings

The Georgia Department of Revenue, or DOR, conducted a sales and use tax audit of the Company’s operations in Georgia for the period from January 1, 2007 through June 30, 2011. As a result of their initial audit, the DOR issued a notice of proposed assessment for uncollected sales taxes in which it asserted that the Company failed to collect and remit sales taxes totaling $73.8 million, including penalties and interest.

The Company subsequently engaged a Georgia law firm and outside tax advisors to review the conduct of its business operations in Georgia, the notice of proposed assessment, and the DOR’s policy position. In particular, the Company’s outside legal counsel provided the Company an opinion that the sales for resale to non-U.S. registered resellers should not be subject to Georgia sales and use tax. In rendering its opinion, the Company’s counsel noted that non-U.S. registered resellers are unable to comply strictly with technical requirements for a Georgia certificate of exemption but concluded that its sales for resale to non-U.S. registered resellers should not be subject to Georgia sales and use tax notwithstanding this technical inability to comply. Following the Company’s receipt of the notice of proposed assessment, the Company and its counsel engaged in active discussions with the DOR to resolve the matter.

During an extended remand period, it was determined that grounds exist for a substantial reduction in the Official Assessment, on the basis that (i) the transactions and resulting tax at issue were erroneously double-counted by the DOR in the audit sales transaction work papers on which the Assessment was based; and (ii) the Company was ultimately able to provide documentation showing that most of the remaining transactions were sales at wholesale, therefore qualifying for the sale for resale exemption from Georgia Sales and Use Tax. After these reductions, the remaining amount of principal Georgia Sales and Use Tax still in dispute between the parties is $2.6 million, plus applicable interest. A Consent Order to this effect was entered by the Georgia Tax Tribunal on May 22, 2017. Since the date of entry of the Consent Order, the DOR filed a Motion for Summary Judgment related to the remaining $2.6 million in dispute. The Company opposed the DOR’s motion and is awaiting a decision by the Court regarding the DOR’s motion.

Based on the opinion from the Company’s outside law firm, advice from its outside tax advisors, and the Company’s best estimate of a probable outcome, the Company has adequately provided for the payment of any assessment in its consolidated financial statements. The Company believes it has strong defenses to the remaining tax liability set forth above and intends to continue to defend this matter. There can be no assurance that this matter will be resolved in the Company’s favor or that the Company will not ultimately be required to make a substantial payment to the DOR. The Company understands that litigating and defending the matter in Georgia could be expensive and time-consuming and result in substantial management distraction. If the matter were to be resolved in a manner adverse to the Company, it could have a material adverse effect on the Company’s consolidated results of operations and financial position.

NOTE 16 — Guarantees — Indemnifications to Officers and Directors

The Company typically enters into indemnification agreements with its directors and certain of its officers to indemnify them to the extent permitted by law against any and all liabilities, costs, expenses, amounts paid in settlement and damages incurred by the directors as a result of any lawsuit, or any judicial, administrative or investigative proceeding in which the directors are sued as a result of their service as members of its Board of Directors.

NOTE 17 — Related Party Transactions

During the year ended July 31, 2016, the Company acquired interest in a partnership which was partially owned by an executive and which held the lease on property where the Company is operating a facility and totaled $2.0 million.

There were no amounts due to or from related parties as of July 31, 2018 and 2017 that are not separately or previously disclosed.

NOTE 18 — Employee Benefit Plan

The Company sponsors a 401(k) defined contribution plan covering its eligible employees. The plan is available to all U.S. employees who meet minimum age and service requirements and provides employees with tax deferred salary deductions and alternative investment options. The Company matches 20% of employee contributions up to 15% of employee salary deferral. The Company recognized expenses of $0.9 million for the years ended July 31, 2018, 2017 and $0.8 million for the year ended July 31, 2016, respectively, related to this plan.

The Company also sponsors an additional defined contribution plan for its U.K. employees, which is available to all U.K. employees who meet minimum service requirements. The Company matches up to 5% of employee contributions. The Company recognized expenses of $0.7 million, for the years ended July 31, 2018 and 2017, and $0.6 million for the year ended July 31, 2016, related to this plan.

NOTE 19 — Quarterly Financial Information (Unaudited)(1)

		Fiscal Quarter
Fiscal Year 2018 (In thousands, except per share data)		First				Second				Third				Fourth
Total revenue		$	419,168			$	459,106			$	478,198			$	449,223
Gross profit		163,264				191,609				219,068				188,425
Operating income		123,942				150,947				174,619				134,837
Income before income taxes		114,128				144,438				171,216				132,729
Net income attributable to Copart, Inc.		77,515				103,256				127,348				109,748
Basic net income per common share		$	0.34			$	0.45			$	0.55			$	0.47
Diluted net income per common share		$	0.32			$	0.43			$	0.52			$	0.45

		Fiscal Quarter
Fiscal Year 2017 (In thousands, except per share data)		First				Second				Third				Fourth
Total revenue		$	345,991			$	349,532			$	373,862			$	378,596
Gross profit		145,293				146,765				172,505				167,465
Operating income		104,824				108,880				136,788				110,807
Income before income taxes		102,534				100,099				131,088				106,379
Net income attributable to Copart, Inc.		167,280				66,066				90,546				70,335
Basic net income per common share		$	0.74			$	0.29			$	0.39			$	0.31
Diluted net income per common share		$	0.70			$	0.28			$	0.38			$	0.30

(1)	Earnings per share were computed independently for each of the periods presented; therefore, the sum of the earnings per share amounts for the quarters may not equal the total for the year.

EXHIBIT INDEX

The following Exhibits are filed as part of, or incorporated by reference into this report.

					Incorporated by reference herein
Exhibit Number			Description		Form		Date
3.1			Copart, Inc. Certificate of Incorporation		Current Report on Form 8-K, (File No. 000-23255), Exhibit No. 3.1		February 25, 2016
3.2			Certificate of Amendment to the Copart, Inc. Certificate of Incorporation		Current Report on Form 8-K, (File No. 000-23255), Exhibit No. 2		December 22, 2016
3.3			Bylaws of Copart, Inc.		Current Report on Form 8-K, (File No. 000-23255), Exhibit No. 3		December 22, 2016
10.1		*	Copart Inc. 2007 Equity Incentive Plan, as Amended and Restated (2007 EIP)		Current Report on Form 8-K, (File No. 000-23255), Exhibit No. 1		December 22, 2016
10.2		*	Form of Performance Share Award Agreement for use with 2007 EIP		Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.1		December 12, 2007
10.3		*	Form of Restricted Stock Unit Award Agreement for use with 2007 EIP		Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.3		December 12, 2007
10.4		*	Form of Stock Option Award Agreement for use with 2007 EIP		Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.5		December 12, 2007
10.5		*	Form of Restricted Stock Award Agreement for use with 2007 EIP		Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.4		December 12, 2007
10.6		*	Credit Agreement dated as of December 14, 2010 by and between the Registrant and Bank of America, N.A.		Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.1		December 15, 2010
10.7		*	Amendment to Credit Agreement between the Registrant and Bank of America, N.A., dated as of September 29, 2011		Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.13b		October 4, 2011
10.8		*	Copart, Inc. Executive Bonus Plan		Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.13		August 3, 2006
10.9		*	Amended and Restated Executive Officer Employment Agreement between the Registrant and William E. Franklin, dated September 25, 2008		Quarterly Report on Form 10-Q (File No. 000-23255), Exhibit No. 10.1		December 10, 2008
10.10		*	Form of Indemnification Agreement signed by executive officers and directors		Annual Report on Form 10-K (File No. 000-23255), Exhibit No. 10.17		October 1, 2012

					Incorporated by reference herein
Exhibit Number			Description		Form		Date
10.11			Standard Industrial/Commercial single tenant lease-net dated February 3, 2013 between Garden Centura, L.P. and the Registrant		Annual Report on Form 10-K (File No. 000-23255), Exhibit No. 10.18		October 1, 2012
10.12			Credit Agreement among the Registrant, the lenders from time to time party thereto, and Wells Fargo Bank, N.A., as administrative agent, dated as of December 3, 2014		Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.1		December 4, 2014
10.13			Security Agreement among the Registrant, the lenders from time to time party thereto, and Wells Fargo Bank, N.A., as collateral agent, dated as of December 3, 2014		Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.2		December 4, 2014
10.14			Note Purchase Agreement among the Registrant and each of the purchasers listed on Schedule B dated as of December 3, 2014		Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.3		December 4, 2014
10.15		*	Copart, Inc. 2014 Employee Stock Purchase Plan		Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.1		December 5, 2014
10.16		*	Form of Copart, Inc. Stand-Alone Stock Option Award Agreement for grant of options to purchase 2,000,000 and 1,500,000 shares of the Registrant’s common stock to A. Jayson Adair and Vincent W. Mitz, respectively.		Registration Statement on Form S-8 (File No. 333-193244), Exhibit No. 4.2		January 9, 2014
10.17		*	Amended and Restated Stand-Alone Stock Option Award Agreement dated June 2, 2015, between the Registrant and A. Jayson Adair.		Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.1		June 4, 2015
10.18		*	Amended and Restated Stand-Alone Stock Option Award Agreement dated June 2, 2015, between the Registrant and Vincent W. Mitz.		Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.2		June 4, 2015
10.19		*	Executive Officer Employment Agreement, effective January 4, 2016, between the Registrant and Jeffrey Liaw.		Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.26		November 23, 2015
10.20			First Amendment to Credit Agreement, dated as of March 15, 2016, by and among Copart, Inc., the subsidiaries of Copart, Inc. party thereto, the lenders party thereto, and Wells Fargo Bank, National Association, as administrative agent.		Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.1		March 17, 2016
10.21			Second Amendment to Credit Agreement, dated as of July 21, 2016, by and among Copart, Inc., the subsidiaries of Copart, Inc. party thereto, the lenders party thereto, and Bank of America, N.A., as administrative agent.		Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.1		July 27, 2016
10.22			First Amendment to Note Purchase Agreement, dated as of July 21, 2016, by and among Copart, Inc., the subsidiaries of Copart, Inc. party thereto and the purchasers party thereto.		Current Report on Form 8-K (File No. 000-23255), Exhibit No. 10.2		July 27, 2016
14.01			Code of Ethics for Principal Executive and Senior Financial Officers		Annual Report on Form 10-K (File No. 000-23254), Exhibit No. 14-01		October 17, 2003

					Incorporated by reference herein
Exhibit Number			Description		Form		Date
21.1			List of subsidiaries of Registrant		—		Filed herewith
23.1			Consent of Independent Registered Public Accounting Firm		—		Filed herewith
24.1			Power of Attorney (included on signature page)		—		Filed herewith
31.1			Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		—		Filed herewith
31.2			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002		—		Filed herewith
32.1		(1)	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		—		Filed herewith
32.2		(1)	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002		—		Filed herewith
101.INS			XBRL Instance Document
101.SCH			XBRL Taxonomy Extension Schema Document
101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF			XBRL Extension Definition
101.LAB			XBRL Taxonomy Extension Label Linkbase Document
101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document
(1	)		In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

*	Management contract, plan or arrangement