Edgar Filing: COPART INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended April 30, 2017

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from to

Commission file number: 000-23255

COPART, INC.

(Exact name of registrant as specified in its charter)



	Delaware		94-2867490
	(State or other jurisdiction		(IRS Employer
	of incorporation)		Identification No.)

14185 Dallas Parkway, Suite 300, Dallas, Texas 75254

(Address of principal executive offices, including zip code)

(972) 391-5000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	x		Accelerated filer	¨
Non-accelerated filer	¨	(Do not check if a smaller reporting company)	Smaller reporting company	¨
			Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

As of May 24, 2017, 230,331,226 shares of the registrant’s common stock were outstanding.

Copart, Inc.

Index to the Quarterly Report

April 30, 2017



Table of Contents		Page Number
PART I - Financial Information
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets		3
Consolidated Statements of Income		4
Consolidated Statements of Comprehensive Income		5
Consolidated Statements of Cash Flows		6
Notes to Consolidated Financial Statements		7

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview		21
Acquisitions and New Operations		23
Results of Operations		24
Liquidity and Capital Resources		27
Critical Accounting Policies and Estimates		31
Recently Issued Accounting Standards		31
Contractual Obligations and Commitments		31
Off-Balance Sheet Arrangements		31

Item 3 - Quantitative and Qualitative Disclosures About Market Risk		31

Item 4 - Controls and Procedures
Evaluation of Disclosure Controls and Procedures		32
Changes in Internal Controls		32

PART II - Other Information
Item 1 - Legal Proceedings		33
Item 1A - Risk Factors		34
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds		46
Item 6 - Exhibits		46
Signatures		47

Copart, Inc.

Consolidated Balance Sheets

(Unaudited)



(In thousands, except share amounts)	April 30, 2017			July 31, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	189,621		$	155,849
Accounts receivable, net	302,071			266,270
Vehicle pooling costs	31,822			28,599
Inventories	9,239			10,388
Income taxes receivable	42,663			18,751
Deferred income taxes	191			1,444
Prepaid expenses and other assets	18,002			18,005
Total current assets	593,609			499,306
Property and equipment, net	913,303			816,791
Intangibles, net	7,624			11,761
Goodwill	258,634			260,198
Deferred income taxes	2,978			23,506
Other assets	35,538			38,258
Total assets	$	1,811,686		$	1,649,820
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	192,769		$	192,379
Deferred revenue	6,147			4,628
Income taxes payable	6,421			5,625
Current portion of revolving loan facility and capital lease obligations	16,151			76,151
Total current liabilities	221,488			278,783
Deferred income taxes	3,773			3,816
Income taxes payable	26,772			25,641
Long-term debt, revolving loan facility and capital lease obligations, net of discount	550,755			564,341
Other liabilities	2,569			2,783
Total liabilities	805,357			875,364
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; 230,331,255 and 220,244,120 shares issued and outstanding, respectively.	22			22
Additional paid-in capital	444,745			392,434
Accumulated other comprehensive loss	(114,268		)	(109,194		)
Retained earnings	675,830			491,194
Total stockholders’ equity	1,006,329			774,456
Total liabilities and stockholders’ equity	$	1,811,686		$	1,649,820

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

Copart, Inc.

Consolidated Statements of Income

(Unaudited)



	Three Months Ended April 30,						Nine Months Ended April 30,
(In thousands, except per share amounts)	2017			2016			2017			2016
Service revenues and vehicle sales:
Service revenues	$	332,346		$	303,507		$	949,457		$	814,891
Vehicle sales	41,516			43,739			119,928			120,899
Total service revenues and vehicle sales	373,862			347,246			1,069,385			935,790
Operating expenses:
Yard operations	166,572			151,855			503,264			428,729
Cost of vehicle sales	34,785			37,744			101,558			103,939
General and administrative	35,717			35,699			114,071			102,843
Total operating expenses	237,074			225,298			718,893			635,511
Operating income	136,788			121,948			350,492			300,279

Other (expense) income:
Interest expense	(5,869		)	(5,702		)	(17,972		)	(16,996		)
Interest income	363			283			1,084			1,096
Other (expense) income, net	(194		)	39			117			5,501
Total other expenses	(5,700		)	(5,380		)	(16,771		)	(10,399		)
Income before income taxes	131,088			116,568			333,721			289,880
Income tax expense	40,542			41,944			9,829			103,642
Net income	$	90,546		$	74,624		$	323,892		$	186,238

Basic net income per common share	$	0.39		$	0.34		$	1.42		$	0.80
Weighted average common shares outstanding	229,920			221,088			228,146			234,142

Diluted net income per common share	$	0.38		$	0.32		$	1.37		$	0.75
Diluted weighted average common shares outstanding	237,135			236,412			236,808			248,780

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

Copart, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)



	Three Months Ended April 30,					Nine Months Ended April 30,
(In thousands)	2017		2016			2017			2016
Comprehensive income, net of tax:
Net income	$	90,546	$	74,624		$	323,892		$	186,238
Other comprehensive income:
Unrealized gain on interest rate swaps, net (a)	—		—			—			603
Reclassification adjustment of interest rate swaps, net (b)	—		—			—			(320		)
Unrealized gain on available-for-sale securities, net (c)	—		4,030			—			—
Reclassification adjustment for gain on available-for-sale securities, included in net income	—		(379		)	—			—
Foreign currency translation adjustments	5,281		15,629			(5,074		)	(15,281		)
Total comprehensive income	$	95,827	$	93,904		$	318,818		$	171,240


(a)	Net of tax effect of $(342) for the nine months ended April 30, 2016.


(b)	Net of tax effect of $178 for the nine months ended April 30, 2016.


(c)	Net of tax effect of $(3) for the three months ended April 30, 2016.

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

Copart, Inc.

Consolidated Statements of Cash Flows

(Unaudited)



	Nine Months Ended April 30,
(In thousands)	2017			2016
Cash flows from operating activities:
Net income	$	323,892		$	186,238
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, including debt cost	43,951			35,900
Allowance for doubtful accounts	(542		)	1,227
Equity in losses of unconsolidated affiliates	584			768
Stock-based payment compensation	15,613			15,834
Gain on sale of property and equipment	(125		)	(188		)
Deferred income taxes	21,791			(325		)
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable	(35,668		)	(49,594		)
Vehicle pooling costs	(3,289		)	(5,001		)
Inventories	1,027			(3,120		)
Prepaid expenses and other current assets	1,440			293
Other assets	(1,185		)	3,206
Accounts payable and accrued liabilities	1,140			5,024
Deferred revenue	1,532			2,038
Income taxes receivable	(23,909		)	3,326
Income taxes payable	2,619			13,858
Other liabilities	(1,044		)	(1,138		)
Net cash provided by operating activities	347,827			208,346
Cash flows from investing activities:
Purchases of property and equipment	(124,710		)	(143,833		)
Proceeds from sale of property and equipment	554			485
Purchase of assets in connection with acquisitions	(10,000		)	—
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	(137,722		)	(142,969		)
Cash flows from financing activities:
Proceeds from the exercise of stock options	30,171			4,989
Proceeds from the issuance of Employee Stock Purchase Plan shares	1,908			1,640
Repurchases of common stock	—			(442,855		)
Payments for employee stock-based tax withholdings	(134,638		)	—
Proceeds from the issuance of long-term debt, net of discount	—			93,468
Repayments on revolving loan facility, net of proceeds	(73,000		)	—
Debt offering costs	—			(165		)
Principal payments on long-term debt	—			(37,500		)
Net cash used in financing activities	(175,559		)	(380,423		)
Effect of foreign currency translation	(774		)	(3,313		)
Net increase (decrease) in cash and cash equivalents	33,772			(318,359		)
Cash and cash equivalents at beginning of period	155,849			456,012
Cash and cash equivalents at end of period	$	189,621		$	137,653
Supplemental disclosure of cash flow information:
Interest paid	$	17,681		$	16,996
Income taxes paid, net of refunds	$	9,452		$	86,243

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

Copart, Inc.
Notes to Consolidated Financial Statements
April 30, 2017
(Unaudited)

NOTE 1 – Summary of Significant Accounting Policies

Basis of Presentation and Description of Business

Copart, Inc. (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 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 United Arab Emirates (U.A.E.), Oman, Bahrain, Germany, Ireland, Spain and India, 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.), the Company operates both as an agent and on a principal basis, purchasing the salvage vehicles outright from the insurance company and reselling the vehicles for its own account. In Germany and Spain, the Company also derives revenue from sales listing fees for listing vehicles on behalf of insurance companies.

Principles of Consolidation

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments of a normal recurring nature considered necessary for fair presentation of its financial position as of April 30, 2017 and July 31, 2016, its consolidated statements of income and comprehensive income for the three and nine months ended April 30, 2017 and 2016, and its cash flows for the nine months ended April 30, 2017 and 2016. Interim results for the three and nine months ended April 30, 2017 are not necessarily indicative of the results that may be expected for any future period, or for the entire year ending July 31, 2017. These consolidated financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. The interim consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2016. Certain prior year amounts have been reclassified to conform to current year presentation.

On March 23, 2017, the Company’s Board of Directors approved a two-for-one common stock split effected in the form of a stock dividend. The additional shares resulting from the stock split were distributed after the closing of trading on April 10, 2017 to stockholders of record on April 3, 2017. The stock dividend increased the number of shares of common stock outstanding and all per share amounts have been adjusted for the stock dividend, as of the date earliest presented in these financial statements. Certain prior year amounts have been adjusted to conform to current year presentation.

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 legaly 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 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.

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, U.A.E. dirham, Bahraini dinar, Omani rial, Brazilian real, Indian rupee, Chinese renminbi and European Union Euro 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, 2015	$	(68,510	)
Loss on foreign currency translation	(40,684		)
Cumulative loss on foreign currency translation as of July 31, 2016	$	(109,194	)
Loss on foreign currency translation	(5,074		)
Cumulative loss on foreign currency translation as of April 30, 2017	$	(114,268	)

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 benefit 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.

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 three months ended April 30, 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 was $21.5 million, resulting in a realized gain of $0.4 million recorded in other income.

Other Assets

Other assets consist of long-term deposits, contracted prepayments, notes receivable, and investments in unconsolidated affiliates. In accordance with ASC 323, Investments-Equity Method and Joint Ventures, the Company uses the equity method to account for investments in joint ventures and other unconsolidated entities if the Company has the ability to exercise significant influence over the financial and operating policies of those investees. Under the equity method, the Company records the initial investment in an entity at cost and subsequently adjusts the investment for the Company’s share of the affiliate’s undistributed earnings (losses) and distributions recorded in other income. The Company reviews the carrying amount of the investments in unconsolidated affiliates annually, or whenever circumstances indicate that the value of these investments may have declined. If the Company determines an investment is impaired on an other-than-temporary basis, a loss equal to the difference between the fair value of the investment and its carrying amount is recorded.

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 April 30, 2017 and July 31, 2016, 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 2 – Long-Term Debt, and Note 4 – Fair Value Measures.

Capitalized Software Costs

The Company capitalizes system development costs and website development costs related to 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 April 30, 2017 and July 31, 2016 was $55.5 million and $49.4 million, respectively. Accumulated amortization expense related to software as of April 30, 2017 and July 31, 2016 totaled $29.8 million and $20.9 million, respectively.

Acquisitions

The Company recognizes and measures identifiable assets acquired and liabilities assumed in acquired entities in accordance with ASC 805, Business Combinations. The accounting for acquisitions involves significant judgments and estimates, including the fair value of certain forms of consideration, the fair value of acquired intangible assets, which involve projections of future revenues, cash flows and terminal value, which are then either discounted at an estimated discount rate or measured at an estimated royalty rate, and the fair value of other acquired assets and assumed liabilities, including potential contingencies and the useful lives of the assets. The projections are developed using internal forecasts, available industry and market data and estimates of long-term growth rates of the Company. Historical experience is additionally utilized, in which historical or current costs have approximated fair value for certain assets acquired.

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, although recent changes in management structure as of July 31, 2016 and continued growth in the Company’s International region have resulted in the change in the reportable segments. Prior period reportable segment information has been adjusted to reflect the change in reportable segments.

NOTE 2 – 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 April 30, 2017 on the Company’s Revolving Loan Facility was the one month LIBOR rate of 0.99% plus an applicable margin of 1.25%. 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 April 30, 2017, 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 $165.0 million and $238.0 million of outstanding borrowings under the Revolving Loan Facility as of April 30, 2017 and July 31, 2016, respectively.

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 April 30, 2017, the consolidated total net leverage ratio was 0.74:1. Minimum liquidity as of April 30, 2017 was $851.7 million. 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 April 30, 2017.

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 April 30, 2017, the consolidated total net leverage ratio was 0.74:1. Minimum liquidity as of April 30, 2017 was $851.7 million. 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 April 30, 2017.

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. 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.

NOTE 3 – Goodwill and Intangible Assets

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



(In thousands)	April 30, 2017			July 31, 2016
Amortized intangibles:
Covenants not to compete	$	1,706		$	1,702
Supply contracts & customer relationships	26,823			26,471
Trade name	5,113			5,163
Licenses and databases	2,476			2,488
Accumulated amortization	(28,494		)	(24,063		)
Net intangibles	$	7,624		$	11,761

Aggregate amortization expense on amortizable intangible assets was $1.4 million for the three months ended April 30, 2017 and 2016, and $4.0 million and $4.4 million for the nine months ended April 30, 2017 and 2016, respectively.

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



Balance as of July 31, 2016	$	260,198
Goodwill recorded during the period (Note 11 – Acquisitions)	158
Effect of foreign currency exchange rates	(1,722		)
Balance as of April 30, 2017	$	258,634

NOTE 4 – 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:



	April 30, 2017				July 31, 2016
(In thousands)	Fair Value Total		Significant Observable Inputs (Level II)		Fair Value Total		Significant Observable Inputs (Level II)
Assets
Cash equivalents	$	10,804	$	10,804	$	8,422	$	8,422
Total Assets	$	10,804	$	10,804	$	8,422	$	8,422
Liabilities
Long-term fixed rate debt, including current portion	$	401,266	$	401,266	$	430,375	$	430,375
Revolving loan facility	165,000		165,000		238,000		238,000
Total Liabilities	$	566,266	$	566,266	$	668,375	$	668,375

During the nine months ended April 30, 2017, no transfers were made between any levels within the fair value hierarchy. See Note 1 – Summary of Significant Accounting Policies, and Note 2 – Long-Term Debt.

NOTE 5 – Net Income Per Share

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



	Three Months Ended April 30,		Nine Months Ended April 30,
(In thousands)	2017	2016	2017	2016
Weighted average common shares outstanding	229,920	221,088	228,146	234,142
Effect of dilutive securities - stock options	7,215	15,324	8,662	14,638
Weighted average common and dilutive potential common shares outstanding	237,135	236,412	236,808	248,780

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 894,782 and 15,179,042 shares underlying outstanding stock options for the three months ended April 30, 2017 and 2016, respectively, and 2,169,026 and 15,368,822 for the nine months ended April 30, 2017 and 2016, respectively, because their inclusion would have been anti-dilutive.

NOTE 6 – Stock-based Payment Compensation

The Company recognizes compensation expense for stock option awards on a straight-line basis over the requisite service period of the award. The following is a summary of activity for the Company’s stock options for the nine months ended April 30, 2017:



(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, 2016	38,902		$	12.15	4.96	$	508,401
Grants of options	894		27.66
Exercises	(20,598	)	8.19
Forfeitures or expirations	(319	)	17.99
Outstanding as of April 30, 2017	18,879		$	17.11	6.73	$	260,392
Exercisable as of April 30, 2017	11,428		$	15.78	6.13	$	172,766

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of the Company’s common stock. The number of options that were in-the-money was 18,841,251 at April 30, 2017.

The table below sets forth the stock-based payment compensation recognized by the Company:



	Three Months Ended April 30,				Nine Months Ended April 30,
(In thousands)	2017		2016		2017		2016
General and administrative	$	4,180	$	4,320	$	13,176	$	13,758
Yard operations	828		714		2,437		2,076
Total stock-based payment compensation	$	5,008	$	5,034	$	15,613	$	15,834

In accordance with 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.

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, 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 $5.6 million in compensation expenses for these grants in the nine months ended April 30, 2017 and 2016.

NOTE 7 – 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 Company deems appropriate and may be discontinued at any time. The Company did not repurchase any shares of its common stock under the program during the nine months ended April 30, 2017 or 2016. As of April 30, 2017, 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 July 9, 2015, the Company completed a modified “Dutch Auction” tender offer, or tender offer, to purchase up to 27,777,776 shares of its common stock at a price not greater than $18.00 nor less than $17.38 per share. In connection with the tender offer, the Company accepted for payment an aggregate of 12,508,122 shares of its common stock at a purchase price of $18.00 per share for a total value of $225.1 million. Additionally, 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 repurchased as a result of the tender offers were not part of the Company’s stock repurchase program.

In fiscal 2017 and fiscal 2016, certain executive officers 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 for the nine months ended April 30, 2017 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		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


(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.

NOTE 8 – Income Taxes

The Company applies the provisions of the accounting standard for uncertain tax positions to its income taxes. For benefits to be realized, a tax position must be more likely than not to be sustained upon examination. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

The Company’s effective income tax rates were 30.9%, and 36.0% for the three months ended April 30, 2017 and 2016, respectively, and 2.9%, and 35.8% for the nine months ended April 30, 2017 and 2016. The decrease in the overall tax rate was primarily the result of recognizing excess tax benefits from the exercise of employee stock options of $4.0 million for the three months ended April 30, 2017 as compared to $0.6 million for the three months ended April 30, 2016 and $106.7 million for the nine months ended April 30, 2017 as compared to $0.8 million for the nine months ended April 30, 2016.

As of April 30, 2017, the gross amounts of the Company’s liabilities for unrecognized tax benefits of $26.8 million, including interest and penalties, were classified as long-term income taxes payable in the accompanying consolidated balance sheets. Over the next twelve months, the Company’s existing positions will continue to generate an increase in liabilities for unrecognized tax benefits, as well as a likely decrease in liabilities as a result of the lapse of the applicable statute of limitations and the conclusion of income tax audits. The expected decrease in liabilities relating to unrecognized tax benefits will have a positive effect on the Company’s consolidated results of operations and financial position when realized. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.

The Company files income tax returns in the U.S. federal jurisdiction, various states and foreign jurisdictions. The Company is currently under examination by certain taxing authorities in the U.S. for fiscal years between 2011 and 2015. 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 has not provided for U.S. federal income and foreign withholding taxes on its foreign subsidiaries’ undistributed earnings as of April 30, 2017 because the Company intends to reinvest such earnings indefinitely in its foreign operations. Specifically, the earnings will be dedicated to the following areas outside the U.S. (i) funding operating and capital spending needs in existing foreign markets; (ii) funding merger and acquisition deals both in existing and new foreign markets; and (iii) other investments to help expand the Company’s footprint in foreign emerging markets. The Company does not anticipate the need for any foreign cash in the U.S. operations. It is not practical to determine the taxes that might be incurred if these earnings were to be distributed in the form of dividends or otherwise. If distributed, however, foreign tax credits may become available under current law to reduce or eliminate the resultant U.S. income tax liability.

NOTE 9 – Recent Accounting Pronouncements

Pending

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 will not have a material impact on the Company’s consolidated results of operations and financial position.

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 beginning after December 15, 2017, 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 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 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 will not have a material impact on the Company’s consolidated results of operations and financial position.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. ASU 2014-15 requires management to evaluate whether there are conditions and events that raise substantial doubt about an entity's ability to continue as a going concern within one year after the financial statements are issued and provide related disclosures in certain circumstances. This ASU is effective for annual and interim periods within those annual reporting periods beginning after December 15, 2016; however, early adoption is permitted. The Company’s adoption of ASU 2014-15 will not have a material impact 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. ASU 2014-09 allows adoption with either retrospective application to each period presented, or retrospective application with the cumulative effect recognized as of the date of initial application. ASU 2014-09 will be effective for the Company beginning with the first quarter of fiscal year 2019, the three months ended October 31, 2018. The Company is currently evaluating the impact of implementing ASU 2014-09 on the consolidated financial statements, as well as evaluating the transition alternatives.

While the Company is continuing to assess all potential impacts of ASU 2014-09, it currently believes the most significant impact relates to the Company’s performance obligations through the determination of distinct and separately identifiable services, which may be different from the Company’s current separate units of accounting under ASU 2009-13. Additionally, changes in revenue recognition requirements regarding the Company’s performance obligations within its service contracts could potentially result in either the earlier recognition of revenue and associated costs for certain performance obligations or the deferral of a significant portion of revenue and associated costs for a vehicle until the sale is substantially complete. Due to the variety and complexity of the Company’s contracts, the actual revenue recognition treatment required under ASU 2014-09 may be dependent on contract-specific terms and vary in some instances.

Adopted

In January 2017, the FASB issued ASU 2017-01, Business Combination (Topic 805): Clarifying the Definition of a Business. This ASU clarifies the definition of a business, with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. The Company early adopted ASU 2017-01 during the second quarter of fiscal 2017 and the adoption did not have a material impact on the Company’s consolidated results of operations and financial position.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payments, including income tax consequences and classification on the statement of cash flows. Under the new standard, all excess tax benefits and tax deficiencies are recognized as income tax expense or benefit in the income statement as discrete items in the reporting period in which they occur. Additionally, excess tax benefits are classified as an operating activity on the consolidated statements of cash flows. The Company early adopted ASU 2016-09 during the fourth quarter of fiscal 2016 on a modified retrospective basis.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810), which is intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). The ASU focuses on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification and improves current U.S. GAAP by placing more emphasis on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (VIE), and changing consolidation conclusions for companies in several industries that typically make use of limited partnerships or VIEs. The ASU was effective for annual and interim periods within those annual reporting periods beginning after December 15, 2015. The Company’s adoption of ASU 2015-02 did not have a material impact on the Company’s consolidated results of operations and financial position.

NOTE 10 – 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) in the 44th Judicial District Court of Dallas County, Texas, alleging fraud, fraudulent inducement, and/or promissory fraud, negligent misrepresentation, unfair business practices pursuant to California Business and Professions Code § 17200, breach of contract, declaratory judgment, and attorney’s fees. The Company seeks compensatory and exemplary damages, disgorgement of amounts paid, attorney’s fees, pre- and post-judgment interest, costs of suit, and a judicial declaration of the parties’ rights, duties, and obligations under the Implementation Services Agreement dated October 6, 2011. The suit arises 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 2, 2014, KPIT removed this suit to the United States District Court for the Northern District of Texas. On August 11, 2014, the Northern District of Texas transferred the suit to the United States District Court for the Eastern District of California for convenience. 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. KPIT seeks compensatory and exemplary damages, prejudgment interest, costs of suit, and a judicial declaration of the parties’ rights, duties, and obligations under the Implementation Services Agreement. 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 Company is pursuing its claim for damages, and defending against KPIT’s claim for damages. The Company and KPIT filed competing motions for summary judgment in January 2017. Those motions are still pending before the court.

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, has 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. According to the DOR, the proposed assessment was based on its initial determination that the Company’s sales did not constitute nontaxable sales for resale.

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.

Since the Company’s receipt of the notice of proposed assessment, the Company and its counsel have engaged in active discussions with the DOR to resolve the matter. On June 5, 2015, following the Company’s discussions and after additional review of documentation, the DOR provided the Company with revised audit work papers computing a sales tax liability of $2.7 million before interest and any penalties.

On June 22, 2015, representatives of the DOR and the Office of the Attorney General for the State of Georgia informed the Company’s counsel that the DOR intended to issue a formal notice of assessment for an estimated $100.0 million, based on the DOR’s original proposed assessment of $73.8 million plus additional accumulated interest and penalties. On August 4, 2015, the DOR issued an official Assessment and Demand for Payment for $96.1 million for sales taxes, penalties, and interest that the DOR alleges the Company owes the State of Georgia. The Company filed an appeal of this notice of assessment from the DOR with the Georgia Tax Tribunal on September 3, 2015. On August 5, 2016, the DOR filed a response in which it denied all allegations noted in the Company’s appeal of the notice of assessment. The Company continues to substantiate its position that these transactions are nontaxable sales for resale by providing the DOR with documentation supporting the exempt nature of these sales.

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 Official 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.

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 Georgia 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 11 – Acquisitions

During the nine months ended April 30, 2017, the Company acquired the assets of an excavation company, which engages in earthwork, soil stabilization, equipment hauling and erosion control commercial contractor services, for a total cash purchase price of $10.0 million.

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



Allocation of the acquisition:
Property and equipment	$	9,750
Inventory	92
Goodwill	158
Fair value of net assets acquired	$	10,000

This asset acquisition was undertaken to enhance the Company’s land development capabilities. This acquisition has 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 was recorded because the purchase price of the acquisition reflected a number of factors, including the future earnings and cash flow potential; the multiple to earnings, cash flow and other factors at which similar businesses have been purchased by other acquirers; and the complementary tactical development capability and cost control of the development of the Company’s yard locations and resulting synergies brought to existing operations.

The acquisition does not result in a significant change in the Company’s consolidated results of operations; 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 date. The acquisition-related expenses incurred during the nine months ended April 30, 2017, were not significant and were included in general and administrative expenses in the Company’s consolidated financial position and results of operations.

NOTE 12 – Segments and Other Geographic Reporting

The following tables present financial information by segment:



	Three Months Ended April 30, 2017									Three Months Ended April 30, 2016
(In thousands)	United States			International			Total			United States			International			Total
Total service revenues and vehicle sales	$	307,120		$	66,742		$	373,862		$	279,210		$	68,036		$	347,246
Yard operations	142,631			23,941			166,572			128,839			23,016			151,855
Cost of vehicle sales	15,009			19,776			34,785			14,575			23,169			37,744
General and administrative	30,363			5,354			35,717			30,882			4,817			35,699
Operating income	119,117			17,671			136,788			104,914			17,034			121,948
Interest (expense) income, net	(5,766		)	260			(5,506		)	(4,753		)	(666		)	(5,419		)
Other (expense) income, net	(399		)	205			(194		)	77			(38		)	39
Intercompany income (expense)	2,717			(2,717		)	—			4,980			(4,980		)	—
Income before income taxes	115,669			15,419			131,088			105,218			11,350			116,568
Income taxes	37,691			2,851			40,542			39,262			2,682			41,944
Net income	$	77,978		$	12,568		$	90,546		$	65,956		$	8,668		$	74,624

Depreciation and amortization	$	10,904		$	2,304		$	13,208		$	10,048		$	2,310		$	12,358
Capital expenditures, including acquisitions	40,872			1,426			42,298			49,866			16,204			66,070



	Nine Months Ended April 30, 2017									Nine Months Ended April 30, 2016
(In thousands)	United States			International			Total			United States			International			Total
Total service revenues and vehicle sales	$	879,093		$	190,292		$	1,069,385		$	747,936		$	187,854		$	935,790
Yard operations	435,179			68,085			503,264			363,089			65,640			428,729
Cost of vehicle sales	43,731			57,827			101,558			40,134			63,805			103,939
General and administrative	98,492			15,579			114,071			87,807			15,036			102,843
Operating income	301,691			48,801			350,492			256,906			43,373			300,279
Interest (expense) income, net	(17,690		)	802			(16,888		)	(15,812		)	(88		)	(15,900		)
Other (expense) income, net	(310		)	427			117			438			5,063			5,501
Intercompany income (expense)	8,372			(8,372		)	—			10,974			(10,974		)	—
Income before income taxes	292,063			41,658			333,721			252,506			37,374			289,880
Income taxes	1,065			8,764			9,829			95,402			8,240			103,642
Net income	$	290,998		$	32,894		$	323,892		$	157,104		$	29,134		$	186,238

Depreciation and amortization	$	35,957		$	7,175		$	43,132		$	28,383		$	7,187		$	35,570
Capital expenditures, including acquisitions	128,934			5,776			134,710			126,184			17,649			143,833



	April 30, 2017						July 31, 2016
(In thousands)	United States		International		Total		United States		International		Total
Total assets	$	1,372,425	$	439,261	$	1,811,686	$	1,249,755	$	400,065	$	1,649,820
Goodwill	180,063		78,571		258,634		179,906		80,292		260,198

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q, 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-Q 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-Q and those discussed elsewhere in this Form 10-Q. Unless the context otherwise requires, references in this Form 10-Q 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.

Although we believe that, based on information currently available to us and our management, the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements.

Overview

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

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 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 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 U.A.E., Oman, Bahrain, Germany, Ireland, Spain and India, we sell vehicles primarily as an agent and derive 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 U.K., we operate both as an agent and on a principal basis, purchasing the salvage vehicles outright from the insurance companies and reselling the vehicles for our own account. In Germany and Spain, we also derive revenue from sales listing fees for listing vehicles on behalf of many insurance companies.

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, or 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 vehicle, 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 to 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 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 which 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 11.6 years in 2016. The factors that 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 Unaudited Consolidated Financial Statements, Note 2 – 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 Quarterly Report on Form 10-Q.

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 U.A.E., Oman, Bahrain, Germany, Spain, Ireland and India with the intention of providing national coverage for our sellers. Any acquisitions have been accounted for using the purchase method of accounting.

The following table sets forth facilities that we have acquired or opened and began operations from August 1, 2015 through April 30, 2017:



Locations	Acquisition or Greenfield	Date	Geographic Service Area
Sonepat, India (New Delhi)	Greenfield	October 2015	India
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
Castledermot, Ireland	Greenfield	April 2016	Ireland
Algete, Spain (Madrid)	Greenfield	July 2016	Spain
Bad Fallingbostel, Germany (Hanover)	Greenfield	September 2016	Germany
Newbury, United Kingdom	Greenfield	September 2016	United Kingdom
Betim, Minas Gerais	Greenfield	April 2017	Brazil

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 in the U.K. 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 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 the three and nine months ended April 30, 2017 and 2016:



	Three Months Ended April 30,				Nine Months Ended April 30,
	2017		2016		2017		2016
Service revenues and vehicle sales:
Service revenues	89	%	87	%	89	%	87	%
Vehicle sales	11	%	13	%	11	%	13	%
Total service revenues and vehicle sales	100	%	100	%	100	%	100	%

Operating expenses:
Yard operations	45	%	44	%	47	%	46	%
Cost of vehicle sales	9	%	11	%	9	%	11	%
General and administrative	10	%	10	%	11	%	11	%
Total operating expenses	64	%	65	%	67	%	68	%
Operating income	36	%	35	%	33	%	32	%
Other expense	(1	)%	(2	)%	(2	)%	(1	)%
Income before income taxes	35	%	33	%	31	%	31	%
Income taxes	11	%	12	%	1	%	11	%
Net income	24	%	21	%	30	%	20	%

Comparison of the Three and Nine Months Ended April 30, 2017 and 2016

The following table presents a comparison of service revenues for the three and nine months ended April 30, 2017 and 2016:



		Three Months Ended April 30,								Nine Months Ended April 30,
(In thousands)		2017		2016		Change		% Change		2017		2016		Change		% Change
Service revenues
	United States	$	291,280	$	263,931	$	27,349	10.4	%	$	833,510	$	706,339	$	127,171	18.0	%
	International	41,066		39,576		1,490		3.8	%	115,947		108,552		7,395		6.8	%
	Total service revenues	$	332,346	$	303,507	$	28,839	9.5	%	$	949,457	$	814,891	$	134,566	16.5	%

Service Revenues. The increase in service revenues during the three months ended April 30, 2017 of $28.8 million, or 9.5%, as compared to the same period last year resulted from (i) an increase in the U.S. of $27.3 million and (ii) an increase in International of $1.5 million. The growth 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 is due to higher commodity prices. The increase in volume in the U.S. was primarily due to (i) growth in the number of units sold from new and expanded contracts with insurance companies and (ii) growth from existing suppliers, driven by what we believe was an increase in total loss frequency. Excluding the detrimental impact of $4.0 million 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 $5.5 million was driven primarily by increased volume.

The increase in service revenues during the nine months ended April 30, 2017 of $134.6 million, or 16.5%, as compared to the same period last year resulted from (i) an increase in the U.S. of $127.2 million and (ii) an increase in International of $7.4 million. The growth in the U.S. was driven primarily by increased volume, and a marginal increase in revenue per car due higher average auction selling prices, which we believe is due to higher commodity prices. The increase in volume the U.S. was derived from (i) growth in the number of units sold from new and expanded contracts with insurance companies and (ii) growth from existing suppliers, driven by what we believe was an increase in total loss frequency. Excluding the detrimental impact of $14.1 million 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 $21.5 million was driven primarily by increased volume.

The following table presents a comparison of vehicle sales for the three and nine months ended April 30, 2017 and 2016:



		Three Months Ended April 30,									Nine Months Ended April 30,
(In thousands)		2017		2016		Change			% Change		2017		2016		Change			% Change
Vehicle sales
	United States	$	15,840	$	15,279	$	561		3.7	%	$	45,583	$	41,597	$	3,986		9.6	%
	International	25,676		28,460		(2,784		)	(9.8	)%	74,345		79,302		(4,957		)	(6.3	)%
	Total vehicle sales	$	41,516	$	43,739	$	(2,223	)	(5.1	)%	$	119,928	$	120,899	$	(971	)	(0.8	)%

Vehicle Sales. The decrease in vehicle sales for the three months ended April 30, 2017 of $2.2 million, or 5.1%, as compared to the same period last year resulted from (i) a decrease in International of $2.8 million, partially offset by (ii) an increase in the U.S. of $0.6 million. Excluding a detrimental impact of $3.5 million 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 $0.7 million was primarily the result of higher average auction selling prices. 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 of volume for certain sellers from principal to agency business.

The decrease in vehicle sales for the nine months ended April 30, 2017 of $1.0 million, or 0.8%, as compared to the same period last year resulted from (i) a decrease in International of $5.0 million, partially offset by (ii) an increase in the U.S. of $4.0 million. Excluding a detrimental impact of $12.1 million 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 $7.1 million was primarily the result of higher average auction selling prices. 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 of volume for certain sellers from principal to agency business.

The following table presents a comparison of yard operations expenses for the three and nine months ended April 30, 2017 and 2016:



		Three Months Ended April 30,									Nine Months Ended April 30,
(In thousands)		2017		2016		Change			% Change		2017		2016		Change			% Change
Yard operations expenses
	United States	$	142,631	$	128,839	$	13,792		10.7	%	$	435,179	$	363,089	$	72,090		19.9	%
	International	23,941		23,016		925			4.0	%	68,085		65,640		2,445			3.7	%
	Total yard operations expenses	$	166,572	$	151,855	$	14,717		9.7	%	$	503,264	$	428,729	$	74,535		17.4	%

Yard operations expenses, excluding depreciation and amortization
	United States	$	134,645	$	122,477	$	12,168		9.9	%	$	411,831	$	344,213	$	67,618		19.6	%
	International	21,976		21,039		937			4.5	%	62,317		59,584		2,733			4.6	%

Yard depreciation and amortization
	United States	$	7,986	$	6,362	$	1,624		25.5	%	$	23,348	$	18,875	$	4,473		23.7	%
	International	1,965		1,977		(12		)	(0.6	)%	5,768		6,057		(289		)	(4.8	)%

Yard Operations Expenses. The increase in yard operations expenses for the three months ended April 30, 2017 of $14.7 million, or 9.7%, as compared to the same period last year resulted from (i) an increase in the U.S. of $13.8 million, primarily from growth in volume and a marginal increase in the cost to process each car; and (ii) an increase in International of $0.9 million, primarily from growth in volume, partially offset by the beneficial impact of $2.3 million due to changes in foreign currency exchange rates, primarily from the change 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 increase in yard operations expense for the nine months ended April 30, 2017 of $74.5 million, or 17.4%, as compared to the same period last year resulted from (i) an increase in the U.S. of $72.1 million, primarily from growth in volume and a marginal increase in the cost to process each car; and (ii) an increase in International of $2.4 million primarily from growth in volume, partially offset by the beneficial impact of $7.9 million due to changes in foreign currency exchange rates, primarily from the change 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 the three and nine months ended April 30, 2017 and 2016:



		Three Months Ended April 30,									Nine Months Ended April 30,
(In thousands)		2017		2016		Change			% Change		2017		2016		Change			% Change
Cost of vehicle sales
	United States	$	15,009	$	14,575	$	434		3.0	%	$	43,731	$	40,134	$	3,597		9.0	%
	International	19,776		23,169		(3,393		)	(14.6	)%	57,827		63,805		(5,978		)	(9.4	)%
	Total cost of vehicle sales	$	34,785	$	37,744	$	(2,959	)	(7.8	)%	$	101,558	$	103,939	$	(2,381	)	(2.3	)%

Cost of Vehicle Sales. The decrease in cost of vehicle sales for the three months ended April 30, 2017 of $3.0 million, or 7.8%, as compared to the same period last year resulted from (i) a decrease in International of $3.4 million, partially offset by (ii) an increase in the U.S. of $0.4 million. Excluding the beneficial impact of $2.6 million due to changes in foreign currency exchange rates, primarily from the change in the British pound to U.S. dollar exchange rate, the decrease in International of $0.8 million was primarily the result of lower average purchase prices. 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 of volume for certain sellers from principal to agency business.

The decrease in cost of vehicle sales for the nine months ended April 30, 2017 of $2.4 million, or 2.3%, as compared to the same period last year resulted from (i) a decrease in International of $6.0 million, partially offset by (ii) an increase in the U.S. of $3.6 million. Excluding the beneficial impact of $9.1 million due to changes in foreign currency exchange rates, primarily from the change in the British pound to U.S. dollar exchange rate, the increase in International of $3.1 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 of volume for certain sellers from principal to agency business.

The following table presents a comparison of general and administrative expenses for the three and nine months ended April 30, 2017 and 2016:



		Three Months Ended April 30,									Nine Months Ended April 30,
(In thousands)		2017		2016		Change			% Change		2017		2016		Change		% Change
General and administrative expenses
	United States	$	30,363	$	30,882	$	(519	)	(1.7	)%	$	98,492	$	87,807	$	10,685	12.2	%
	International	5,354		4,817		537			11.1	%	15,579		15,036		543		3.6	%
	Total general and administrative expenses	$	35,717	$	35,699	$	18		0.1	%	$	114,071	$	102,843	$	11,228	10.9	%

General and administrative expenses, excluding depreciation and amortization
	United States	$	27,444	$	27,195	$	249		0.9	%	$	85,883	$	78,300	$	7,583	9.7	%
	International	5,016		4,485		531			11.8	%	14,172		13,905		267		1.9	%

General and administrative depreciation and amortization