Notes to Consolidated Financial Statements
(
Unaudited
)
1.
Background
CarMax, Inc. (“we,” “our,” “us,” “CarMax” and “the company”), including its wholly owned subsidiaries, is the largest retailer of used vehicles in the United States. We operate in
two
reportable segments: CarMax Sales Operations and CarMax Auto Finance (“CAF”). Our CarMax Sales Operations segment consists of all aspects of our auto merchandising and service operations, excluding financing provided by CAF. Our CAF segment consists solely of our own finance operation that provides financing to customers buying retail vehicles from CarMax.
We deliver an unrivaled customer experience by offering a broad selection of high quality used vehicles and related products and services at low, no-haggle prices using a customer-friendly sales process in an attractive, modern sales facility, as well as through carmax.com and our mobile apps. We provide customers with a range of related products and services, including the appraisal and purchase of vehicles directly from consumers; the financing of retail vehicle purchases through CAF and third-party finance providers; the sale of extended protection plan (“EPP”) products, which include extended service plans (“ESPs”) and guaranteed asset protection (“GAP”); and vehicle repair service. Vehicles purchased through the appraisal process that do not meet our retail standards are sold to licensed dealers through on-site wholesale auctions.
2.
Accounting Policies
Basis of Presentation and Use of Estimates.
The accompanying interim unaudited consolidated financial statements include the accounts of CarMax and our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. These consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, such interim consolidated financial statements reflect all normal recurring adjustments considered necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the fiscal year ended
February 28, 2017
.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform to the current year’s presentation. Amounts and percentages may not total due to rounding.
In connection with our adoption of the Financial Accounting Standards Board's (“FASB”) Accounting Standards Update (“ASU”) 2016-09 during the current fiscal year, cash flows related to excess tax benefits from share-based payment arrangements are now classified as operating activities, rather than financing activities, in the consolidated statements of cash flows. Prior period amounts have been reclassified to conform to the current year's presentation.
Cash and Cash Equivalents.
Cash equivalents of approximately
$34.4 million
as of
May 31, 2017
, and
$0.3 million
as of
February 28, 2017
, consisted of highly liquid investments with original maturities of three months or less.
Restricted Cash from Collections on Auto Loan Receivables.
Cash equivalents totaling
$385.7 million
as of
May 31, 2017
, and
$380.4 million
as of
February 28, 2017
, consisted of collections of principal, interest and fee payments on auto loan receivables that are restricted for payment to the term securitization and warehouse facility investors pursuant to the applicable agreements.
Financing and Securitization Transactions.
We maintain a revolving funding program composed of
three
warehouse facilities (“warehouse facilities”) that we use to fund auto loan receivables originated by CAF. We typically elect to fund these receivables through a term securitization or alternative funding arrangement at a later date. We sell the auto loan receivables to one of three wholly owned, bankruptcy-remote, special purpose entities that transfer an undivided percentage ownership interest in the receivables, but not the receivables themselves, to entities formed by third-party investors. These entities issue asset-backed commercial paper or utilize other funding sources supported by the transferred receivables, and the proceeds are used to finance the related receivables.
We typically use term securitizations to provide long-term funding for most of the auto loan receivables initially funded through the warehouse facilities. In these transactions, a pool of auto loan receivables is sold to a bankruptcy-remote, special purpose entity that, in turn, transfers the receivables to a special purpose securitization trust. The securitization trust issues asset-backed securities, secured or otherwise supported by the transferred receivables, and the proceeds from the sale of the asset-backed securities are used to finance the securitized receivables.
We are required to evaluate term securitization trusts for consolidation. In our capacity as servicer, we have the power to direct the activities of the trusts that most significantly impact the economic performance of the trusts. In addition, we have the obligation to absorb losses (subject to limitations) and the rights to receive any returns of the trusts, which could be significant. Accordingly, we are the primary beneficiary of the trusts and are required to consolidate them.
We recognize transfers of auto loan receivables into the warehouse facilities and term securitizations (“funding vehicles”) as secured borrowings, which result in recording the auto loan receivables and the related non-recourse notes payable on our consolidated balance sheets.
These receivables can only be used as collateral to settle obligations of the related funding vehicles. The funding vehicles and investors have no recourse to our assets beyond the related receivables, the amounts on deposit in reserve accounts and the restricted cash from collections on auto loan receivables. We have not provided financial or other support to the funding vehicles that was not previously contractually required, and there are no additional arrangements, guarantees or other commitments that could require us to provide financial support to the funding vehicles.
See Notes 4 and 10 for additional information on auto loan receivables and non-recourse notes payable.
Auto Loan Receivables, Net.
Auto loan receivables include amounts due from customers related to retail vehicle sales financed through CAF. The receivables are presented net of an allowance for estimated loan losses. The allowance for loan losses represents an estimate of the amount of net losses inherent in our portfolio of managed receivables as of the applicable reporting date and anticipated to occur during the following 12 months. The allowance is primarily based on the credit quality of the underlying receivables, historical loss trends and forecasted forward loss curves. We also take into account recent trends in delinquencies and defaults, recovery rates and the economic environment. The provision for loan losses is the periodic expense of maintaining an adequate allowance.
An account is considered delinquent when the related customer fails to make a substantial portion of a scheduled payment on or before the due date. In general, accounts are charged-off on the last business day of the month during which the earliest of the following occurs: the receivable is
120 days
or more delinquent as of the last business day of the month, the related vehicle is repossessed and liquidated, or the receivable is otherwise deemed uncollectible. For purposes of determining impairment, auto loans are evaluated collectively, as they represent a large group of smaller-balance homogeneous loans, and therefore, are not individually evaluated for impairment. See Note 4 for additional information on auto loan receivables.
Interest income and expenses related to auto loans are included in CAF income. Interest income on auto loan receivables is recognized when earned based on contractual loan terms. All loans continue to accrue interest until repayment or charge-off. Direct costs associated with loan originations are not considered material, and thus, are expensed as incurred. See Note 3 for additional information on CAF income.
Property and Equipment.
Property and equipment is stated at cost less accumulated depreciation and amortization of
$1.08 billion
and
$1.04 billion
as of
May 31, 2017
and
February 28, 2017
, respectively.
Other Assets.
Other assets includes amounts classified as restricted cash on deposit in reserve accounts and restricted investments. The restricted cash on deposit in reserve accounts is for the benefit of holders of non-recourse notes payable, and these funds are not expected to be available to the company or its creditors. In the event that the cash generated by the related receivables in a given period was insufficient to pay the interest, principal and other required payments, the balances on deposit in the reserve accounts would be used to pay those amounts. Restricted cash on deposit in reserve accounts is invested in money market securities or bank deposit accounts and was
$55.7 million
as of
May 31, 2017
, and
$52.8 million
as of
February 28, 2017
.
Restricted investments includes money market securities primarily held to satisfy certain insurance program requirements, as well as mutual funds held in a rabbi trust established to fund informally our executive deferred compensation plan. Restricted investments totaled
$74.1 million
as of
May 31, 2017
, and
$70.8 million
as of
February 28, 2017
.
Revenue Recognition.
We recognize revenue when the earnings process is complete, generally either at the time of sale to a customer or upon delivery to a customer. As part of our customer service strategy, we guarantee the retail vehicles we sell with a 5-day, money-back guarantee. We record a reserve for estimated returns based on historical experience and trends.
We also sell ESP and GAP products on behalf of unrelated third parties, who are the primary obligors, to customers who purchase a retail vehicle. The ESPs we currently offer on all used vehicles provide coverage up to 60 months (subject to mileage limitations), while GAP covers the customer for the term of their finance contract. We recognize revenue, on a net basis, at the time of sale. We also record a reserve for estimated contract cancellations. Periodically, we may receive additional revenue based upon the level of underwriting profits of the third parties who administer the products. These additional amounts are recognized as revenue when received. The reserve for cancellations is evaluated for each product and is based on forecasted forward cancellation curves utilizing historical experience, recent trends and credit mix of the customer base. Our risk related to contract cancellations is limited to the revenue that we receive. Cancellations fluctuate depending on the volume of EPP sales, customer financing default or prepayment rates, and shifts in customer behavior, including those related to changes in the coverage or term of the product. The current portion of estimated cancellation reserves is recognized as a component of accrued expenses and other current liabilities with the remaining amount recognized in other liabilities. See Note 7 for additional information on cancellation reserves.
Customers applying for financing who are not approved or are conditionally approved by CAF are generally evaluated by other third-party finance providers. These providers generally either pay us or are paid a fixed, pre-negotiated fee per contract. We recognize these fees at the time of sale.
We collect sales taxes and other taxes from customers on behalf of governmental authorities at the time of sale. These taxes are accounted for on a net basis and are not included in net sales and operating revenues or cost of sales.
Derivative Instruments and Hedging Activities.
We enter into derivative instruments to manage certain risks arising from both our business operations and economic conditions that result in the future known receipt or payment of uncertain cash amounts, the values of which are impacted by interest rates. We recognize the derivatives at fair value as either current assets or current liabilities on the consolidated balance sheets, and where applicable, such contracts covered by master netting agreements are reported net. Gross positive fair values are netted with gross negative fair values by counterparty. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. We may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting may not apply or we do not elect to apply hedge accounting. See Note 5 for additional information on derivative instruments and hedging activities.
Recent Accounting Pronouncements.
Effective in the Current Period
.
In July 2015, the FASB issued an accounting pronouncement (FASB ASU 2015-11), which simplifies the subsequent measurement of inventory by replacing the lower of cost or market test with a lower of cost or net realizable value (“NRV”) test. NRV is calculated as the estimated selling price less reasonably predictable costs of completion, disposal and transportation. We adopted this pronouncement for our fiscal year beginning March 1, 2017, and it did not have a material effect on our consolidated financial statements.
In March 2016, the FASB issued an accounting pronouncement (FASB ASU 2016-09) related to simplifications of employee share-based payment accounting. This pronouncement eliminates the APIC pool concept and requires that excess tax benefits and tax deficiencies be recorded in the income statement when awards are settled. The standard also addresses simplifications related to statement of cash flows classification, accounting for forfeitures, and minimum statutory tax withholding requirements. We adopted this pronouncement for our fiscal year beginning March 1, 2017. The requirements related to the tax consequences of share-based payments were applied prospectively and resulted in
$2.4 million
recorded as a reduction to the income tax provision during the three months ended
May 31, 2017
. The provisions related to the presentation of excess tax benefits on the consolidated statements of cash flows were applied retrospectively, resulting in an increase in cash provided by operating activities and a decrease in cash provided by financing activities of
$2.2 million
for the three months ended
May 31, 2016
. We elected to continue estimating forfeitures of share-based awards, and none of the other provisions of the pronouncement had a material effect on our consolidated financial statements.
Effective in Future Periods
.
In May 2014, the FASB issued an accounting pronouncement (FASB ASU 2014-09) related to revenue recognition. This ASU, along with subsequent ASUs issued to clarify certain provisions and the effective date of ASU 2014-09, provides a single, comprehensive revenue recognition model for all contracts with customers. The standard contains principles that an entity will apply to determine the measurement of revenue and the timing of when it is recognized. The entity will recognize revenue to
reflect the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. This standard will become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. ASU 2014-09 may be adopted using either a full retrospective method, which requires a restatement of prior periods presented, or a modified retrospective method with the cumulative effect of applying the standard recognized at the date of adoption. We will adopt this standard for our fiscal year beginning March 1, 2018.
While we continue to assess all potential impacts of this standard, we generally do not expect adoption of the standard to have a material impact on our consolidated financial statements. We primarily sell products and recognize revenue at the point of sale or delivery to customers, at which point the earnings process is deemed to be complete. Our performance obligations are clearly identifiable and we do not anticipate significant changes to the assessment of such performance obligations or the timing of our revenue recognition upon adoption of the new standard. Our primary business processes are consistent with the principles contained in the ASU, and we do not expect significant changes to those processes, our internal controls or systems. The standard is expected to have an impact on the way we account for sales returns on our consolidated balance sheets. We are still evaluating the impact of the new standard on our financial statement disclosures as well as our planned transition approach.
In February 2016, the FASB issued an accounting pronouncement (FASB ASU 2016-02) related to the accounting for leases. This pronouncement requires lessees to record most leases on their balance sheet while also disclosing key information about those lease arrangements. Under the new guidance, lease classification as either a finance lease or an operating lease will affect the pattern and classification of expense recognition in the income statement. The classification criteria to distinguish between finance and operating leases are generally consistent with the classification criteria to distinguish between capital and operating leases under existing lease accounting guidance. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018. We expect to adopt the new standard for our fiscal year beginning March 1, 2019. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with practical expedients available for election as a package.
We expect that this standard will have a material effect on our consolidated balance sheets as a result of recognizing new right-of-use assets and lease liabilities for existing operating leases. To date, we have not completed our comprehensive analysis of those leases and are unable to quantify the impact at this time. We are still evaluating the impact of the standard on our sale-leaseback transactions currently accounted for as direct financings. We believe that the majority of our leases will maintain their current lease classification under the new standard. As a result, we do not expect the new standard to have a material effect on our expense recognition pattern or, in turn, our consolidated statements of operations. We are continuing to evaluate the full impact of the new standard, as well as its impacts on our business processes, systems, and internal controls.
In May 2017, the FASB issued an accounting pronouncement (FASB ASU 2017-09) to provide guidance on determining which changes to the terms or conditions of share-based payment awards require an entity to apply modification accounting under Accounting Standards Codification Topic 718. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted, and is applied prospectively to changes in terms or conditions of awards occurring on or after the adoption date. We plan to adopt this pronouncement for our fiscal year beginning March 1, 2018 and will consider the impact that this standard may have on future share-based payment award changes, should they occur.
3.
CarMax Auto Finance
CAF provides financing to qualified retail customers purchasing vehicles from CarMax. CAF provides us the opportunity to capture additional profits, cash flows and sales while managing our reliance on third-party finance sources. Management regularly analyzes CAF's operating results by assessing profitability, the performance of the auto loan receivables including trends in credit losses and delinquencies, and CAF direct expenses. This information is used to assess CAF's performance and make operating decisions, including resource allocation.
We typically use securitizations to fund loans originated by CAF, as discussed in Note 2. CAF income primarily reflects the interest and fee income generated by the auto loan receivables less the interest expense associated with the debt issued to fund these receivables, a provision for estimated loan losses and direct CAF expenses.
CAF income does not include any allocation of indirect costs. Although CAF benefits from certain indirect overhead expenditures, we have not allocated indirect costs to CAF to avoid making subjective allocation decisions. Examples of indirect costs not allocated to CAF include retail store expenses and corporate expenses. In addition, except for auto loan receivables, which are disclosed in Note 4, CAF assets are not separately reported nor do we allocate assets to CAF because such allocation would not be useful to management in making operating decisions.
Components of CAF Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31
|
(In millions)
|
2017
|
|
%
(1)
|
|
2016
|
|
%
(1)
|
Interest margin:
|
|
|
|
|
|
|
|
Interest and fee income
|
$
|
206.7
|
|
|
7.6
|
|
|
$
|
184.1
|
|
|
7.6
|
|
Interest expense
|
(49.0
|
)
|
|
(1.8
|
)
|
|
(39.4
|
)
|
|
(1.6
|
)
|
Total interest margin
|
157.7
|
|
|
5.8
|
|
|
144.7
|
|
|
5.9
|
|
Provision for loan losses
|
(28.6
|
)
|
|
(1.1
|
)
|
|
(26.6
|
)
|
|
(1.1
|
)
|
Total interest margin after provision for loan losses
|
129.1
|
|
|
4.8
|
|
|
118.1
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
Direct expenses:
|
|
|
|
|
|
|
|
Payroll and fringe benefit expense
|
(8.5
|
)
|
|
(0.3
|
)
|
|
(7.6
|
)
|
|
(0.3
|
)
|
Other direct expenses
|
(11.2
|
)
|
|
(0.4
|
)
|
|
(9.7
|
)
|
|
(0.4
|
)
|
Total direct expenses
|
(19.7
|
)
|
|
(0.7
|
)
|
|
(17.3
|
)
|
|
(0.7
|
)
|
CarMax Auto Finance income
|
$
|
109.4
|
|
|
4.0
|
|
|
$
|
100.8
|
|
|
4.1
|
|
|
|
|
|
|
|
|
|
Total average managed receivables
|
$
|
10,829.5
|
|
|
|
|
|
$
|
9,745.0
|
|
|
|
|
|
|
(1)
|
Annualized percentage of total average managed receivables.
|
4.
Auto Loan Receivables
Auto loan receivables include amounts due from customers related to retail vehicle sales financed through CAF and are presented net of an allowance for estimated loan losses. We generally use warehouse facilities to fund auto loan receivables originated by CAF until we elect to fund them through a term securitization or alternative funding arrangement. The majority of the auto loan receivables serve as collateral for the related non-recourse notes payable of
$11.00 billion
as of
May 31, 2017
and
$10.74 billion
as of
February 28, 2017
. See Notes 2 and 10 for additional information on securitizations and non-recourse notes payable.
Auto Loan Receivables, Net
|
|
|
|
|
|
|
|
|
|
As of May 31
|
|
As of February 28
|
(In millions)
|
2017
|
|
2017
|
Term securitizations
|
$
|
8,642.5
|
|
|
$
|
8,784.7
|
|
Warehouse facilities
|
2,022.0
|
|
|
1,624.0
|
|
Overcollateralization
(1)
|
233.7
|
|
|
211.4
|
|
Other managed receivables
(2)
|
85.1
|
|
|
61.2
|
|
Total ending managed receivables
|
10,983.3
|
|
|
10,681.3
|
|
Accrued interest and fees
|
45.3
|
|
|
38.5
|
|
Other
|
(6.0
|
)
|
|
(0.1
|
)
|
Less allowance for loan losses
|
(129.8
|
)
|
|
(123.6
|
)
|
Auto loan receivables, net
|
$
|
10,892.8
|
|
|
$
|
10,596.1
|
|
|
|
(1)
|
Represents receivables restricted as excess collateral for the warehouse facilities and term securitizations.
|
|
|
(2)
|
Other managed receivables includes receivables not funded through the warehouse facilities or term securitizations.
|
Credit Quality.
When customers apply for financing, CAF’s proprietary scoring models rely on the customers’ credit history and certain application information to evaluate and rank their risk. We obtain credit histories and other credit data that includes information such as number, age, type of and payment history for prior or existing credit accounts. The application information that is used includes income, collateral value and down payment. The scoring models yield credit grades that represent the relative likelihood of repayment. Customers assigned a grade of “A” are determined to have the highest probability of repayment, and
customers assigned a lower grade are determined to have a lower probability of repayment. For loans that are approved, the credit grade influences the terms of the agreement, such as the required loan-to-value ratio and interest rate.
CAF uses a combination of the initial credit grades and historical performance to monitor the credit quality of the auto loan receivables on an ongoing basis. We validate the accuracy of the scoring models periodically. Loan performance is reviewed on a recurring basis to identify whether the assigned grades adequately reflect the customers’ likelihood of repayment.
Ending Managed Receivables by Major Credit Grade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May 31
|
|
As of February 28
|
(In millions)
|
2017
(1)
|
|
%
(2)
|
|
2017
(1)
|
|
%
(2)
|
A
|
$
|
5,362.5
|
|
|
48.8
|
|
$
|
5,223.4
|
|
|
48.9
|
B
|
3,878.0
|
|
|
35.3
|
|
3,739.4
|
|
|
35.0
|
C and other
|
1,742.8
|
|
|
15.9
|
|
1,718.5
|
|
|
16.1
|
Total ending managed receivables
|
$
|
10,983.3
|
|
|
100.0
|
|
$
|
10,681.3
|
|
|
100.0
|
|
|
(1)
|
Classified based on credit grade assigned when customers were initially approved for financing.
|
|
|
(2)
|
Percent of total ending managed receivables.
|
Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31
|
(In millions)
|
2017
|
|
%
(1)
|
|
2016
|
|
%
(1)
|
Balance as of beginning of period
|
$
|
123.6
|
|
|
1.16
|
|
$
|
94.9
|
|
|
0.99
|
Charge-offs
|
(54.1
|
)
|
|
|
|
(45.8
|
)
|
|
|
Recoveries
|
31.7
|
|
|
|
|
28.3
|
|
|
|
Provision for loan losses
|
28.6
|
|
|
|
|
26.6
|
|
|
|
Balance as of end of period
|
$
|
129.8
|
|
|
1.18
|
|
$
|
104.0
|
|
|
1.05
|
|
|
(1)
|
Percent
of total ending managed receivables.
|
The allowance for loan losses represents an estimate of the amount of net losses inherent in our portfolio of managed receivables as of the applicable reporting date and anticipated to occur during the following 12 months. The allowance is primarily based on the credit quality of the underlying receivables, historical loss trends and forecasted forward loss curves. We also take into account recent trends in delinquencies and defaults, recovery rates and the economic environment. The provision for loan losses is the periodic expense of maintaining an adequate allowance.
Past Due Receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May 31
|
|
As of February 28
|
(In millions)
|
2017
|
|
%
(1)
|
|
2017
|
|
%
(1)
|
Total ending managed receivables
|
$
|
10,983.3
|
|
|
100.0
|
|
$
|
10,681.3
|
|
|
100.0
|
Delinquent loans:
|
|
|
|
|
|
|
|
31-60 days past due
|
$
|
219.7
|
|
|
2.0
|
|
$
|
211.0
|
|
|
2.0
|
61-90 days past due
|
91.7
|
|
|
0.8
|
|
93.5
|
|
|
0.9
|
Greater than 90 days past due
|
27.0
|
|
|
0.3
|
|
26.5
|
|
|
0.2
|
Total past due
|
$
|
338.4
|
|
|
3.1
|
|
$
|
331.0
|
|
|
3.1
|
|
|
(1)
|
Percent of total ending managed receivables.
|
5.
Derivative Instruments and Hedging Activities
We use derivatives to manage certain risks arising from both our business operations and economic conditions, particularly with regard to issuances of debt. Primary exposures include LIBOR and other rates used as benchmarks in our securitizations and other debt financing. We enter into derivative instruments to manage exposures related to the future known receipt or payment of uncertain cash amounts, the values of which are impacted by interest rates, and designate these derivative instruments as cash flow hedges for accounting purposes. Our derivative instruments are used to manage (i) differences in the amount of our known or expected cash receipts and our known or expected cash payments principally related to the funding of our auto loan receivables, and (ii) exposure to variable interest rates associated with our term loan, as further discussed in Note 10.
For the derivatives associated with our securitization program, the effective portion of changes in the fair value is initially recorded in accumulated other comprehensive loss (“AOCL”). For the majority of these derivatives, the amounts are subsequently reclassified into CAF income in the period that the hedged forecasted transaction affects earnings, which occurs as interest expense is recognized on those future issuances of debt. During the next 12 months, we estimate that an additional
$3.7 million
will be reclassified from AOCL as a decrease to CAF income.
As of
May 31, 2017
and
February 28, 2017
, we had interest rate swaps outstanding with a combined notional amount of
$2.22 billion
and
$2.03 billion
, respectively, that were designated as cash flow hedges of interest rate risk.
Fair Values of Derivative Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May 31, 2017
|
|
As of February 28, 2017
|
(In thousands)
|
Assets
(1)
|
|
Liabilities
(2)
|
|
Assets
(1)
|
|
Liabilities
(2)
|
Derivatives designated as accounting hedges:
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
577
|
|
|
$
|
(3,739
|
)
|
|
$
|
2,997
|
|
|
$
|
(509
|
)
|
|
|
(1)
|
Reported in other current assets on the consolidated balance sheets.
|
|
|
(2)
|
Reported in accounts payable on the consolidated balance sheets.
|
Effect of Derivative Instruments on Comprehensive Income
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
May 31
|
(In thousands)
|
2017
|
|
2016
|
Derivatives designated as accounting hedges:
|
|
|
|
(Loss) gain recognized in AOCL
(1)
|
$
|
(4,226
|
)
|
|
$
|
2,331
|
|
Loss reclassified from AOCL into CAF income
(1)
|
$
|
(1,013
|
)
|
|
$
|
(2,813
|
)
|
|
|
(1)
|
Represents the effective portion.
|
6.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market or, if none exists, the most advantageous market, for the specific asset or liability at the measurement date (referred to as the “exit price”). The fair value should be based on assumptions that market participants would use, including a consideration of nonperformance risk.
We assess the inputs used to measure fair value using the three-tier hierarchy. The hierarchy indicates the extent to which inputs used in measuring fair value are observable in the market.
|
|
Level 1
|
Inputs include unadjusted quoted prices in active markets for identical assets or liabilities that we can access at the measurement date.
|
|
|
Level 2
|
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets in active markets, quoted prices from identical or similar assets in inactive markets and observable inputs such as interest rates and yield curves.
|
|
|
Level 3
|
Inputs that are significant to the measurement that are not observable in the market and include management's judgments about the assumptions market participants would use in pricing the asset or liability (including assumptions about risk).
|
Our fair value processes include controls that are designed to ensure that fair values are appropriate. Such controls include model validation, review of key model inputs, analysis of period-over-period fluctuations and reviews by senior management.
Valuation Methodologies
Money Market Securities.
Money market securities are cash equivalents, which are included in cash and cash equivalents, restricted cash from collections on auto loan receivables or other assets. They consist of highly liquid investments with original maturities of three months or less and are classified as Level 1.
Mutual Fund Investments.
Mutual fund investments consist of publicly traded mutual funds that primarily include diversified investments in large-, mid- and small-cap domestic and international companies. The investments, which are included in other assets, are held in a rabbi trust established to fund informally our executive deferred compensation plan and are classified as Level 1.
Derivative Instruments.
The fair values of our derivative instruments are included in either other current assets or accounts payable. As described in Note 5, as part of our risk management strategy, we utilize derivative instruments to manage differences in the amount of our known or expected cash receipts and our known or expected cash payments principally related to the funding of our auto loan receivables as well as to manage exposure to variable interest rates on our term loan. Our derivatives are not exchange-traded and are over-the-counter customized derivative instruments. All of our derivative exposures are with highly rated bank counterparties.
We measure derivative fair values assuming that the unit of account is an individual derivative instrument and that derivatives are sold or transferred on a stand-alone basis. We estimate the fair value of our derivatives using quotes determined by the derivative counterparties and third-party valuation services. Quotes from third-party valuation services and quotes received from bank counterparties project future cash flows and discount the future amounts to a present value using market-based expectations for interest rates and the contractual terms of the derivative instruments. The models do not require significant judgment and model inputs can typically be observed in a liquid market; however, because the models include inputs other than quoted prices in active markets, all derivatives are classified as Level 2.
Our derivative fair value measurements consider assumptions about counterparty and our own nonperformance risk. We monitor counterparty and our own nonperformance risk and, in the event that we determine that a party is unlikely to perform under terms of the contract, we would adjust the derivative fair value to reflect the nonperformance risk.
Items Measured at Fair Value on a Recurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May 31, 2017
|
(In thousands)
|
Level 1
|
|
Level 2
|
|
Total
|
Assets:
|
|
|
|
|
|
Money market securities
|
$
|
410,764
|
|
|
$
|
—
|
|
|
$
|
410,764
|
|
Mutual fund investments
|
17,813
|
|
|
—
|
|
|
17,813
|
|
Derivative instruments
|
—
|
|
|
577
|
|
|
577
|
|
Total assets at fair value
|
$
|
428,577
|
|
|
$
|
577
|
|
|
$
|
429,154
|
|
|
|
|
|
|
|
Percent of total assets at fair value
|
99.9
|
%
|
|
0.1
|
%
|
|
100.0
|
%
|
Percent of total assets
|
2.6
|
%
|
|
—
|
%
|
|
2.6
|
%
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Derivative instruments
|
$
|
—
|
|
|
$
|
(3,739
|
)
|
|
$
|
(3,739
|
)
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
(3,739
|
)
|
|
$
|
(3,739
|
)
|
|
|
|
|
|
|
Percent of total liabilities
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 28, 2017
|
(In thousands)
|
Level 1
|
|
Level 2
|
|
Total
|
Assets:
|
|
|
|
|
|
Money market securities
|
$
|
397,994
|
|
|
$
|
—
|
|
|
$
|
397,994
|
|
Mutual fund investments
|
16,519
|
|
|
—
|
|
|
16,519
|
|
Derivative instruments
|
—
|
|
|
2,997
|
|
|
2,997
|
|
Total assets at fair value
|
$
|
414,513
|
|
|
$
|
2,997
|
|
|
$
|
417,510
|
|
|
|
|
|
|
|
Percent of total assets at fair value
|
99.3
|
%
|
|
0.7
|
%
|
|
100.0
|
%
|
Percent of total assets
|
2.5
|
%
|
|
—
|
%
|
|
2.6
|
%
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Derivative instruments
|
$
|
—
|
|
|
$
|
(509
|
)
|
|
$
|
(509
|
)
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
(509
|
)
|
|
$
|
(509
|
)
|
|
|
|
|
|
|
Percent of total liabilities
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
There were
no
transfers between Levels 1 and 2 for the
three
months ended
May 31, 2017
. As of
May 31, 2017
and
February 28, 2017
we had
no
Level 3 assets.
Fair Value of Financial Instruments
The carrying value of our cash and cash equivalents, accounts receivable, other restricted cash deposits and accounts payable approximates fair value due to the short-term nature and/or variable rates associated with these financial instruments. Auto loan receivables are presented net of an allowance for estimated loan losses. We believe that the carrying value of our revolving credit facility and term loan approximates fair value due to the variable rates associated with these obligations. The fair value of our senior unsecured notes, which are not carried at fair value on our consolidated balance sheets, was determined using Level 2 inputs based on quoted market prices. The carrying value and fair value of the senior unsecured notes as of
May 31, 2017
and
February 28, 2017
, respectively, are as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
As of May 31, 2017
|
|
As of February 28, 2017
|
Carrying value
|
$
|
500,000
|
|
|
$
|
500,000
|
|
Fair value
|
$
|
509,255
|
|
|
$
|
499,518
|
|
7.
Cancellation Reserves
We recognize revenue for EPP products, on a net basis, at the time of sale. We also record a reserve for estimated contract cancellations. Cancellations of these services may result from early termination by the customer, or default or prepayment on the finance contract. The reserve for cancellations is evaluated for each product, and is based on forecasted forward cancellation curves utilizing historical experience, recent trends and credit mix of the customer base.
Cancellation Reserves
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31
|
(In millions)
|
2017
|
|
2016
|
Balance as of beginning of period
|
$
|
108.2
|
|
|
$
|
110.2
|
|
Cancellations
|
(16.3
|
)
|
|
(16.4
|
)
|
Provision for future cancellations
|
17.1
|
|
|
18.7
|
|
Balance as of end of period
|
$
|
109.0
|
|
|
$
|
112.5
|
|
The current portion of estimated cancellation reserves is recognized as a component of accrued expenses and other current liabilities with the remaining amount recognized in other liabilities. As of
May 31, 2017
and
February 28, 2017
, the current portion of cancellation reserves was
$56.9 million
and
$56.4 million
, respectively.
8.
Income Taxes
We had
$29.9 million
of gross unrecognized tax benefits as of
May 31, 2017
, and
$30.0 million
as of
February 28, 2017
. There were no significant changes to the gross unrecognized tax benefits as reported for the year ended
February 28, 2017
, as all activity was related to positions taken on tax returns previously filed or intended to be filed in the current fiscal year.
9.
Retirement Benefit Plans
We have two frozen noncontributory defined benefit plans: our pension plan (the “pension plan”) and our unfunded, nonqualified plan (the “restoration plan”), which restores retirement benefits for certain associates who are affected by Internal Revenue Code limitations on benefits provided under the pension plan. No additional benefits have accrued under these plans since they were frozen; however, we have a continuing obligation to fund the pension plan and will continue to recognize net periodic pension expense for both plans for benefits earned prior to being frozen. We use a fiscal year end measurement date for both the pension plan and the restoration plan.
Net Pension Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31
|
|
Pension Plan
|
|
Restoration Plan
|
|
Total
|
(In thousands)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net pension expense
|
$
|
52
|
|
|
$
|
82
|
|
|
$
|
117
|
|
|
$
|
120
|
|
|
$
|
169
|
|
|
$
|
202
|
|
Net pension expense includes actuarial loss amortization of
$0.5 million
and
$0.4 million
for the three months ended
May 31, 2017
and
2016
, respectively. We made
no
contributions to the pension plan during the
three
months ended
May 31, 2017
. We expect to make contributions of
$2.1 million
to the pension plan during the remainder of fiscal
2018
. The expected long-term rate of return on plan assets for the pension plan was
7.75%
as of
February 28, 2017
.
10.
Debt
|
|
|
|
|
|
|
|
|
|
As of May 31
|
|
As of February 28
|
(In thousands)
|
2017
|
|
2017
|
Revolving credit facility
|
$
|
693
|
|
|
$
|
155,062
|
|
Term loan
|
300,000
|
|
|
300,000
|
|
3.86% Senior notes due 2023
|
100,000
|
|
|
100,000
|
|
4.17% Senior notes due 2026
|
200,000
|
|
|
200,000
|
|
4.27% Senior notes due 2028
|
200,000
|
|
|
200,000
|
|
Finance and capital lease obligations
|
494,166
|
|
|
496,136
|
|
Non-recourse notes payable
|
11,003,290
|
|
|
10,742,425
|
|
Total debt
|
12,298,149
|
|
|
12,193,623
|
|
Less: current portion
|
(349,297
|
)
|
|
(343,266
|
)
|
Less: unamortized debt issuance costs
|
(22,982
|
)
|
|
(23,919
|
)
|
Long-term debt, net
|
$
|
11,925,870
|
|
|
$
|
11,826,438
|
|
Revolving Credit Facility.
We have a
$1.20 billion
unsecured revolving credit facility (the “credit facility”) with various financial institutions that expires in
August 2020
. Borrowings under the credit facility are available for working capital and general corporate purposes. Borrowings accrue interest at variable rates based on LIBOR, the federal funds rate, or the prime rate, depending on the type of borrowing, and we pay a commitment fee on the unused portions of the available funds. Borrowings under the credit facility are either due “on demand” or at maturity depending on the type of borrowing. Borrowings with “on demand” repayment terms are presented as short-term debt, while amounts due at maturity are presented as long-term debt with expected repayments within the next 12 months presented as a component of current portion of long-term debt. As of
May 31, 2017
, the unused capacity of
$1,199.3 million
was fully available to us.
Term Loan.
We have a
$300 million
term loan that expires in
August 2020
. The term loan accrues interest at variable rates based on the LIBOR rate, the federal funds rate, or the prime rate, and interest is payable monthly. As of
May 31, 2017
,
$300 million
remained outstanding and was classified as long-term debt, as no repayments are scheduled to be made within the next 12 months. Borrowings under the term loan are available for working capital and general corporate purposes. We have entered into an interest rate derivative contract, which will expire in November 2017, to manage our exposure to variable interest rates associated with this term loan.
Senior Notes.
We have senior unsecured notes with outstanding principal totaling
$500 million
as of
May 31, 2017
, which are due in 2023, 2026 and 2028. These notes were classified as long-term debt as no repayments are scheduled to be made within the next 12 months. Borrowings under these notes are available for working capital and general corporate purposes. Interest on the notes is payable semi-annually.
Finance and Capital Lease Obligations.
Finance and capital lease obligations relate primarily to stores subject to sale-leaseback transactions that did not qualify for sale accounting, and therefore, are accounted for as financings. The leases were structured at varying interest rates and generally have initial lease terms ranging from
15
to
20 years
with payments made monthly. Payments on the leases are recognized as interest expense and a reduction of the obligations. We have not entered into any new sale-leaseback transactions since fiscal 2009. In the event the leases are modified or extended beyond their original lease term, the related obligation is increased based on the present value of the revised future lease payments, with a corresponding increase to the assets subject to these transactions. Upon modification, the amortization of the obligation is reset, resulting in more of the lease payments being applied to interest expense in the initial years following the modification. See Note 14 for additional information on finance and capital lease obligations.
Non-Recourse Notes Payable.
The non-recourse notes payable relate to auto loan receivables funded through term securitizations and our warehouse facilities. The timing of principal payments on the non-recourse notes payable is based on the timing of principal collections and defaults on the related auto loan receivables. The current portion of non-recourse notes payable represents principal payments that are due to be distributed in the following period.
As of
May 31, 2017
,
$8.98 billion
of non-recourse notes payable was outstanding related to term securitizations. These notes payable accrue interest predominantly at fixed rates and have scheduled maturities through
October 2023
, but may mature earlier, depending upon the repayment rate of the underlying auto loan receivables.
As of
May 31, 2017
,
$2.02 billion
of non-recourse notes payable was outstanding related to our warehouse facilities. As of
May 31, 2017
, the combined warehouse facility limit was
$2.80 billion
, and the unused warehouse capacity totaled
$778.0 million
. Of the combined warehouse facility limit,
$1.30 billion
will expire in
August 2017
and
$1.50 billion
will expire in
February 2018
. The return requirements of warehouse facility investors could fluctuate significantly depending on market conditions. At renewal, the cost, structure and capacity of the facilities could change. These changes could have a significant impact on our funding costs.
See Notes 2 and 4 for additional information on the related auto loan receivables.
Capitalized Interest.
We capitalize interest in connection with the construction of certain facilities. For the
three
months ended
May 31, 2017
and
2016
, we capitalized interest of
$1.7 million
and
$2.6 million
, respectively.
Financial Covenants.
The credit facility, term loan and senior note agreements contain representations and warranties, conditions and covenants. We must also meet financial covenants in conjunction with certain of the sale-leaseback transactions. Our securitization and warehouse facility agreements contain representations and warranties, financial covenants and performance triggers. As of
May 31, 2017
, we were in compliance with all financial covenants and our term securitizations and warehouse facilities were in compliance with the related performance triggers.
11.
Stock and Stock-Based Incentive Plans
(A) Share Repurchase Program
As of
May 31, 2017
, our board of directors has authorized the repurchase of up to
$4.55 billion
of our common stock. At that date,
$1.41 billion
was available for repurchase, with no expiration date, under the board's outstanding authorization.
Common Stock Repurchases
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
May 31
|
|
2017
|
|
2016
|
Number of shares repurchased
(in thousands)
|
3,034.7
|
|
|
2,569.6
|
|
Average cost per share
|
$
|
60.00
|
|
|
$
|
51.39
|
|
Available for repurchase, as of end of period
(in millions)
|
$
|
1,408.3
|
|
|
$
|
1,266.0
|
|
(B) Stock Incentive Plans
We maintain long-term incentive plans for management, certain employees and the nonemployee members of our board of directors. The plans allow for the granting of equity-based compensation awards, including nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, stock- and cash-settled restricted stock units, stock grants or a combination of awards. To date, we have not awarded any incentive stock options.
The majority of associates who receive share-based compensation awards primarily receive cash-settled restricted stock units. Senior management and other key associates receive awards of nonqualified stock options, stock-settled restricted stock units and/or restricted stock awards. Nonemployee directors receive awards of nonqualified stock options, stock grants and/or restricted stock awards. Excluding stock grants, all share-based compensation awards, including any associated dividend rights, are subject to forfeiture.
Nonqualified Stock Options.
Nonqualified stock options are awards that allow the recipient to purchase shares of our common stock at a fixed price. Stock options are granted at an exercise price equal to the fair market value of our common stock on the grant date. The stock options generally vest annually in equal amounts over
4 years
. These options expire
7 years
after the date of the grant.
Cash-Settled Restricted Stock Units.
Also referred to as restricted stock units, or RSUs, these are restricted stock unit awards that entitle the holder to a cash payment equal to the fair market value of a share of our common stock for each unit granted. Conversion generally occurs at the end of a
three
-year vesting period. However, the cash payment per RSU will not be greater than
200%
or less than
75%
of the fair market value of a share of our common stock on the grant date. RSUs are liability awards and do not have voting rights.
Stock-Settled Market Stock Units.
Also referred to as market stock units, or MSUs, these are restricted stock unit awards with market conditions granted to eligible key associates that are converted into between
zero
and
two
shares of common stock for each unit granted. Conversion generally occurs at the end of a three-year vesting period. The conversion ratio is calculated by dividing the average closing price of our stock during the final
40
trading days of the
three
-year vesting period by our stock price on the grant date, with the resulting quotient capped at
two
. This quotient is then multiplied by the number of MSUs granted to yield the number of shares awarded. MSUs do not have voting rights.
Stock-Settled Performance Stock Units.
Also referred to as performance stock units, or PSUs, these are restricted stock unit awards with performance conditions granted to eligible key associates that are converted into between
zero
and
two
shares of common stock for each unit granted. Conversion generally occurs at the end of a
three
-year vesting period. For grants prior to fiscal 2018, the conversion ratio is based on the company reaching certain target levels set by the board of directors for cumulative three-year earnings before interest and taxes at the end of the three-year period. For the fiscal 2018 grants, the conversion ratio is based on reaching certain target levels set by the board of directors for cumulative three-year diluted earnings per share as adjusted to exclude income taxes. The resulting quotients are subject to meeting a minimum
25%
threshold and capped at
200%
. These quotients are then multiplied by the number of PSUs granted to yield the number of shares awarded. PSUs do not have voting rights.
Restricted Stock Awards.
Restricted stock awards (RSAs) are awards of our common stock that are subject to specified restrictions that generally lapse after a
one
- to
three
-year period from date of grant. Participants holding restricted stock are entitled to vote on matters submitted to holders of our common stock for a vote.
(C) Share-Based Compensation
Composition of Share-Based Compensation Expense
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
May 31
|
(In thousands)
|
2017
|
|
2016
|
Cost of sales
|
$
|
227
|
|
|
$
|
1,360
|
|
CarMax Auto Finance income
|
820
|
|
|
904
|
|
Selling, general and administrative expenses
|
18,093
|
|
|
29,583
|
|
Share-based compensation expense, before income taxes
|
$
|
19,140
|
|
|
$
|
31,847
|
|
Composition of Share-Based Compensation Expense – By Grant Type
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
May 31
|
(In thousands)
|
2017
|
|
2016
|
Nonqualified stock options
|
$
|
10,370
|
|
|
$
|
13,131
|
|
Cash-settled restricted stock units
|
3,118
|
|
|
12,376
|
|
Stock-settled market stock units
|
3,621
|
|
|
3,650
|
|
Stock-settled performance stock units
|
1,353
|
|
|
2,133
|
|
Employee stock purchase plan
|
414
|
|
|
410
|
|
Restricted stock awards
|
264
|
|
|
147
|
|
Share-based compensation expense, before income taxes
|
$
|
19,140
|
|
|
$
|
31,847
|
|
Unrecognized Share-
Based Compensation Expense – By Grant Type
|
|
|
|
|
|
|
|
As of May 31, 2017
|
(Costs in millions)
|
Unrecognized Compensation Costs
|
|
Weighted Average Remaining Recognition Life (Years)
|
Nonqualified stock options
|
$
|
53.6
|
|
|
2.8
|
Stock-settled market stock units
|
17.7
|
|
|
1.9
|
Stock-settled performance stock units
|
5.3
|
|
|
1.9
|
Restricted stock
|
0.3
|
|
|
1.2
|
Total
|
$
|
76.9
|
|
|
2.5
|
We recognize compensation expense for stock options, MSUs, PSUs and RSAs on a straight-line basis (net of estimated forfeitures) over the requisite service period, which is generally the vesting period of the award. The PSU expense is adjusted for any change in management’s assessment of the performance target level that is probable of being achieved. The variable expense associated with RSUs is recognized over their vesting period (net of estimated forfeitures) and is calculated based on the volume-weighted average price of our common stock on the last trading day of each reporting period.
The total costs for matching contributions for our employee stock purchase plan are included in share-based compensation expense. There were
no
capitalized share-based compensation costs as of or for the
three months
ended
May 31, 2017
or
2016
.
Stock Option Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
Remaining
|
|
Aggregate
|
|
Number of
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
(Shares and intrinsic value in thousands)
|
Shares
|
|
Price
|
|
Life (Years)
|
|
Value
|
Outstanding as of February 28, 2017
|
7,753
|
|
|
$
|
50.00
|
|
|
|
|
|
Options granted
|
1,930
|
|
|
58.38
|
|
|
|
|
|
|
Options exercised
|
(158
|
)
|
|
39.64
|
|
|
|
|
|
|
Options cancelled
|
(5
|
)
|
|
62.05
|
|
|
|
|
|
|
Outstanding as of May 31, 2017
|
9,520
|
|
|
$
|
51.86
|
|
|
4.8
|
|
$
|
119,287
|
|
|
|
|
|
|
|
|
|
Exercisable as of May 31, 2017
|
4,647
|
|
|
$
|
46.55
|
|
|
3.5
|
|
$
|
83,119
|
|
Stock Option Information
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31
|
|
2017
|
|
2016
|
Options granted
|
1,930,362
|
|
|
2,154,718
|
|
Weighted average grant date fair value per share
|
$
|
16.11
|
|
|
$
|
14.19
|
|
Cash received from options exercised
(in millions)
|
$
|
6.6
|
|
|
$
|
4.1
|
|
Intrinsic value of options exercised
(in millions)
|
$
|
3.2
|
|
|
$
|
4.9
|
|
Realized tax benefits
(in millions)
|
$
|
1.3
|
|
|
$
|
1.9
|
|
For stock options, the fair value of each award is estimated as of the date of grant using a binomial valuation model. In computing the value of the option, the binomial model considers characteristics of fair-value option pricing that are not available for consideration under a closed-form valuation model (for example, the Black-Scholes model), such as the contractual term of the option, the probability that the option will be exercised prior to the end of its contractual life and the probability of termination or retirement of the option holder. For this reason, we believe that the binomial model provides a fair value that is more representative of actual experience and future expected experience than the value calculated using a closed-form model. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by the recipients of share-based awards.
Assumptions Used to Estimate Option Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31
|
|
2017
|
|
2016
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
|
0.0
|
%
|
Expected volatility factor
(1)
|
29.4
|
%
|
—
|
32.7
|
%
|
|
30.4
|
%
|
—
|
33.9
|
%
|
Weighted average expected volatility
|
|
|
29.8
|
%
|
|
|
|
30.8
|
%
|
Risk-free interest rate
(2)
|
0.7
|
%
|
—
|
2.1
|
%
|
|
0.2
|
%
|
—
|
1.6
|
%
|
Expected term
(in years)
(3)
|
|
|
4.6
|
|
|
|
|
4.6
|
|
|
|
(1)
|
Measured using historical daily price changes of our stock for a period corresponding to the term of the options and the implied volatility derived from the market prices of traded options on our stock.
|
|
|
(2)
|
Based on the U.S. Treasury yield curve at the time of grant.
|
|
|
(3)
|
Represents the estimated number of years that options will be outstanding prior to exercise.
|
Cash-Settled Restricted Stock Unit Activity
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Number of
|
|
Grant Date
|
(Units in thousands)
|
Units
|
|
Fair Value
|
Outstanding as of February 28, 2017
|
1,406
|
|
|
$
|
55.05
|
|
Stock units granted
|
627
|
|
|
$
|
58.38
|
|
Stock units vested and converted
|
(459
|
)
|
|
$
|
45.00
|
|
Stock units cancelled
|
(17
|
)
|
|
$
|
57.11
|
|
Outstanding as of May 31, 2017
|
1,557
|
|
|
$
|
59.33
|
|
Cash-Settled Restricted Stock Unit Information
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31
|
|
2017
|
|
2016
|
Stock units granted
|
627,127
|
|
|
631,907
|
|
Initial weighted average grant date fair value per share
|
$
|
58.38
|
|
|
$
|
51.63
|
|
Payments (before payroll tax withholdings) upon vesting
(in millions)
|
$
|
25.9
|
|
|
$
|
22.9
|
|
Realized tax benefits
(in millions)
|
$
|
10.4
|
|
|
$
|
9.0
|
|
Expected Cash Settlement Range Upon Restricted Stock Unit Vesting
|
|
|
|
|
|
|
|
|
|
As of May 31, 2017
|
(In thousands)
|
Minimum
(1)
|
|
Maximum
(1)
|
Fiscal 2019
|
$
|
18,443
|
|
|
$
|
49,182
|
|
Fiscal 2020
|
19,776
|
|
|
52,735
|
|
Fiscal 2021
|
22,360
|
|
|
59,626
|
|
Total expected cash settlements
|
$
|
60,579
|
|
|
$
|
161,543
|
|
|
|
(1)
|
Net of estimated forfeitures.
|
Stock-Settled Market Stock Unit Activity
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Number of
|
|
Grant Date
|
(Units in thousands)
|
Units
|
|
Fair Value
|
Outstanding as of February 28, 2017
|
504
|
|
|
$
|
65.74
|
|
Stock units granted
|
159
|
|
|
$
|
73.58
|
|
Stock units vested and converted
|
(221
|
)
|
|
$
|
55.42
|
|
Stock units cancelled
|
(2
|
)
|
|
$
|
74.76
|
|
Outstanding as of May 31, 2017
|
440
|
|
|
$
|
73.72
|
|
Stock-Settled Market Stock Unit Information
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31
|
|
2017
|
|
2016
|
Stock units granted
|
158,637
|
|
|
168,681
|
|
Weighted average grant date fair value per share
|
$
|
73.58
|
|
|
$
|
63.97
|
|
Realized tax benefits
(in millions)
|
$
|
7.0
|
|
|
$
|
5.2
|
|
Stock-Settled Performance Stock Unit Activity
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Number of
|
|
Grant Date
|
(Units in thousands)
|
Units
|
|
Fair Value
|
Outstanding as of February 28, 2017
|
149
|
|
|
$
|
60.94
|
|
Stock units granted
|
74
|
|
|
$
|
58.38
|
|
Outstanding as of May 31, 2017
|
223
|
|
|
$
|
60.10
|
|
Stock-Settled Performance Stock Unit Information
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31
|
|
2017
|
|
2016
|
Stock units granted
|
73,648
|
|
|
83,032
|
|
Weighted average grant date fair value per share
|
$
|
58.38
|
|
|
$
|
51.63
|
|
Restricted Stock Awards Activity
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Number of
|
|
Grant Date
|
(Units in thousands)
|
Units
|
|
Fair Value
|
Outstanding as of February 28, 2017
|
50
|
|
|
$
|
50.94
|
|
Restricted stock vested
|
(1
|
)
|
|
$
|
51.63
|
|
Outstanding as of May 31, 2017
|
49
|
|
|
$
|
50.93
|
|
Restricted Stock Awards Information
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31
|
|
2017
|
|
2016
|
Restricted stock granted
|
—
|
|
|
19,998
|
|
Weighted average grant date fair value per share
|
$
|
—
|
|
|
$
|
51.63
|
|
12.
Net Earnings Per Share
Basic net earnings per share is computed by dividing net earnings available for basic common shares by the weighted average number of shares of common stock outstanding. Diluted net earnings per share is computed by dividing net earnings available for diluted common shares by the sum of weighted average number of shares of common stock outstanding and dilutive potential common stock. Diluted net earnings per share is calculated using the “if-converted” treasury stock method.
Basic and Dilutive Net Earnings Per Share Reconciliations
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
May 31
|
(In thousands except per share data)
|
2017
|
|
2016
|
Net earnings
|
$
|
211,702
|
|
|
$
|
175,360
|
|
|
|
|
|
Weighted average common shares outstanding
|
185,200
|
|
|
193,531
|
|
Dilutive potential common shares:
|
|
|
|
Stock options
|
1,209
|
|
|
1,248
|
|
Stock-settled stock units and awards
|
450
|
|
|
474
|
|
Weighted average common shares and dilutive potential common shares
|
186,859
|
|
|
195,253
|
|
|
|
|
|
Basic net earnings per share
|
$
|
1.14
|
|
|
$
|
0.91
|
|
Diluted net earnings per share
|
$
|
1.13
|
|
|
$
|
0.90
|
|
Certain options to purchase shares of common stock were outstanding and not included in the calculation of diluted net earnings per share because their inclusion would have been antidilutive. On a weighted average basis, for the three months ended
May 31, 2017
and
2016
, options to purchase
2,218,318
shares and
2,610,461
shares of common stock, respectively, were not included.
13.
Accumulated Other Comprehensive Loss
Changes in Accumulated Other Comprehensive Loss By Component
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Net
|
|
|
|
Accumulated
|
|
Unrecognized
|
|
Net
|
|
Other
|
|
Actuarial
|
|
Unrecognized
|
|
Comprehensive
|
(In thousands, net of income taxes)
|
Losses
|
|
Hedge Losses
|
|
Loss
|
Balance as of February 28, 2017
|
$
|
(55,521
|
)
|
|
$
|
(1,034
|
)
|
|
$
|
(56,555
|
)
|
Other comprehensive loss before reclassifications
|
—
|
|
|
(2,562
|
)
|
|
(2,562
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
274
|
|
|
614
|
|
|
888
|
|
Other comprehensive income (loss)
|
274
|
|
|
(1,948
|
)
|
|
(1,674
|
)
|
Balance as of May 31, 2017
|
$
|
(55,247
|
)
|
|
$
|
(2,982
|
)
|
|
$
|
(58,229
|
)
|
Changes In and Reclassifications Out of Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31
|
(In thousands)
|
2017
|
|
2016
|
Retirement Benefit Plans (Note 9):
|
|
|
|
Actuarial loss amortization reclassifications recognized in net pension expense:
|
|
|
|
Cost of sales
|
$
|
185
|
|
|
$
|
157
|
|
CarMax Auto Finance income
|
11
|
|
|
9
|
|
Selling, general and administrative expenses
|
258
|
|
|
221
|
|
Total amortization reclassifications recognized in net pension expense
|
454
|
|
|
387
|
|
Tax expense
|
(180
|
)
|
|
(138
|
)
|
Amortization reclassifications recognized in net pension expense, net of tax
|
274
|
|
|
249
|
|
Net change in retirement benefit plan unrecognized actuarial losses, net of tax
|
274
|
|
|
249
|
|
|
|
|
|
Cash Flow Hedges (Note 5):
|
|
|
|
Effective portion of changes in fair value
|
(4,226
|
)
|
|
2,331
|
|
Tax benefit (expense)
|
1,664
|
|
|
(916
|
)
|
Effective portion of changes in fair value, net of tax
|
(2,562
|
)
|
|
1,415
|
|
Reclassifications to CarMax Auto Finance income
|
1,013
|
|
|
2,813
|
|
Tax expense
|
(399
|
)
|
|
(1,106
|
)
|
Reclassification of hedge losses, net of tax
|
614
|
|
|
1,707
|
|
Net change in cash flow hedge unrecognized losses, net of tax
|
(1,948
|
)
|
|
3,122
|
|
Total other comprehensive (loss) income, net of tax
|
$
|
(1,674
|
)
|
|
$
|
3,371
|
|
Changes in the funded status of our retirement plans and the effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognized in accumulated other comprehensive loss. The cumulative balances are net of deferred taxes of
$34.9 million
as of
May 31, 2017
, and
$33.8 million
as of
February 28, 2017
.
14.
Supplemental Cash Flow Information
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31
|
(In thousands)
|
2017
|
|
2016
|
Non-cash investing and financing activities:
|
|
|
|
|
|
Decrease in accrued capital expenditures
|
$
|
(1,077
|
)
|
|
$
|
(10,634
|
)
|
Increase in finance and capital lease obligations
|
$
|
—
|
|
|
$
|
20,392
|
|
15.
Contingent Liabilities
Litigation
.
CarMax entities are defendants in three proceedings asserting wage and hour claims with respect to CarMax sales consultants in California. The asserted claims include failure to pay minimum wage, provide meal periods and rest breaks, pay statutory/contractual wages, reimburse for work-related expenses and provide accurate itemized wage statements; unfair competition; and Private Attorney General Act claims. On September 4, 2015, Craig Weiss et al., v. CarMax Auto Superstores California, LLC, and CarMax Auto Superstores West Coast, Inc., a putative class action, was filed in the Superior Court of California, County of Placer. The Weiss lawsuit seeks civil penalties, fines, cost of suit, and the recovery of attorneys’ fees. On June 29, 2016, Ryan Gomez et al. v. CarMax Auto Superstores California, LLC, and CarMax Auto Superstores West Coast, Inc., a putative class action, was filed in the Superior Court of the State of California, Los Angeles. The Gomez lawsuit seeks declaratory relief, unspecified damages, restitution, statutory penalties, interest, cost and attorneys’ fees. On September 7, 2016, James Rowland v. CarMax Auto Superstores California, LLC, and CarMax Auto Superstores West Coast, Inc., a putative class action, was filed in the U.S. District Court, Eastern District of California, Sacramento Division. The Rowland lawsuit seeks unspecified damages, restitution, statutory penalties, interest, cost and attorneys’ fees. We are unable to make a reasonable estimate of the amount or range of loss that could result from an unfavorable outcome in these matters.
On April 25, 2017, the Company met with representatives from multiple California municipality district attorney offices as part of an informal inquiry by those offices into the handling, storage and disposal of certain types of hazardous waste at our store locations in those municipalities. The meeting followed our ongoing dialogue with the Orange County, California District Attorney’s office regarding these matters, which was disclosed in “Legal Proceedings” in Item 3 of the Annual Report on Form 10-K for the fiscal year ended
February 28, 2017
. We are unable to make a reasonable estimate of the amount or range of loss that could result from an unfavorable outcome in these matters.
We are involved in various other legal proceedings in the normal course of business. Based upon our evaluation of information currently available, we believe that the ultimate resolution of any such proceedings will not have a material adverse effect, either individually or in the aggregate, on our financial condition, results of operations or cash flows.
Other Matters.
In accordance with the terms of real estate lease agreements, we generally agree to indemnify the lessor from certain liabilities arising as a result of the use of the leased premises, including environmental liabilities and repairs to leased property upon termination of the lease. Additionally, in accordance with the terms of agreements entered into for the sale of properties, we generally agree to indemnify the buyer from certain liabilities and costs arising subsequent to the date of the sale, including environmental liabilities and liabilities resulting from the breach of representations or warranties made in accordance with the agreements. We do not have any known material environmental commitments, contingencies or other indemnification issues arising from these arrangements.
As part of our customer service strategy, we guarantee the used vehicles we retail with at least a 30-day limited warranty. A vehicle in need of repair within this period will be repaired free of charge. As a result, each vehicle sold has an implied liability associated with it. Accordingly, based on historical trends, we record a provision for estimated future repairs during the guarantee period for each vehicle sold. The liability for this guarantee was
$6.2 million
as of
May 31, 2017
, and
$6.3 million
as of
February 28, 2017
, and is included in accrued expenses and other current liabilities.
ITEM 2.