Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K for the fiscal year ended July 31, 2018, or this Form 10-K, including the information incorporated by reference herein, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). All statements other than statements of historical facts are statements that could be deemed forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Form 10-K involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. These forward-looking statements are made in reliance upon the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These factors include those listed in Part I, Item 1A under the caption entitled “Risk Factors” in this Form 10-K and those discussed elsewhere in this Form 10-K. Unless the context otherwise requires, references in this Form 10-K to “Copart,” the “Company,” “we,” “us,” or “our” refer to Copart, Inc. We encourage investors to review these factors carefully together with the other matters referred to herein, as well as in the other documents we file with the Securities and Exchange Commission (the SEC). We may from time to time make additional written and oral forward-looking statements, including statements contained in our filings with the SEC. We do not undertake to update any forward-looking statement that may be made from time to time by or on behalf of us.

All references to numbered Notes are to specific Notes to our Consolidated Financial Statements included in this Annual Report on Form 10-K and which descriptions are incorporated into the applicable response by reference. Capitalized terms used, but not defined, in this Management’s Discussion and Analysis of Financial Condition and Results of Operation (“MD&A”) have the same meanings as in such Notes.

Overview

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

Our goals are to generate sustainable profits for our stockholders, while also producing environmental and social benefits for the world, by promoting vehicle restoration, repair, and recycling; parts refurbishment and re-use; and facilitating the recovery and resilience of communities affected by severe climate events.

We provide vehicle sellers with a full range of services to process and sell vehicles primarily over the internet through our Virtual Bidding Third Generation internet auction-style sales technology, which we refer to as VB3. Vehicle sellers consist primarily of insurance companies, but also include banks, finance companies, charities, fleet operators, dealers and vehicles sourced directly from individual owners. We sell the vehicles principally to licensed vehicle dismantlers, rebuilders, repair licensees, used vehicle dealers and exporters and, at certain locations, to the general public. The majority of the vehicles sold on behalf of insurance companies are either damaged vehicles deemed a total loss 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. We offer vehicle sellers a full range of services that help expedite each stage of the vehicle sales process, minimize administrative and processing costs, and maximize the ultimate sales price.

In the U.S., Canada, Brazil, the Republic of Ireland, Germany, Finland, the U.A.E., Oman, Bahrain, and Spain, we sell vehicles primarily as an agent and derive revenue primarily from fees paid by vehicle buyers (“members”) and vehicle sellers as well as related fees for services, such as towing and storage. In the U.K. and Germany, we operate both as an agent and on a principal basis, in some cases purchasing salvage vehicles outright and reselling the vehicles for our own account. In Germany and Spain, we also derive revenue from listing vehicles on behalf of insurance companies and insurance experts to determine the vehicle’s residual value and/or to facilitate a sale for the insured.

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

Service and Vehicle Sales Revenue: Our revenue consists of sales transaction fees charged to vehicle sellers and vehicle buyers, transportation revenue, purchased vehicle revenue, and other remarketing services. Revenues from sellers are generally generated either on a fixed fee contract basis, where our fees are fixed based on the sale of each vehicle regardless of the selling price of the vehicle or under our Percentage Incentive Program, which we refer to as PIP, where our fees are generally based on a predetermined percentage of the vehicle sales price. Under the consignment or fixed fee program, we generally charge an additional fee for title processing and special preparation. We may also charge additional fees for the cost of transporting the vehicle to our facility, storage of the vehicle, and other incidental costs not included in the consignment fee. Under the consignment program, only the fees associated with vehicle processing are recorded in revenue, not the actual sales price (gross proceeds). Sales transaction fees also include fees charged to vehicle buyers for purchasing vehicles, storage, loading, and annual registration. Transportation revenue includes charges to sellers for towing vehicles under certain contracts and towing charges assessed to buyers for delivering vehicles. Purchased vehicle revenue includes the gross sales price of the vehicles which we have purchased or are otherwise considered to own, and is primarily generated in the U.K. We have certain contracts with insurance companies in which we act as a principal, purchasing vehicles and reselling them for our own account. We also purchase vehicles in the open market, primarily from individuals, and resell them for our own account.

Our revenue is impacted by several factors, including total loss frequency and the average vehicle auction selling price, as a significant amount of our service revenue is associated in some manner with the ultimate selling price of the vehicle. Vehicle auction selling prices are driven primarily by: (i) changes in commodity prices, particularly the per ton price for crushed car bodies, as we believe this has an impact on the ultimate selling price of vehicles sold for scrap and vehicles sold for dismantling; (ii) used car pricing, which we also believe has an impact on total loss frequency; (iii) the mix of cars sold; and (iv) changes in the U.S. dollar exchange rate to foreign currencies, which we believe has an impact on auction participation by international buyers. We cannot specifically quantify the financial impact that commodity pricing, used car pricing, and product sales mix has on the selling price of vehicles, our service revenues or financial results. Total loss frequency is the percentage of cars involved in accidents that insurance companies salvage rather than repair and is driven by the relationship between repairs costs, used car values, and auction returns. Over the last several years, we believe there has been an increase in overall growth in the salvage market driven by an increase in total loss frequency. The increase in total loss frequency may have been driven by the decline in used car values relative to repair costs, which we believe are generally trending upward. Conversely, increases in used car prices, such as occurred during the most recent recession, may decrease total loss frequency and adversely affect our growth rate. Used car values are determined by many factors, including used car supply, which is tied directly to new car sales, and the average age of cars on the road. The average age of cars on the road continued to increase, growing from 9.6 years in 2002 to 12.1 years in 2018. The factors that can influence repair costs, used car pricing, and auction returns are many and varied and we cannot predict their movements. Accordingly, we cannot predict future trends in total loss frequency.

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

Other Income and Expense: Other income primarily includes income from the rental of certain real property, foreign exchange rate gains and losses, and gains and losses from the disposal of assets, which will fluctuate based on the nature of these activities each period. Other expense consists primarily of interest expense on long-term debt. See Notes to Consolidated Financial Statements, Note 8 — Long-Term Debt.

Liquidity and Cash Flows: Our primary source of working capital is cash operating results and debt financing. The primary source of our liquidity is our cash and cash equivalents and Revolving Loan Facility. The primary factors affecting cash operating results are: (i) seasonality; (ii) market wins and losses; (iii) supplier mix; (iv) accident frequency; (v) total loss frequency; (vi) increased volume from our existing suppliers; (vii) commodity pricing; (viii) used car pricing; (ix) foreign currency exchange rates; (x) product mix; (xi) contract mix to the extent applicable; and (xii) our capital expenditures. These factors are further discussed in the Results of Operations and Risk Factors sections of this Annual Report on Form 10-K.

Potential internal sources of additional working capital are the sale of assets or the issuance of shares through option exercises and shares issued under our Employee Stock Purchase Plan. A potential external source of additional working capital is the issuance of additional debt with new lenders and equity. However, we cannot predict if these sources will be available in the future or on commercially acceptable terms.

Acquisitions and New Operations

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

The following table sets forth operational facilities that we have acquired or opened and began operations from August 1, 2015 through July 31, 2018:

Locations		Acquisition or Greenfield		Date		Geographic Service Area
Dallas, Texas		Greenfield		March 2016		United States
Wilmer, Texas (Dallas)		Greenfield		April 2016		United States
Temple, Texas		Greenfield		April 2016		United States
Colorado Springs, Colorado		Greenfield		May 2016		United States
Denver, Colorado		Greenfield		July 2016		United States
Cartersville, Georgia		Greenfield		July 2016		United States
Brighton, Colorado (Denver)		Greenfield		August 2016		United States
Sun Valley, California (Los Angeles)		Greenfield		November 2016		United States
Casper, Wyoming		Greenfield		January 2017		United States
Littleton, Colorado (Denver)		Greenfield		January 2017		United States
Apopka, Florida (Orlando)		Greenfield		January 2017		United States
Alorton, Illinois (St. Louis)		Greenfield		February 2017		United States
Okeechobee, Florida		Greenfield		March 2017		United States
Ogden, Utah (Salt Lake City)		Greenfield		March 2017		United States
Wilmington, California (Long Beach)		Greenfield		March 2017		United States
Cycle Express, LLC (1)		Acquisition		June 2017		United States
Andrews, Texas (Midland)		Greenfield		August 2017		United States
Exeter, Rhode Island		Greenfield		October 2017		United States
Lumberton, North Carolina		Greenfield		June 2018		United States
Castledermot, Republic of Ireland		Greenfield		April 2016		Republic of Ireland
Algete, Spain (Madrid)		Greenfield		July 2016		Spain
Bad Fallingbostel, Germany (Hanover)		Greenfield		September 2016		Germany
Nobitz, Germany (Leipzig)		Greenfield		April 2018		Germany
Newbury, United Kingdom		Greenfield		September 2016		United Kingdom
Belfast, Northern Ireland		Greenfield		April 2018		United Kingdom
Betim, Minas Gerais		Greenfield		April 2017		Brazil
Espoo, Finland		Acquisition		March 2018		Finland
Pirkkala, Finland		Acquisition		March 2018		Finland
Oulu, Finland		Acquisition		March 2018		Finland
Turku, Finland		Acquisition		March 2018		Finland

(1)	Cycle Express, LLC conducts business primarily as National Powersport Auctions (NPA), a leading non-salvage auction platform for motorcycles, snowmobiles, watercraft and other powersports vehicles. NPA currently operates facilities in Atlanta, Georgia; Cincinnati, Ohio; Dallas, Texas; Philadelphia, Pennsylvania; and San Diego, California.

The period-to-period comparability of our consolidated operating results and financial position is affected by business acquisitions, new openings, weather and product introductions during such periods. In particular, we have certain contracts inherited through our U.K. acquisitions that require us to act as a principal, purchasing vehicles from the insurance companies and reselling them for our own account. It has been our practice and remains our intention, where possible, to migrate these

types of contracts to the agency model in future periods. Changes in the amount of revenue derived in a period from principal transactions relative to total revenue will impact revenue growth and margin percentages.

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

Results of Operations

The following table shows certain data from our consolidated statements of income expressed as a percentage of total service revenues and vehicle sales for fiscal 2018, 2017 and 2016:

		Year Ended July 31,
(In percentages)		2018			2017			2016
Service revenues and vehicle sales:
Service revenues		87	%		89	%		87	%
Vehicle sales		13	%		11	%		13	%
Total service revenues and vehicle sales		100	%		100	%		100	%
Operating expenses:
Yard operations		47	%		47	%		46	%
Cost of vehicle sales		11	%		9	%		11	%
General and administrative		10	%		11	%		11	%
Impairment of long-lived assets		—	%		1	%		—	%
Total operating expenses		68	%		68	%		68	%
Operating income		32	%		32	%		32	%
Other (expense) income		(1	)%		(2	)%		(1	)%
Income before income taxes		31	%		30	%		31	%
Income taxes		8	%		3	%		10	%
Net income		23	%		27	%		21	%

Comparison of Fiscal Years ended July 31, 2018, 2017 and 2016

The following table presents a comparison of service revenues for fiscal 2018, 2017 and 2016:

			Year Ended July 31,												2018 vs. 2017							2017 vs. 2016
(In thousands)			2018				2017				2016				Change				% Change			Change				% Change
Service revenues
	United States		$	1,385,238			$	1,128,990			$	958,558			$	256,248			22.7	%		$	170,432			17.8	%
	International		193,264				157,262				145,821				36,002				22.9	%		11,441				7.8	%
Total service revenues			$	1,578,502			$	1,286,252			$	1,104,379			$	292,250			22.7	%		$	181,873			16.5	%

Service Revenues. The increase in service revenues for fiscal 2018 of $292.3 million, or 22.7% as compared to fiscal 2017 came from (i) an increase in the U.S. of $256.2 million and (ii) an increase in International of $36.0 million. The increase in the U.S. was driven primarily by (i) increased volume and (ii) an increase in revenue per car due to higher average auction selling prices, which we believe is due to a change in the mix of vehicles sold, and higher commodity prices. The increase in volume in the U.S. was derived from (i) growth in the number of units sold from new and expanded contracts with insurance companies, (ii) growth from existing suppliers, driven by what we believe was an increase in total loss frequency and (iii) Hurricane Harvey, as the storm produced an extraordinary volume of flood damaged vehicles. Excluding the beneficial impact of $9.4 million due to changes in foreign currency exchange rates, primarily from the change in the British pound and European Union euro to U.S. dollar exchange rates, the increase in International of $26.6 million was driven primarily by increased volume and an increase in revenue per car.

The increase in service revenues for fiscal 2017 of $181.9 million, or 16.5% as compared to fiscal 2016 came from (i) an increase in the U.S. of $170.4 million and (ii) an increase in International of $11.4 million. The increase in the U.S. was driven primarily by increased volume and a marginal increase in revenue per car due to higher average auction selling prices, which we believe was due to higher commodity prices. The increase in volume in the U.S. was derived from (i) growth in the number of units sold from new and expanded contracts with insurance companies, and (ii) growth from existing suppliers, driven by what we believe was an increase in salvage frequency. Excluding a detrimental impact of $16.4 million due to changes in foreign currency exchange rates, primarily from changes in the British pound to U.S. dollar exchange rate, the increase in International of $27.8 million was driven primarily by increased volume and an increase in revenue per car.

The following table presents a comparison of vehicle sales for fiscal 2018, 2017 and 2016:

			Year Ended July 31,												2018 vs. 2017							2017 vs. 2016
(In thousands)			2018				2017				2016				Change				% Change			Change				% Change
Vehicle sales
	United States		$	105,784			$	64,198			$	57,478			$	41,586			64.8	%		$	6,720			11.7	%
	International		121,409				97,531				106,592				23,878				24.5	%		(9,061		)		(8.5	)%
Total vehicle sales			$	227,193			$	161,729			$	164,070			$	65,464			40.5	%		$	(2,341	)		(1.4	)%

Vehicle Sales. The increase in vehicle sales for fiscal 2018 of $65.5 million, or 40.5% as compared to fiscal 2017 came from (i) an increase in the U.S. of $41.6 million and (ii) an increase in International of $23.9 million. Excluding a beneficial impact of $7.9 million due to changes in foreign currency exchange rates, primarily from the change in the British pound and European Union euro to U.S. dollar exchange rates, the growth in International of $16.0 million was primarily the result of higher average auction selling prices, partially offset by a decrease in volume. The increase in the U.S. was primarily the result of increased volume partially driven by higher average auction selling prices, which we believe was due to a change in the mix of vehicles sold and higher commodity prices.

The decrease in vehicle sales for fiscal 2017 of $2.3 million, or 1.4% as compared to fiscal 2016 came from (i) a decrease in International of $9.1 million, partially offset by (ii) an increase in in the U.S. of $6.7 million. Excluding a $13.9 million detrimental impact due to changes in foreign currency exchange rates, primarily from the change in the British pound to U.S. dollar exchange rate, the growth in International of $4.8 million was primarily the result of increased volume. The increase in the U.S. was primarily the result of higher average auction selling prices, which we believe was due to higher commodity prices and a change in the mix of vehicles sold, partially offset by a shift in volume for certain sellers from principal to agency business.

The following table presents a comparison of yard operations expense for fiscal 2018, 2017 and 2016:

			Year Ended July 31,												2018 vs. 2017							2017 vs. 2016
(In thousands)			2018				2017				2016				Change				% Change			Change				% Change
Yard operations expenses
	United States		$	730,865			$	585,587			$	494,146			$	145,278			24.8	%		$	91,441			18.5	%
	International		116,003				92,814				88,758				23,189				25.0	%		4,056				4.6	%
Total yard operations expenses			$	846,868			$	678,401			$	582,904			$	168,467			24.8	%		$	95,497			16.4	%
Yard operations expenses, excluding depreciation and amortization
	United States		$	683,079			$	553,329			$	468,528			$	129,750			23.4	%		$	84,801			18.1	%
	International		106,559				85,117				80,718				21,442				25.2	%		4,399				5.4	%
Yard depreciation and amortization
	United States		$	47,786			$	32,258			$	25,618			$	15,528			48.1	%		$	6,640			25.9	%
	International		9,444				7,697				8,040				1,747				22.7	%		(343		)		(4.3	)%

Yard Operations Expenses. The increase in yard operations expenses for fiscal 2018 of $168.5 million, or 24.8% as compared to fiscal 2017 resulted from (i) an increase in the U.S. of $145.3 million, primarily from growth in volume; a marginal increase in the cost to process each car; and a $15.5 million increase in depreciation; and (ii) an increase in International of $23.2 million related primarily to growth in volume; partially offset by the detrimental impact of $5.8 million due to changes in foreign currency exchange rates, primarily from changes in the British pound and European Union euro to U.S. dollar exchange rate. The increase in the cost to process each car in the U.S. was negatively impacted by abnormal costs of $68.6 million for temporary storage facilities; premiums for subhaulers; labor costs incurred from overtime; travel and lodging due to the reassignment of employees to the affected region; and equipment lease expenses to handle the increased volume associated with Hurricane Harvey, as the storm produced extraordinary volumes of flood damaged vehicles. These costs do not include normal expenses associated with the increased unit volume created by the hurricane, which are deferred until the sale of the units and are recognized as vehicle pooling costs on the balance sheet. Included in yard operations expenses were depreciation and amortization expenses. The increase in yard operations depreciation and amortization expenses resulted primarily from depreciating new and expanded facilities and certain technology assets placed into service in the U.S. and International locations as well as changes to the useful lives of certain fixed assets.

The increase in yard operations expenses for fiscal 2017 of $95.5 million, or 16.4% as compared to fiscal 2016 resulted from (i) an increase in the U.S. of $91.4 million, primarily from growth in volume and a marginal increase in the cost to process each car; and (ii) an increase in International of $4.1 million related primarily to growth in volume; partially offset by the beneficial impact of $9.1 million due to changes in foreign currency exchange rates, primarily from changes in the British pound to U.S. dollar exchange rate. Included in yard operations expenses were depreciation and amortization expenses. The increase in yard operations depreciation and amortization expenses resulted primarily from depreciating new and expanded facilities and certain technology assets placed into service in the U.S.

The following table presents a comparison of cost of vehicle sales for fiscal 2018, 2017 and 2016:

			Year Ended July 31,												2018 vs. 2017							2017 vs. 2016
(In thousands)			2018				2017				2016				Change				% Change			Change				% Change
Cost of vehicle sales
	United States		$	101,130			$	61,484			$	55,866			$	39,646			64.5	%		$	5,618			10.1	%
	International		95,331				76,068				85,093				19,263				25.3	%		(9,025		)		(10.6	)%
Total cost of vehicle sales			$	196,461			$	137,552			$	140,959			$	58,909			42.8	%		$	(3,407	)		(2.4	)%

Cost of Vehicle Sales. The increase in cost of vehicle sales for fiscal 2018 of $58.9 million, or 42.8% as compared to fiscal 2017 was the result of (i) an increase in the U.S. of $39.6 million and (ii) an increase in International of $19.3 million. Excluding the detrimental impact of $6.3 million due to changes in foreign currency exchange rates, primarily from changes in the British pound and European euro to U.S. dollar exchange rate, the increase in International of $13.0 million was primarily the result of increased volume. The increase in the U.S. was primarily the result of increased volume partially driven by

acquisitions and higher average purchase prices, which we believe is due to higher commodity prices and a change in the mix of vehicles sold.

The decrease in cost of vehicle sales for fiscal 2017 of $3.4 million, or 2.4% as compared to fiscal 2016 was the result of (i) a decrease in International of $9.0 million; partially offset by and (ii) an increase in the U.S. of $5.6 million. Excluding the beneficial impact of $10.4 million due to changes in foreign currency exchange rates, primarily from changes in the British pound to U.S. dollar exchange rate, the increase in International of $1.4 million was primarily the result of increased volume. The increase in the U.S. was primarily the result of higher average purchase prices, which we believe is due to higher commodity prices and a change in the mix of vehicles sold; partially offset by a shift in volume for certain sellers from principal to agency business.

The following table presents a comparison of general and administrative expenses for fiscal 2018, 2017 and 2016:

			Year Ended July 31,												2018 vs. 2017							2017 vs. 2016
(In thousands)			2018				2017				2016				Change				% Change			Change				% Change
General and administrative expenses
	United States		$	144,140			$	130,392			$	118,315			$	13,748			10.5	%		$	12,077			10.2	%
	International		32,750				20,972				19,801				11,778				56.2	%		1,171				5.9	%
Total general and administrative expenses			$	176,890			$	151,364			$	138,116			$	25,526			16.9	%		$	13,248			9.6	%
General and administrative expenses, excluding depreciation and amortization
	United States		$	124,147			$	115,143			$	104,850			$	9,004			7.8	%		$	10,293			9.8	%
	International		31,375				19,176				18,349				12,199				63.6	%		827				4.5	%
General and administrative depreciation and amortization
	United States		$	19,993			$	15,249			$	13,465			$	4,744			31.1	%		$	1,784			13.2	%
	International		1,375				1,796				1,452				(421		)		(23.4	)%		344				23.7	%

General and Administrative Expenses. The increase in general and administrative expenses for fiscal 2018 of $25.5 million, or 16.9% as compared to fiscal 2017 came primarily from an increase in the U.S. of $13.7 million, and an increase in International of $11.8 million, primarily from the impact of payroll taxes from the exercise of employee stock options. Excluding depreciation and amortization, the increase in the U.S. of $9.0 million resulted due to the acquisition of Cycle Express, LLC, and litigation costs partially offset by a decrease in payroll taxes from the exercise of employee stock options. The increase in depreciation and amortization expenses for fiscal 2018 as compared to fiscal 2017 came primarily from depreciating certain technology assets placed into service in the U.S. See Notes to Consolidated Financial Statements, Note 2 — Acquisitions.

The increase in general and administrative expenses for fiscal 2017 of $13.2 million, or 9.6% as compared to fiscal 2016 came primarily from an increase in the U.S. of $12.1 million, and an increase in International of $1.2 million. Excluding depreciation and amortization, the increase in the U.S. of $10.3 million resulted primarily from the impact of payroll taxes from the exercise of employee stock options, an increase in professional services expenses, acquisition-related expenses, and charges related to sales tax and franchise tax adjustments. The increase in depreciation and amortization expenses for fiscal 2017 as compared to fiscal 2016 came primarily from depreciating certain technology assets placed into service in the U.S.

The following table summarizes impairment, total other expenses and income taxes for fiscal 2018, 2017 and 2016:

		Year Ended July 31,												2018 vs. 2017							2017 vs. 2016
(In thousands)		2018				2017				2016				Change				% Change			Change				% Change
Impairment		$	1,131			$	19,365			$	—			$	(18,234	)		(94.2	)%		$	19,365			100.0	%
Total other expenses		(21,834		)		(21,199		)		(10,605		)		(635		)		(3.0	)%		(10,594		)		(99.9	)%
Income taxes		144,504				45,839				125,505				98,665				215.2	%		(79,666		)		(63.5	)%

Impairment. During fiscal 2018, we recognized a $1.1 million charge primarily related to fully impairing a supply contract in the International segment. During fiscal 2017, we recognized a $19.4 million charge primarily related to fully impairing costs previously capitalized in connection with the development of business operating software.

Other (Expense) Income. The increase in total other expense for fiscal 2018 of $0.6 million, or 3.0% as compared to fiscal 2017 was primarily due to a decrease in currency gains in International, primarily due to the change in the British pound to U.S. dollar exchange rate and to a decrease in interest expense of $3.4 million as a result of the paydown of our Revolving Loan Facility.

The increase in total other expense for fiscal 2017 of $10.6 million, or 99.9% as compared to fiscal 2016 was primarily due to a decrease in currency gains in International, primarily due to the change in the British pound to U.S. dollar exchange rate and a change in the mix of currencies held in cash and cash equivalents.

Income Taxes. Our 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 year were impacted primarily from the result of recognizing excess tax benefits from the exercise of employee stock options of $21.3 million and $107.6 million for fiscal years 2018 and 2017, respectively. The current year’s effective tax rate was computed based on the 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 (“Tax Reform” or “Tax Act”). See Note 12 — Income Taxes for a detailed discussion of the Tax Act.

During the year ended July 31, 2016, we adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which impacted the accounting for share-based payments, including income tax consequences. As a result of the adoption, we 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. The decrease in the effective income tax rate for fiscal 2017 as compared to fiscal 2016 was primarily the result of recognizing excess tax benefits from the exercise of employee stock options of $107.6 million in fiscal 2017 as compared to $14.7 million in fiscal 2016, and the geographical allocation of our taxable income.

Liquidity and Capital Resources

The following table presents a comparison of key components of our liquidity and capital resources for fiscal 2018, 2017 and 2016, excluding additional funds available to us through our Revolving Loan Facility:

		July 31,												2018 vs. 2017							2017 vs. 2016
(In thousands)		2018				2017				2016				Change				% Change			Change				% Change
Cash and cash equivalents		$	274,520			$	210,100			$	155,849			$	64,420			30.7	%		$	54,251			34.8	%
Working capital		431,860				285,108				220,523				146,752				51.5	%		64,585				29.3	%

		Year Ended July 31,												2018 vs. 2017							2017 vs. 2016
(In thousands)		2018				2017				2016				Change				% Change			Change				% Change
Operating cash flows		$	535,069			$	492,058			$	332,498			$	43,011			8.7	%		$	159,560			48.0	%
Investing cash flows		(288,476		)		(335,791		)		(172,876		)		47,315				14.1	%		(162,915		)		(94.2	)%
Financing cash flows		(182,038		)		(106,975		)		(448,496		)		(75,063		)		(70.2	)%		341,521				76.1	%
Capital expenditures, excluding acquisitions		$	(287,910	)		$	(172,178	)		$	(173,917	)		$	(115,732	)		(67.2	)%		$	1,739			1.0	%
Acquisitions, net of cash acquired		(8,787		)		(160,812		)		—				152,025				94.5	%		(160,812		)		(100.0	)%
Net (repayments) proceeds on revolving loan facility		(231,000		)		(7,000		)		238,000				(224,000		)		(3,200.0	)%		(245,000		)		(102.9	)%
Principal payments on long-term debt		—				—				(337,500		)		—				—	%		(337,500		)		(100.0	)%

Cash and cash equivalents and working capital increased at July 31, 2018 as compared July 31, 2017 primarily due to cash generated from operations and a decrease in payments for employee stock-based tax withholdings, and proceeds from the

exercise of stock options, partially offset by a net repayments on our Revolving Loan Facility and a decline in cash used for acquisitions. Cash equivalents consisted of bank deposits, domestic certificates of deposit, and funds invested in money market accounts, which bear interest at variable rates. Cash and cash equivalents decreased at July 31, 2017 as compared to July 31, 2016 primarily due to repurchases of common stock as part of our tender offer and stock repurchase program, capital expenditures, and payments on long-term debt, partially offset by cash generated from operations and proceeds from our Revolving Loan Facility. Working capital increased at July 31, 2017 as compared to July 31, 2016 primarily due to cash generated from operations and proceeds from our Revolving Loan Facility, partially offset by repurchases of common stock as part of our tender offer and stock repurchase program, capital expenditures, payments on long-term debt and changes in operating assets.

Historically, we have financed our growth through cash generated from operations, public offerings of common stock, equity issued in conjunction with certain acquisitions and debt financing. Our primary source of cash generated by operations is from the collection of sellers’ fees, members’ fees and reimbursable advances from the proceeds of vehicle sales. We expect to continue to use cash flows from operations to finance our working capital needs and to develop and grow our business. In addition to our stock repurchase program, we are considering a variety of alternative potential uses for our remaining cash balances and our cash flows from operations. These alternative potential uses include additional stock repurchases, repayments of long-term debt, the payment of dividends, and acquisitions. For further detail, see Notes to Consolidated Financial Statements, Note 8 — Long-Term Debt and Note 11 — Stockholders’ Equity and under the subheadings “Credit Agreement” and “Note Purchase Agreement” below.

Our business is seasonal as inclement weather during the winter months increases the frequency of accidents and consequently, the number of cars involved in accidents which the insurance companies salvage rather than repair. During the winter months, most of our facilities process 10% to 30% more vehicles than at other times of the year. This increased volume requires the increased use of our cash to pay out advances and handling costs of the additional business.

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

As of July 31, 2018, $115.5 million of the $274.5 million of cash and cash equivalents was held by our foreign subsidiaries. If these funds are needed for our operations in the U.S. the repatriation of these funds could still be subject to the foreign withholding tax related to the U.S. Tax Reform and the mandatory Transition Tax, which is imposed on the post-1986 undistributed foreign earnings and profits. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not require repatriation to fund our U.S. operations.

Net cash used in operating activities increased for fiscal 2018 as compared to fiscal 2017 due to improved cash operating results from an increase in service revenues and lower asset impairments, partially offset by an increase in yard operations and general and administrative expenses, and changes in operating assets and liabilities. The change in operating assets and liabilities was primarily the result of an increase in accounts payable of $49.1 million, partially offset by a decrease in income taxes receivable of $21.3 million, and a decrease in inventory and vehicle pooling costs of $6.7 million.

Net cash used in operating activities increased for fiscal 2017 as compared to fiscal 2016 due to improved cash operating results from an increase in service revenues, partially offset by an increase in yard operations and general and administrative expenses, an impairment of previously capitalized software development assets, and changes in operating assets and liabilities. The change in operating assets and liabilities was primarily the result of a decrease in accounts payable of $44.1 million, an increase in income taxes receivable of $25.0 million, an increase in accounts receivable of $15.7 million, and a decrease in other assets of $3.1 million.

Net cash used in investing activities decreased for fiscal 2018 as compared to fiscal 2017 due primarily to a decline in acquisitions and proceeds from the sale of assets, including the majority-owned subsidiary, partially offset by increases in capital expenditures. We acquired 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. See Notes to Consolidated Financial Statements, Note 2 — Acquisitions. Our capital expenditures are primarily related to lease buyouts of certain

facilities, opening and improving facilities, software development, and acquiring yard equipment. We continue to expand and invest in new and existing facilities and standardize the appearance of existing locations. We have no material non-cancelable commitments for future capital expenditures as of July 31, 2018. Included in capital expenditures were capitalized software development costs for new software for internal use and major software enhancements to existing software. Capitalized software development costs were $7.4 million, $7.1 million and $14.1 million for fiscal 2018, 2017 and 2016, respectively. If, at any time it is determined that capitalized software provides a reduced economic benefit, the unamortized portion of the capitalized development costs will be impaired. Additionally, during fiscal 2017, we recognized a $19.4 million charge primarily related to fully impairing costs previously capitalized in connection with the development of business operating software. See Notes to Consolidated Financial Statements, Capitalized Software Costs in Note 1 — Summary of Significant Accounting Policies.

Net cash used in investing activities increased for fiscal 2017 as compared to fiscal 2016 due primarily to acquisitions, partially offset by a decline in capital expenditures. We acquired 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. We 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. See Notes to Consolidated Financial Statements, Note 2 — Acquisitions. Included in capital expenditures were capitalized software development costs for new software for internal use and major software enhancements to existing software.

Net cash used in financing activities increased in fiscal 2018 as compared to fiscal 2017 primarily due net repayments on our revolving loan facility, partially offset by reduced payments for employee stock-based tax withholdings and an increase in proceeds from the exercise of stock options. For further detail, see Notes to Consolidated Financial Statements, Note 11 — Stockholders’ Equity.

Net cash used in financing activities increased in fiscal 2017 as compared to fiscal 2016 primarily due to a decrease in repurchases of our common stock as part of our tender offers and stock repurchase program as discussed in further detail under the subheading “Stock Repurchases”, and an increase in proceeds from the exercise of stock options, partially offset by payments for employee stock-based tax withholdings. For further detail, see Notes to Consolidated Financial Statements, Note 11 — Stockholders’ Equity.

Stock Repurchases

On September 22, 2011, our Board of Directors approved an 80 million share increase in the stock repurchase program, bringing the total current authorization to 196 million shares. The repurchases may be effected through solicited or unsolicited transactions in the open market or in privately negotiated transactions. No time limit has been placed on the duration of the stock repurchase program. Subject to applicable securities laws, such repurchases will be made at such times and in such amounts as we deem appropriate and may be discontinued at any time. For fiscal 2018 and 2017, we did not repurchase any shares of our common stock under the program. For fiscal 2016, we repurchased 5,877,038 shares of our 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 our program.

On December 30, 2015, we completed a modified “Dutch Auction” tender offer, or tender offer, to purchase up to 14,634,146 shares of our common stock at a price not greater than $20.50 nor less than $19.00 per share. In connection with the tender offer, we accepted for payment an aggregate of 16,666,666 shares of our common stock at a purchase price of $19.50 per share for a total value of $325.0 million. Our 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 our 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. We 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 our stock repurchase program.

Contractual Obligations

We lease certain domestic and foreign facilities, and certain equipment under non-cancelable operating leases. In addition to the minimum future lease commitments presented, the leases generally require us to pay property taxes, insurance, maintenance and repair costs which are not included in the table because we have determined these items are not material. The following table summarizes our significant contractual obligations and commercial commitments as of July 31, 2018:

		Payments Due by Fiscal Year
(In thousands)		Less than 1 year				1–3 Years				3–5 Years				More than 5 Years				Other				Total
Contractual Obligations
Long-term debt, revolving loan facility, including current portion (1)		$	—			$	—			$	—			$	400,000			$	—			$	400,000
Interest payments on long-term debt, revolving loan facility, including current portion (1)		17,901				35,776				33,720				65,361				—				152,758
Operating leases (2)		29,773				40,986				25,462				54,068				—				150,289
Capital leases (2)		966				43				—				—				—				1,009
Tax liabilities (3)		—				—				—				—				27,277				27,277
Total contractual obligations		$	48,640			$	76,805			$	59,182			$	519,429			$	27,277			$	731,333

		Amount of Commitment Expiration Per Period
Commercial Commitments (4)		Less than 1 year				1–3 Years				3–5 Years				More than 5 Years				Other				Total
Letters of Credit		$	17,276			$	—			$	—			$	—			$	—			$	17,276

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

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

(3)	Tax liabilities include the long-term liabilities in the consolidated balance sheet for unrecognized tax positions. At this time, we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the timing of tax audit outcomes.

(4)	Commercial commitments consist primarily of letters of credit provided for insurance programs and certain business transactions.

Credit Agreement

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

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

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

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

The Revolving Loan Facility under the Credit Agreement bears interest, at our election, at either (a) the Base Rate, which is defined as a fluctuating rate per annum equal to the greatest of (i) the Prime Rate in effect on such day; (ii) the Federal Funds Rate in effect on such date plus 0.50%; or (iii) 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 our 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 our consolidated total net leverage ratio during the preceding fiscal quarter. Interest is due and payable quarterly, in arrears, for loans bearing interest at the Base Rate, and at the end of an interest period (or at each three month interval in the case of loans with interest periods greater than three months) in the case of loans bearing interest at the adjusted LIBOR rate. The interest rate as of July 31, 2018 on our 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. We are obligated to pay a commitment fee on the unused portion of the Revolving Loan Facility. The commitment fee rate ranges from 0.125% to 0.20%, depending on our consolidated total net leverage ratio during the preceding fiscal quarter, on the average daily unused portion of the revolving credit commitment under the Credit Agreement. We had no outstanding borrowings under the Revolving Loan Facility as of July 31, 2018. We had $231.0 million of outstanding borrowings under the Revolving Loan Facility as of July 31, 2017.

Our obligations under the Credit Agreement are guaranteed by certain of our domestic subsidiaries meeting materiality thresholds set forth in the Credit Agreement. Such obligations, including the guaranties, are secured by substantially all of our assets and the assets of the subsidiary guarantors pursuant to a Security Agreement, dated December 3, 2014, among us, 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 us and our subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, make investments, make acquisitions, enter into transactions with affiliates, pay dividends, or make distributions on and repurchase stock, in each case subject to certain exceptions. We are also required to maintain compliance, measured at the end of each fiscal quarter, with a consolidated total net leverage ratio and a consolidated interest coverage ratio. The Credit Agreement contains no restrictions on the payment of dividends and other restricted payments, as defined, as long as (1) the consolidated total net leverage ratio, as defined, both before and after giving effect to any such dividend or restricted payment on a pro forma basis, is less than 3.25:1, in an unlimited amount, (2) if clause (1) is not available, so long as the consolidated total net leverage ratio both before and after giving effect to any such dividend on a pro forma basis is less than 3.50:1, in an aggregate amount not to exceed the available amount, as defined, and (3) if clauses (1) and (2) are not available, in an aggregate amount not to exceed $50.0 million; provided, that, minimum liquidity, as defined, shall be not less than $75.0 million both before and after giving effect to any such dividend or restricted payment. As of July 31, 2018, the consolidated total net leverage ratio was 0.21:1. Minimum liquidity as of July 31, 2018 was $1.1 billion. Accordingly, we do not believe that the provisions of the Credit Agreement represent a significant restriction to our ability to pay dividends or to the successful future operations of the business. We have not paid a cash dividend since becoming a public company in 1994. We were in compliance with all covenants related to the Credit Agreement as of July 31, 2018.

Note Purchase Agreement

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

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

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

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

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

Related to the execution of the Credit Agreement, First Amendment to Credit Agreement, Second Amendment to Credit Agreement, and the Note Purchase Agreement, we incurred $3.4 million in costs, of which $2.0 million was capitalized as debt issuance fees and $1.4 million was recorded as a reduction of the long-term debt proceeds as a debt discount. During the year ended July 31, 2016, we 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.

Off-Balance Sheet Arrangements

As of July 31, 2018, we had no off-balance sheet arrangements pursuant to Item 303(a)(4) of Regulation S-K promulgated under the Securities Exchange Act of 1934, as amended.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including costs related to vehicle pooling, self-insured reserves, allowance for doubtful accounts, income taxes, revenue recognition, stock-based payment compensation, purchase price allocations, long-lived asset impairment calculations and contingencies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Management has discussed the selection of critical accounting policies and estimates with the Audit Committee of the Board of Directors and the Audit Committee has reviewed our disclosure relating to critical accounting policies and estimates in this Annual Report on Form 10-K. Our significant accounting policies are described in the Notes to Consolidated Financial Statements, Note 1 — Summary of Significant Accounting Policies. The following is a summary of the more significant judgments and estimates included in our critical accounting policies used in the preparation of our consolidated financial statements. We discuss, where appropriate, sensitivity to change based on other outcomes reasonably likely to occur.

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related Notes in Part I., Item I., “Financial Statements.”

Revenue Recognition

We provide a portfolio of services to our sellers and buyers that facilitate the sale and delivery of a vehicle from seller to buyer. These services include the ability to use our internet sales technology and vehicle delivery, loading, title processing, preparation and storage. We evaluate multiple-element arrangements relative to our member and seller agreements.

The services we provide to the seller of a vehicle involve disposing of a vehicle on the seller’s behalf and, under most of our current contracts, collecting the proceeds from the member. Pre-sale services, including towing, title processing, preparation and storage, as well as sale fees and other enhancement service fees meet the criteria for separate units of accounting. The 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 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 selling price of each service is determined based on management’s best estimate and is allotted based on the relative selling price method.

Vehicle sales, where vehicles are purchased and remarketed on our 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 we record the gross sales price as revenue.

We also provide 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 we have met the requirements to separate them into units of accounting within a multiple-element arrangement. We have 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. The fees for the post-sale services are recognized upon successful completion of those services using the relative selling price method.

We also charge members an annual registration fee for the right to participate in our 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 we provide for bad debt expense in the case of non-performance by our members or sellers.

We allocate arrangement consideration based on the relative estimated selling prices of the separate units of accounting containing multiple deliverables. Estimated selling prices are determined using management’s best estimate. Significant inputs in our 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.

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 beginning with the first quarter of fiscal year 2019. ASU 2014-09 allows adoption with either retrospective application to each period presented, or modified retrospective application, with the cumulative effect recognized as of the date of initial application. We 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 our 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. We have evaluated the impact the adoption will have on the consolidated financial statements, and we are finalizing the calculation of our 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.

Fair Value of Financial Instruments

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

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

Level II	Inputs other than quoted prices included within Level I that are observable for the asset or liability, either directly or indirectly. Interest rate hedges are valued at exit prices obtained from the counter-party.

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

The amounts recorded for financial instruments in our consolidated financial statements, which included cash, accounts receivable, accounts payable and accrued liabilities approximate their fair values for fiscal 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 Notes to Consolidated Financial Statements, Note 8 — Long-Term Debt for additional fair value disclosures.

Vehicle Pooling Costs

We defer in vehicle pooling costs certain yard operation expenses associated with vehicles consigned to and received by us, but not sold as of the balance sheet date. We quantify the deferred costs using a calculation that includes the number of vehicles at our facilities at the beginning and end of the period, the number of vehicles sold during the period and an allocation of certain yard operation expenses of the period. The primary expenses allocated and deferred are certain facility costs, labor, and vehicle processing. If our 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 our business, there is not a direct correlation for an increase in expenses or units processed on vehicle pooling costs.

We apply the provisions of accounting guidance for subsequent measurement of inventory to our vehicle pooling costs. The provision requires that items such as idle facility expense, 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.

Capitalized Software Costs

We capitalize system development costs and website development costs related to our enterprise computing services during the application development stage. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life, generally three years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could 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, 2016, we retired fully amortized capitalized software of $29.8 million, which were no longer being utilized. Additionally, during fiscal 2017, we recognized a $19.4 million charge primarily related to fully impairing costs previously capitalized in connection with the development of business operating software.

Valuation of Goodwill

We evaluate the impairment of goodwill for our reporting units annually or on an interim basis if certain indicators are present, either through a quantitative or qualitative analysis. We have 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, we voluntarily changed the date of our annual goodwill impairment assessment for our 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 is a change in accounting principle, which we believe is preferable as it more closely aligns the timing of the annual goodwill impairment assessment date with the most current information from our planning and forecasting process and also provides us with additional time to complete the annual assessment in advance of our year-end reporting. This change in the annual assessment date does not delay, accelerate, or avoid an impairment charge. This change was not applied retrospectively as it was impracticable to do so because retrospective application would require application of significant estimates and assumptions with the use of hindsight. Accordingly, the change has been applied prospectively.

The annual goodwill impairment analysis, which was performed qualitatively during the fourth quarter of fiscal 2018, considered all relevant factors specific to our reporting units, including macroeconomic conditions; industry and market considerations; overall financial performance and relevant entity-specific events. Management considered the above factors noting none involved significant uncertainty. In addition, the industry in which we operate improved over the observable period, and our calculated fair value exceeded carrying value for each reporting unit by a substantial amount in our prior year quantitative analysis, indicating no material risk as of July 31, 2018, with respect to potential goodwill impairments.

Income Taxes and Deferred Tax Assets

We account for income tax exposures as required under ASC 740, Income Taxes. We are subject to income taxes in the U.S., Canada, the U.K., Brazil, Spain, Germany, and other emerging markets around the world. In arriving at a provision of income taxes, we first calculate taxes payable in accordance with the prevailing tax laws in the jurisdictions in which we operate. Then we analyze the timing differences between the financial reporting and tax basis of our assets and liabilities, such as various accruals, depreciation and amortization. The tax effects of the timing difference are presented as deferred tax assets and liabilities in the consolidated balance sheets. We assess the probability that the deferred tax assets will be realized based on our ability to generate future taxable income. In the event that it is more likely than not, the full benefit would not be realized from

deferred tax assets, we record a valuation allowance to reduce the carrying value of the deferred tax assets to the amount expected to be realized. As of July 31, 2018, we have $4.6 million of valuation allowance arising from both our U.S. and International operations. To the extent we establish a valuation allowance or change the amount of valuation allowance in a period, we reflect the change with a corresponding increase or decrease in our income tax provision in the consolidated statements of income.

Historically, our income tax provision has been sufficient to cover our actual income tax liabilities among the jurisdictions in which we operate. Nonetheless, our future effective tax rate could still be adversely affected by several factors, including (i) the geographical allocation of our future earnings; (ii) the change in tax laws or our interpretation of tax laws; (iii) the changes in governing regulations and accounting principles; (iv) the changes in the valuation of our deferred tax assets and liabilities; and (v) the outcome of the income tax examinations. We routinely assess the possibilities of material changes resulting from the aforementioned factors to determine the adequacy of our income tax provision. The repatriation of our accumulated foreign earnings could also affect our effective tax rate, nevertheless, we intend to indefinitely reinvest these earnings in our foreign operations and do not anticipate the need for any of our foreign subsidiaries’ cash in the U.S. operations. Accordingly, we do not provide for U.S. federal income and foreign withholding tax on these earnings.

Based on our results for the year ended July 31, 2018, a one percentage adverse change in our provision for income taxes as a percentage of income before taxes would have resulted in an increase in the income tax expense of $5.6 million.

We recognize and measure uncertain tax positions in accordance with ASC740, Income Taxes, pursuant to which we only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. ASC740 further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the quarter in which such change occurs. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

We file annual income tax returns in multiple taxing jurisdictions. A number of years may elapse before an uncertain tax position is audited by the relevant tax authorities and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our reserves for income taxes reflect the most likely outcome. We adjust these reserves, as well as the related interest, where appropriate in light of changing facts and circumstances. Settlement of any particular position could require the use of cash.

Stock-based Payment Compensation

We account for our stock-based awards to employees and non-employees using the fair value method. Compensation cost related to stock-based payment transactions are recognized based on the fair value of the equity or liability instruments issued. Determining the fair value of options using the Black-Scholes Merton option pricing model, or other currently accepted option valuation models, requires subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated fair value on the measurement date. If actual results are not consistent with our assumptions and judgments used in estimating the key assumptions, we may be required to record additional compensation or income tax expense, which could have a material impact on our consolidated results of operations and financial position. During the year ended July 31, 2016, we adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which impacted the accounting for share-based payments, including income tax consequences. As a result of the adoption, we 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.

Foreign Currency Translation

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

Accounting for Acquisitions

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

Segment Reporting

Our U.S. and International regions are considered two separate operating segments and are disclosed as two reportable segments. The segments represent geographic areas and reflect how the chief operating decision maker allocates resources and measures results, including total revenues, operating income and income before income taxes. The segments continue to share similar business models, services and economic characteristics. Our revenues for the year ended July 31, 2018 were distributed as follows: U.S. 82.6% and International 17.4%. Geographic information as well as comparative segment revenues and related financial information pertaining to the U.S. and International segments for the years ended July 31, 2018, 2017 and 2016 are presented in the tables in Note 14 — Segments and Other Geographic Reporting, to the Notes to Consolidated Financial Statements, which are included in Part II, Item 8 of this Form 10-K.

Recently Issued Accounting Standards

For a description of the new accounting standards that affect us, refer to the Notes to Consolidated Financial Statements, Note 1 — Summary of Significant Accounting Policies.