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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the Quarterly Period Ended
August 31, 2022
OR
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission File Number: 1-31420
CARMAX, INC.
(Exact name of registrant as specified in its charter)
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Virginia
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54-1821055
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(State or other jurisdiction of incorporation)
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(I.R.S. Employer Identification No.)
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12800 Tuckahoe Creek Parkway
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23238
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Richmond,
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Virginia
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(Address of Principal Executive Offices)
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(Zip Code)
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(804) 747-0422
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed
since last report)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered |
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Common Stock
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KMX
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New York Stock Exchange |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T during the preceding 12
months (or for such shorter period that the registrant was required
to submit such
files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated
filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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 ☒
Indicate the number of shares outstanding of each of the issuer’s
classes of common stock, as of the latest practicable
date.
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Class |
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Outstanding as of September 28, 2022 |
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Common Stock, par value $0.50 |
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158,015,491 |
CARMAX, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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Page
No.
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PART I. |
FINANCIAL INFORMATION |
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Item 1. |
Financial Statements: |
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Consolidated Statements of Earnings (Unaudited) – |
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Three and Six Months Ended August 31, 2022 and 2021 |
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Consolidated Statements of Comprehensive Income (Unaudited)
– |
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Three and Six Months Ended August 31, 2022 and 2021 |
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Consolidated Balance Sheets (Unaudited) – |
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August 31, 2022 and February 28, 2022 |
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Consolidated Statements of Cash Flows (Unaudited) – |
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Six Months Ended August 31, 2022 and 2021 |
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Consolidated Statements of Shareholders’ Equity (Unaudited)
– |
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Three and Six Months Ended August 31, 2022 and 2021 |
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Notes to Consolidated Financial Statements (Unaudited) |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition
and |
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Results of Operations |
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Item 3. |
Quantitative and Qualitative Disclosures About Market
Risk |
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Item 4. |
Controls and Procedures |
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PART II. |
OTHER INFORMATION |
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Item 1. |
Legal Proceedings |
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Item 1A. |
Risk Factors |
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Item 2. |
Unregistered Sales of Equity Securities and Use of
Proceeds |
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Item 6. |
Exhibits |
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SIGNATURES |
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
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Three Months Ended August 31 |
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Six Months Ended August 31 |
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(In thousands except per share data) |
2022 |
%(1)
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2021 |
%(1)
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2022 |
%(1)
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2021 |
%(1)
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SALES AND OPERATING REVENUES: |
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Used vehicle sales |
$ |
6,284,085 |
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77.2 |
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$ |
6,104,366 |
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76.4 |
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$ |
13,298,575 |
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76.2 |
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$ |
12,261,710 |
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78.2 |
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Wholesale vehicle sales |
1,690,326 |
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20.8 |
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1,701,572 |
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21.3 |
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3,806,843 |
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21.8 |
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3,075,929 |
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19.6 |
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Other sales and revenues |
170,392 |
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2.1 |
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182,421 |
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2.3 |
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351,006 |
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2.0 |
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348,319 |
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2.2 |
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NET SALES AND OPERATING REVENUES |
8,144,803 |
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100.0 |
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7,988,359 |
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100.0 |
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17,456,424 |
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100.0 |
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15,685,958 |
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100.0 |
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COST OF SALES: |
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Used vehicle cost of sales |
5,789,098 |
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71.1 |
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5,597,842 |
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70.1 |
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12,240,108 |
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70.1 |
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11,158,179 |
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71.1 |
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Wholesale vehicle cost of sales |
1,549,669 |
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19.0 |
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1,512,559 |
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18.9 |
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3,474,519 |
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19.9 |
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2,701,072 |
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17.2 |
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Other cost of sales |
68,891 |
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0.8 |
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62,474 |
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0.8 |
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129,261 |
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0.7 |
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86,714 |
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0.6 |
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TOTAL COST OF SALES |
7,407,658 |
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90.9 |
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7,172,875 |
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89.8 |
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15,843,888 |
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90.8 |
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13,945,965 |
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88.9 |
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GROSS PROFIT |
737,145 |
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9.1 |
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815,484 |
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10.2 |
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1,612,536 |
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9.2 |
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1,739,993 |
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11.1 |
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CARMAX AUTO FINANCE INCOME |
182,869 |
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2.2 |
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200,033 |
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2.5 |
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387,342 |
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2.2 |
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441,764 |
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2.8 |
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Selling, general and administrative expenses |
666,041 |
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8.2 |
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574,286 |
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7.2 |
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1,322,781 |
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7.6 |
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1,128,355 |
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7.2 |
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Depreciation and amortization |
57,692 |
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0.7 |
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52,789 |
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0.7 |
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113,340 |
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0.6 |
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102,679 |
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0.7 |
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Interest expense |
32,745 |
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0.4 |
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22,410 |
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0.3 |
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61,520 |
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0.4 |
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42,944 |
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0.3 |
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Other income |
(4,039) |
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— |
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(1,782) |
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— |
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(1,940) |
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— |
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(27,359) |
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(0.2) |
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Earnings before income taxes |
167,575 |
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2.1 |
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367,814 |
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4.6 |
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504,177 |
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2.9 |
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935,138 |
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6.0 |
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Income tax provision |
41,670 |
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0.5 |
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82,547 |
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1.0 |
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126,007 |
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0.7 |
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213,115 |
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1.4 |
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NET EARNINGS |
$ |
125,905 |
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1.5 |
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$ |
285,267 |
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3.6 |
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$ |
378,170 |
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2.2 |
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$ |
722,023 |
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4.6 |
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WEIGHTED AVERAGE COMMON SHARES: |
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Basic |
158,801 |
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162,966 |
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159,556 |
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163,058 |
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Diluted |
160,218 |
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165,643 |
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161,015 |
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165,969 |
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NET EARNINGS PER SHARE: |
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Basic |
$ |
0.79 |
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$ |
1.75 |
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$ |
2.37 |
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$ |
4.43 |
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Diluted |
$ |
0.79 |
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$ |
1.72 |
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$ |
2.35 |
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$ |
4.35 |
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(1) Percents
are calculated as a percentage of net sales and operating revenues
and may not total due to rounding.
See accompanying notes to consolidated financial
statements.
CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
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Three Months Ended August 31 |
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Six Months Ended August 31 |
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(In thousands) |
2022 |
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2021 |
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2022 |
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2021 |
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NET EARNINGS |
$ |
125,905 |
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$ |
285,267 |
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$ |
378,170 |
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$ |
722,023 |
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Other comprehensive income, net of taxes: |
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Net change in retirement benefit plan unrecognized actuarial
losses |
481 |
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|
658 |
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|
962 |
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1,317 |
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Net change in cash flow hedge unrecognized gains |
25,626 |
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2,753 |
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77,459 |
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5,031 |
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Other comprehensive income, net of taxes |
26,107 |
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3,411 |
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78,421 |
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6,348 |
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TOTAL COMPREHENSIVE INCOME |
$ |
152,012 |
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$ |
288,678 |
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$ |
456,591 |
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$ |
728,371 |
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See accompanying notes to consolidated financial
statements.
CARMAX, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
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As of August 31 |
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As of February 28 |
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(In thousands except share data) |
2022 |
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2022 |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
$ |
56,772 |
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$ |
102,716 |
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Restricted cash from collections on auto loans
receivable |
533,253 |
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|
548,099 |
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Accounts receivable, net |
402,452 |
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|
560,984 |
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Inventory |
4,671,685 |
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5,124,569 |
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Other current assets |
208,297 |
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|
212,922 |
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TOTAL CURRENT ASSETS |
5,872,459 |
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|
6,549,290 |
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Auto loans receivable, net of allowance for loan losses of $477,543
and $433,030 as of August 31, 2022 and February 28, 2022,
respectively |
15,961,213 |
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15,289,701 |
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Property and equipment, net of accumulated depreciation of
$1,544,765 and $1,437,548 as of August 31, 2022 and February 28,
2022, respectively |
3,312,605 |
|
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3,209,068 |
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Deferred income taxes |
93,057 |
|
|
120,931 |
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Operating lease assets |
530,285 |
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|
537,357 |
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Goodwill |
141,258 |
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|
141,258 |
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Other assets |
559,666 |
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|
490,659 |
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TOTAL ASSETS |
$ |
26,470,543 |
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$ |
26,338,264 |
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| LIABILITIES
AND SHAREHOLDERS’ EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
$ |
928,749 |
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$ |
937,717 |
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Accrued expenses and other current liabilities |
482,361 |
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|
533,271 |
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Current portion of operating lease liabilities |
48,783 |
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|
44,197 |
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Current portion of long-term debt |
112,504 |
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|
11,203 |
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Current portion of non-recourse notes payable |
559,792 |
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|
521,069 |
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TOTAL CURRENT LIABILITIES |
2,132,189 |
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|
2,047,457 |
|
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Long-term debt, excluding current portion |
2,511,417 |
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3,255,304 |
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Non-recourse notes payable, excluding current portion |
15,534,801 |
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14,919,715 |
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Operating lease liabilities, excluding current portion |
512,542 |
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|
523,269 |
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Other liabilities |
365,367 |
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|
357,080 |
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TOTAL LIABILITIES |
21,056,316 |
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21,102,825 |
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Commitments and contingent liabilities |
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SHAREHOLDERS’ EQUITY: |
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Common stock, $0.50 par value; 350,000,000 shares authorized;
158,043,981 and 161,053,983 shares issued and outstanding as of
August 31, 2022 and February 28, 2022, respectively |
79,022 |
|
|
80,527 |
|
|
Capital in excess of par value |
1,684,408 |
|
|
1,677,268 |
|
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Accumulated other comprehensive income (loss) |
31,999 |
|
|
(46,422) |
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Retained earnings |
3,618,798 |
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|
3,524,066 |
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TOTAL SHAREHOLDERS’ EQUITY |
5,414,227 |
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|
5,235,439 |
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ |
26,470,543 |
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|
$ |
26,338,264 |
|
See accompanying notes to consolidated financial
statements.
CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
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|
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Six Months Ended August 31 |
|
(In thousands) |
2022 |
|
2021 |
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OPERATING ACTIVITIES: |
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Net earnings |
$ |
378,170 |
|
|
$ |
722,023 |
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|
Adjustments to reconcile net earnings to net cash provided by (used
in) operating activities: |
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|
Depreciation and amortization |
137,903 |
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|
129,300 |
|
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Share-based compensation expense |
47,010 |
|
|
72,780 |
|
|
Provision for loan losses |
133,343 |
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|
11,107 |
|
|
Provision for cancellation reserves |
59,208 |
|
|
62,886 |
|
|
Deferred income tax provision |
800 |
|
|
32,502 |
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Other |
9,713 |
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|
(19,883) |
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|
Net decrease (increase) in: |
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|
Accounts receivable, net |
158,532 |
|
|
(244,471) |
|
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Inventory |
452,884 |
|
|
(948,299) |
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Other current assets |
79,188 |
|
|
(26,496) |
|
|
Auto loans receivable, net |
(804,855) |
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|
(1,177,458) |
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Other assets |
(31,703) |
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|
(9,745) |
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Net (decrease) increase in: |
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Accounts payable, accrued expenses and other |
|
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current liabilities and accrued income
taxes |
(74,986) |
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|
115,542 |
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Other liabilities |
(65,618) |
|
|
(105,109) |
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|
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |
479,589 |
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|
(1,385,321) |
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INVESTING ACTIVITIES: |
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Capital expenditures |
(204,463) |
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|
(137,838) |
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Proceeds from disposal of property and equipment |
84 |
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|
260 |
|
|
Proceeds from sale of business |
— |
|
|
602 |
|
|
Purchases of investments |
(5,428) |
|
|
(12,651) |
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|
Sales and returns of investments |
2,492 |
|
|
10,954 |
|
|
Business acquisition, net of cash acquired |
— |
|
|
(241,563) |
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NET CASH USED IN INVESTING ACTIVITIES |
(207,315) |
|
|
(380,236) |
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FINANCING ACTIVITIES: |
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Increase in short-term debt, net |
— |
|
|
167 |
|
|
Proceeds from issuances of long-term debt |
2,412,900 |
|
|
3,035,601 |
|
|
Payments on long-term debt |
(3,057,565) |
|
|
(2,168,411) |
|
|
Cash paid for debt issuance costs |
(10,240) |
|
|
(9,547) |
|
|
Payments on finance lease obligations |
(9,883) |
|
|
(5,709) |
|
|
Issuances of non-recourse notes payable |
8,230,501 |
|
|
7,414,283 |
|
|
Payments on non-recourse notes payable |
(7,576,056) |
|
|
(6,201,801) |
|
|
Repurchase and retirement of common stock |
(325,168) |
|
|
(355,495) |
|
|
Equity issuances |
13,282 |
|
|
60,087 |
|
|
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES |
(322,229) |
|
|
1,769,175 |
|
|
(Decrease) increase in cash, cash equivalents, and restricted
cash |
(49,955) |
|
|
3,618 |
|
|
Cash, cash equivalents, and restricted cash at beginning of
year |
803,618 |
|
|
771,947 |
|
|
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF
PERIOD |
$ |
753,663 |
|
|
$ |
775,565 |
|
|
|
|
|
|
|
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE
CONSOLIDATED BALANCE SHEETS: |
|
Cash and cash equivalents |
$ |
56,772 |
|
|
$ |
58,095 |
|
|
Restricted cash from collections on auto loans
receivable |
533,253 |
|
|
570,567 |
|
|
Restricted cash included in other assets |
163,638 |
|
|
146,903 |
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF
PERIOD |
$ |
753,663 |
|
|
$ |
775,565 |
|
See accompanying notes to consolidated financial
statements.
CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
(Unaudited)
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|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended August 31, 2022 |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
Common |
|
|
|
Capital in |
|
|
|
Other |
|
|
|
|
Shares |
|
Common |
|
Excess of |
|
Retained |
|
Comprehensive |
|
|
|
(In thousands) |
Outstanding |
|
Stock |
|
Par Value |
|
Earnings |
|
Income (Loss) |
|
Total |
|
Balance as of February 28, 2022 |
161,054 |
|
|
$ |
80,527 |
|
|
$ |
1,677,268 |
|
|
$ |
3,524,066 |
|
|
$ |
(46,422) |
|
|
$ |
5,235,439 |
|
|
Net earnings |
— |
|
|
— |
|
|
— |
|
|
252,265 |
|
|
— |
|
|
252,265 |
|
|
Other comprehensive income |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
52,314 |
|
|
52,314 |
|
|
Share-based compensation expense |
— |
|
|
— |
|
|
21,594 |
|
|
— |
|
|
— |
|
|
21,594 |
|
|
Repurchases of common stock |
(1,644) |
|
|
(822) |
|
|
(17,207) |
|
|
(139,565) |
|
|
— |
|
|
(157,594) |
|
|
Exercise of common stock options |
49 |
|
|
24 |
|
|
3,418 |
|
|
— |
|
|
— |
|
|
3,442 |
|
|
Stock incentive plans, net shares issued |
155 |
|
|
78 |
|
|
(6,901) |
|
|
— |
|
|
— |
|
|
(6,823) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2022 |
159,614 |
|
|
$ |
79,807 |
|
|
$ |
1,678,172 |
|
|
$ |
3,636,766 |
|
|
$ |
5,892 |
|
|
$ |
5,400,637 |
|
|
Net earnings |
— |
|
|
— |
|
|
— |
|
|
125,905 |
|
|
— |
|
|
125,905 |
|
|
Other comprehensive income |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
26,107 |
|
|
26,107 |
|
|
Share-based compensation expense |
— |
|
|
— |
|
|
15,062 |
|
|
— |
|
|
— |
|
|
15,062 |
|
|
Repurchases of common stock |
(1,730) |
|
|
(865) |
|
|
(18,279) |
|
|
(143,873) |
|
|
— |
|
|
(163,017) |
|
|
Exercise of common stock options |
155 |
|
|
78 |
|
|
9,762 |
|
|
— |
|
|
— |
|
|
9,840 |
|
|
Stock incentive plans, net shares issued |
5 |
|
|
2 |
|
|
(309) |
|
|
— |
|
|
— |
|
|
(307) |
|
|
Balance as of August 31, 2022 |
158,044 |
|
|
$ |
79,022 |
|
|
$ |
1,684,408 |
|
|
$ |
3,618,798 |
|
|
$ |
31,999 |
|
|
$ |
5,414,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended August 31, 2021 |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
Common |
|
|
|
Capital in |
|
|
|
Other |
|
|
|
|
Shares |
|
Common |
|
Excess of |
|
Retained |
|
Comprehensive |
|
|
|
(In thousands) |
Outstanding |
|
Stock |
|
Par Value |
|
Earnings |
|
Loss |
|
Total |
|
Balance as of February 28, 2021 |
163,172 |
|
|
$ |
81,586 |
|
|
$ |
1,513,821 |
|
|
$ |
2,887,897 |
|
|
$ |
(118,691) |
|
|
$ |
4,364,613 |
|
|
Net earnings |
— |
|
|
— |
|
|
— |
|
|
436,756 |
|
|
— |
|
|
436,756 |
|
|
Other comprehensive income |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
2,937 |
|
|
2,937 |
|
|
Share-based compensation expense |
— |
|
|
— |
|
|
20,102 |
|
|
— |
|
|
— |
|
|
20,102 |
|
|
Repurchases of common stock |
(998) |
|
|
(499) |
|
|
(9,348) |
|
|
(114,695) |
|
|
— |
|
|
(124,542) |
|
|
Exercise of common stock options |
375 |
|
|
187 |
|
|
21,403 |
|
|
— |
|
|
— |
|
|
21,590 |
|
|
Stock incentive plans, net shares issued |
254 |
|
|
127 |
|
|
(18,102) |
|
|
— |
|
|
— |
|
|
(17,975) |
|
|
Balance as of May 31, 2021 |
162,803 |
|
|
$ |
81,401 |
|
|
$ |
1,527,876 |
|
|
$ |
3,209,958 |
|
|
$ |
(115,754) |
|
|
$ |
4,703,481 |
|
|
Net earnings |
— |
|
|
— |
|
|
— |
|
|
285,267 |
|
|
— |
|
|
285,267 |
|
|
Other comprehensive income |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
3,411 |
|
|
3,411 |
|
|
Share-based compensation expense |
— |
|
|
— |
|
|
14,116 |
|
|
— |
|
|
— |
|
|
14,116 |
|
|
Shares issued for acquisition |
776 |
|
|
388 |
|
|
90,183 |
|
|
— |
|
|
— |
|
|
90,571 |
|
|
Repurchases of common stock |
(1,754) |
|
|
(877) |
|
|
(17,164) |
|
|
(202,004) |
|
|
— |
|
|
(220,045) |
|
|
Exercise of common stock options |
621 |
|
|
311 |
|
|
38,185 |
|
|
— |
|
|
— |
|
|
38,496 |
|
|
Stock incentive plans, net shares issued |
24 |
|
|
12 |
|
|
(130) |
|
|
— |
|
|
— |
|
|
(118) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of August 31, 2021 |
162,470 |
|
|
$ |
81,235 |
|
|
$ |
1,653,066 |
|
|
$ |
3,293,221 |
|
|
$ |
(112,343) |
|
|
$ |
4,915,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
CARMAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1.Background
Business.
CarMax, Inc. (“we,” “our,” “us,” “CarMax” and “the company”),
including its wholly owned subsidiaries, is the nation’s largest
retailer of used vehicles. 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. On June
1, 2021, we completed the acquisition of Edmunds Holding Company
(“Edmunds”), which does not meet the quantitative thresholds to be
considered a reportable segment.
See Note 17 for additional information on our reportable segments
and Note 2 for additional information regarding our acquisition of
Edmunds.
We deliver an unrivaled customer experience by offering a broad
selection of quality used vehicles and related products and
services at competitive, no-haggle prices using a customer-friendly
sales process. Our omni-channel platform, which gives us
the largest addressable market in the used car industry, empowers
our retail customers to buy a car on their terms – online, in-store
or an integrated combination of both. Customers can choose to
complete the car-buying experience in-person at one of our stores;
or buy the car online and receive delivery through express pickup,
available nationwide, or home delivery, available to most
customers. We offer customers 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 or virtual wholesale auctions.
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 interim unaudited 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.
The accounting policies followed in the presentation of our interim
financial results are consistent with those included in the
company’s Annual Report on Form 10-K for the fiscal year ended
February 28, 2022 (the “2022 Annual Report”), with the
exception of those related to recent accounting pronouncements
adopted in the current fiscal year. These interim unaudited
consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and footnotes
included in our 2022 Annual Report.
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. In particular, the novel coronavirus (“COVID-19”)
pandemic and the resulting adverse impacts to global economic
conditions, as well as our operations, may impact future estimates
including, but not limited to, our allowance for loan losses,
inventory valuations, fair value measurements, downward adjustments
to investments in equity securities, asset impairment charges, the
effectiveness of the company’s hedging instruments, deferred tax
valuation allowances, cancellation reserves, actuarial losses on
our retirement benefit plans and discount rate assumptions. Certain
prior year amounts have been reclassified to conform to the current
year’s presentation. Amounts and percentages may not total
due to rounding.
Recent Accounting Pronouncements.
Effective in Future Periods
In June 2022, the Financial Accounting Standards Board (“FASB”)
issued an accounting pronouncement (ASU 2022-03) related to
accounting for equity securities. The amendments in the update
clarify the guidance for measuring the fair value of equity
securities subject to contractual restrictions that prohibit the
sale of the equity securities, as well as introduce new disclosure
requirements for equity securities subject to contractual sale
restrictions that are measured at fair value. This update is
effective for annual periods beginning after December 15, 2023, and
interim periods within those fiscal years. We plan to adopt this
pronouncement for our fiscal year beginning March 1, 2024, and we
do not expect it to have a material effect on our consolidated
financial statements.
2.
Acquisition of Edmunds
On June 1, 2021, we completed the acquisition of Edmunds Holding
Company, one of the most well established and trusted online guides
for automotive information and a recognized leader in digital car
shopping innovations. With this acquisition, CarMax has enhanced
its digital capabilities and further strengthened its role and
reach across the used auto ecosystem while adding exceptional
technology and creative talent. Edmunds continues to operate
independently and remains focused on delivering confidence to
consumers and excellent value to its dealer and Original Equipment
Manufacturer (“OEM”) clients. Additionally, this acquisition allows
both businesses to accelerate their respective capabilities to
deliver an enhanced digital experience to their customers by
leveraging Edmunds’ compelling content and technology, CarMax’s
unparalleled national scale and infrastructure, and the combined
talent of both businesses.
The acquisition was accounted for in accordance with Accounting
Standards Codification (“ASC”) Topic 805, Business Combinations,
and, accordingly, Edmunds’ results of operations have been
consolidated in our financial statements since the date of
acquisition. We recorded a preliminary allocation of the purchase
price to assets acquired and liabilities assumed based on their
estimated fair values as of June 1, 2021. The transaction costs
associated with the acquisition were approximately
$8.0 million and were expensed as incurred within selling,
general and administrative expenses.
The following table summarizes the total purchase
consideration:
|
|
|
|
|
|
|
(In thousands) |
|
|
Total cash consideration for outstanding shares |
$ |
251,047 |
|
|
Fair value of common stock
(1)
|
90,571 |
|
|
Fair value of preexisting relationship |
60,200 |
|
|
Total |
$ |
401,818 |
|
(1) Represents
the issuance of 776,097 shares of CarMax common stock to Edmunds
equity holders, the fair value of which was based on the market
value of CarMax common stock as of market close on the acquisition
date (June 1, 2021).
In January 2020, we acquired a minority stake in Edmunds for $50
million. The noncontrolling equity investment in Edmunds was
remeasured at a fair value of $60.2 million prior to the
acquisition of the remaining ownership stake on June 1, 2021, which
resulted in the recognition of a gain of $8.7 million. The
gain was included in other income in the consolidated statements of
earnings for the second quarter of fiscal 2022.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of the
acquisition:
|
|
|
|
|
|
|
(In thousands) |
Fair Value |
|
Cash |
$ |
9,484 |
|
|
Accounts receivable, net |
33,719 |
|
|
Other current assets |
2,397 |
|
|
Property and equipment, net |
20,741 |
|
|
Goodwill
(1)
|
141,258 |
|
|
Intangible assets |
218,000 |
|
|
Operating lease assets |
97,250 |
|
|
Other assets |
191 |
|
|
Total assets acquired |
523,040 |
|
|
|
|
|
Accounts payable |
5,063 |
|
|
Accrued expenses and other current liabilities |
11,277 |
|
|
Current portion of operating lease liabilities |
12,795 |
|
|
Deferred income taxes
(1)
|
3,823 |
|
|
Operating lease liabilities, excluding current portion |
88,264 |
|
|
Total liabilities assumed |
121,222 |
|
|
Net assets acquired |
$ |
401,818 |
|
(1) During
the third quarter of fiscal 2022, we obtained new information about
facts and circumstances that existed as of the acquisition date,
which resulted in a change in the fair value of assets and
liabilities recognized. The adjustments were primarily related to
research and development tax credits, which resulted in a decrease
in goodwill and a decrease in deferred income taxes of
$8.4 million.
The excess of purchase consideration over the fair value of net
identifiable assets acquired and liabilities assumed was recorded
as goodwill, which was primarily attributed to expected synergies
and the assembled workforce of the acquired business and was not
deductible for tax purposes. The fair values assigned to the net
identifiable assets and liabilities assumed were based on
management’s estimates and assumptions.
Identifiable intangible assets were recognized at their estimated
acquisition date fair values. The fair value of identifiable
intangible assets was determined by using certain estimates and
assumptions that were not observable in the market. The fair values
of the trade name asset and the internally developed software asset
were determined using the relief-from-royalty method, and the fair
value of the customer relationships asset was determined using the
excess earnings method. These income-based approaches included
significant assumptions such as the amount and timing of projected
cash flows, growth rates, customer attrition rates, discount rates,
and the assessment of the asset’s life cycle. The estimated fair
value and estimated remaining useful lives of identifiable
intangible assets as of the acquisition date were as
follows:
|
|
|
|
|
|
|
|
|
|
(In thousands) |
Useful Life (Years) |
Fair Value |
|
Trade name |
Indefinite |
$ |
31,900 |
|
|
Internally developed software |
7 |
52,900 |
|
|
Customer relationships |
17 |
133,200 |
|
|
Identifiable intangible assets |
|
$ |
218,000 |
|
The operating results of Edmunds have been included in our
consolidated financial statements since the date of the
acquisition. Net sales and operating revenues and net earnings
attributable to Edmunds were not material for the reporting periods
presented. Our pro forma results as if the acquisition had taken
place on the first day of fiscal 2021 would not be materially
different from the amounts reflected in the accompanying
consolidated financial statements, and therefore were not
presented.
3.
Revenue
We recognize revenue when control of the good or service has been
transferred to the customer, generally either at the time of sale
or upon delivery to a customer. Our contracts have a
fixed contract price and revenue is measured as the amount of
consideration we expect to receive in exchange for transferring
goods or providing services. 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. We generally expense sales commissions when incurred because
the amortization period would have been less than one year. These
costs are recorded within selling, general and administrative
expenses. We do not have any significant payment terms as payment
is received at or shortly after the point of sale.
Disaggregation of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31 |
|
Six Months Ended August 31 |
|
(In millions) |
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Used vehicle sales |
$ |
6,284.1 |
|
|
$ |
6,104.4 |
|
|
$ |
13,298.6 |
|
|
$ |
12,261.7 |
|
|
Wholesale vehicle sales |
1,690.3 |
|
|
1,701.6 |
|
|
3,806.8 |
|
|
3,075.9 |
|
|
Other sales and revenues: |
|
|
|
|
|
|
|
|
Extended protection plan revenues |
109.8 |
|
|
113.0 |
|
|
226.3 |
|
|
247.3 |
|
|
Third-party finance income, net |
2.7 |
|
|
2.8 |
|
|
6.1 |
|
|
(1.8) |
|
|
Advertising & subscription revenues
(1)
|
34.3 |
|
|
34.5 |
|
|
68.7 |
|
|
34.5 |
|
|
Service revenues |
19.4 |
|
|
21.0 |
|
|
41.2 |
|
|
43.2 |
|
|
Other |
4.2 |
|
|
11.1 |
|
|
8.7 |
|
|
25.1 |
|
|
Total other sales and revenues |
170.4 |
|
|
182.4 |
|
|
351.0 |
|
|
348.3 |
|
|
Total net sales and operating revenues |
$ |
8,144.8 |
|
|
$ |
7,988.4 |
|
|
$ |
17,456.4 |
|
|
$ |
15,686.0 |
|
(1) Excludes
intersegment sales and operating revenues that have been eliminated
in consolidation. See Note 17 for further details.
Used Vehicle Sales.
Revenue from the sale of used vehicles is recognized upon transfer
of control of the vehicle to the customer. As part of our customer
service strategy, we guarantee the retail vehicles we sell with a
30-day/1,500 mile, money-back guarantee. We record a
reserve for estimated returns based on historical experience and
trends. The reserve for estimated returns is presented gross on the
consolidated balance sheets, with a return asset recorded in other
current assets and a refund liability recorded in accrued expenses
and other current liabilities. We also guarantee the used vehicles
we sell with a 90-day/4,000-mile limited warranty. These warranties
are deemed assurance-type warranties and are accounted for as
warranty obligations. See Note 16 for additional information on
this warranty and its related obligation.
Wholesale Vehicle Sales.
Wholesale vehicles are sold at our auctions, and revenue from the
sale of these vehicles is recognized upon transfer of control of
the vehicle to the customer. Dealers also pay a fee to us based on
the sale price of the vehicles they purchase. This fee is
recognized as revenue at the time of sale. While we provide
condition disclosures on each wholesale vehicle sold, the vehicles
are subject to a limited right of return. We record a reserve for
estimated returns based on historical experience and trends. The
reserve for estimated returns is presented gross on the
consolidated balance sheets, with a return asset recorded in other
current assets and a refund liability recorded in accrued expenses
and other current liabilities.
EPP Revenues.
We also sell ESP and GAP products on behalf of unrelated third
parties, who are primarily responsible for fulfilling the contract,
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, or refund liability, for estimated contract cancellations.
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 8 for additional information on
cancellation reserves.
We are contractually entitled to receive profit-sharing revenues
based on the performance of the ESPs administered by third parties.
These revenues are a form of variable consideration included in EPP
revenues to the extent that it is probable that it
will not result in a significant revenue reversal. An estimate of
the amount to which we expect to be entitled, subject to various
constraints, is recognized upon satisfying the performance
obligation of selling the ESP. These constraints include factors
that are outside of the company’s influence or control and the
length of time until settlement. We apply the expected value
method, utilizing historical claims and cancellation data from
CarMax customers, as well as external data and other qualitative
assumptions. This estimate is reassessed each reporting period with
changes reflected in other sales and revenues on our consolidated
statements of earnings and other assets on our consolidated balance
sheets. As of August 31, 2022 and February 28, 2022, no
current or long-term contract asset was recognized related to
cumulative profit-sharing payments to which we expect to be
entitled.
Third-Party Finance Income/(Fees).
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.
Advertising and Subscription Revenues.
Advertising and subscription revenues consist of revenues earned by
our Edmunds business. Advertising revenues are derived from
advertising contracts with automotive manufacturers based on fixed
fees per impression and fees for certain activities completed by
customers on the manufacturers' websites. These fees are recognized
in the period the impressions are delivered or certain activities
occurred. Subscription revenues are derived from packages sold to
automotive dealers that include car leads, inventory listings and
enhanced placement in Edmunds' dealer locator and are recognized
over the period that the services are made available to the
dealers. Subscription revenues also include a digital marketing
subscription service, which allows dealers to gain exposure on
third party partner websites. Revenues for this service are
recognized on a net basis.
Service Revenues.
Service revenue consists of labor and parts income related to
vehicle repair service, including repairs of vehicles covered under
an ESP we sell or warranty program. Service revenue is recognized
at the time the work is completed.
Other Revenues.
Other revenues consist primarily of new vehicle sales and sales of
accessories. Revenue in this category is recognized upon transfer
of control to the customer.
4.
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 loans receivable, 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 or other funding arrangements to
fund loans originated by CAF. CAF income primarily
reflects the interest and fee income generated by the auto loans
receivable 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 loans
receivable, which are disclosed in Note 5, 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 August 31 |
|
Six Months Ended August 31 |
|
(In millions) |
2022 |
|
% (1)
|
|
2021 |
|
% (1)
|
|
2022 |
|
% (1)
|
|
2021 |
|
% (1)
|
|
Interest margin: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income |
$ |
357.2 |
|
|
8.8 |
|
|
$ |
324.1 |
|
|
8.8 |
|
|
$ |
703.9 |
|
|
8.8 |
|
|
$ |
634.4 |
|
|
8.8 |
|
|
Interest expense |
(62.5) |
|
|
(1.5) |
|
|
(60.6) |
|
|
(1.7) |
|
|
(111.3) |
|
|
(1.4) |
|
|
(126.4) |
|
|
(1.8) |
|
|
Total interest margin |
294.7 |
|
|
7.3 |
|
|
263.5 |
|
|
7.2 |
|
|
592.6 |
|
|
7.4 |
|
|
508.0 |
|
|
7.0 |
|
|
Provision for loan losses |
(75.5) |
|
|
(1.9) |
|
|
(35.5) |
|
|
(1.0) |
|
|
(133.3) |
|
|
(1.7) |
|
|
(11.1) |
|
|
(0.2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest margin after provision for loan losses |
219.2 |
|
|
5.4 |
|
|
228.0 |
|
|
6.2 |
|
|
459.3 |
|
|
5.7 |
|
|
496.9 |
|
|
6.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payroll and fringe benefit expense |
(15.9) |
|
|
(0.4) |
|
|
(12.4) |
|
|
(0.3) |
|
|
(30.6) |
|
|
(0.4) |
|
|
(25.0) |
|
|
(0.3) |
|
|
Depreciation and amortization |
(3.8) |
|
|
(0.1) |
|
|
(0.2) |
|
|
— |
|
|
(7.6) |
|
|
(0.1) |
|
|
(0.4) |
|
|
— |
|
|
Other direct expenses |
(16.6) |
|
|
(0.4) |
|
|
(15.3) |
|
|
(0.4) |
|
|
(33.7) |
|
|
(0.4) |
|
|
(29.7) |
|
|
(0.4) |
|
|
Total direct expenses |
(36.3) |
|
|
(0.9) |
|
|
(27.9) |
|
|
(0.8) |
|
|
(71.9) |
|
|
(0.9) |
|
|
(55.1) |
|
|
(0.8) |
|
|
CarMax Auto Finance income |
$ |
182.9 |
|
|
4.5 |
|
|
$ |
200.0 |
|
|
5.4 |
|
|
$ |
387.3 |
|
|
4.8 |
|
|
$ |
441.8 |
|
|
6.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average managed receivables |
$ |
16,176.2 |
|
|
|
|
$ |
14,683.3 |
|
|
|
|
$ |
15,996.6 |
|
|
|
|
$ |
14,416.0 |
|
|
|
(1) Annualized
percentage of total average managed receivables.
5.
Auto Loans Receivable
Auto loans receivable include amounts due from customers related to
retail vehicle sales financed through CAF and are presented net of
an allowance for estimated loan losses. These auto loans
represent a large group of smaller-balance homogeneous loans, which
we consider to be part of one class of financing receivable and one
portfolio segment for purposes of determining our allowance for
loan losses. We generally use warehouse facilities to fund auto
loans receivable originated by CAF until we elect to fund them
through an asset-backed term funding transaction, such as a term
securitization or alternative funding arrangement. We
recognize transfers of auto loans receivable into the warehouse
facilities and asset-backed term funding transactions (together,
“non-recourse funding vehicles”) as secured borrowings, which
result in recording the auto loans receivable and the related
non-recourse notes payable on our consolidated balance sheets. The
majority of the auto loans receivable serve as collateral for the
related non-recourse notes payable of $16.12 billion as of
August 31, 2022, and $15.47 billion as of
February 28, 2022. See Note 10 for additional information on
securitizations and non-recourse notes payable.
Interest income and expenses related to auto loans are included in
CAF income. Interest income on auto loans receivable is
recognized when earned based on contractual loan
terms. All loans continue to accrue interest until
repayment or charge-off. When a charge-off occurs,
accrued interest is written off by reversing interest income.
Direct costs associated with loan originations are not considered
material, and thus, are expensed as incurred. See Note 4
for additional information on CAF income.
Auto Loans Receivable, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31 |
|
As of February 28 |
|
(In millions) |
2022 |
|
2022 |
|
Asset-backed term funding |
$ |
12,563.5 |
|
|
$ |
11,653.8 |
|
|
Warehouse facilities |
2,997.9 |
|
|
3,291.9 |
|
|
Overcollateralization
(1)
|
629.0 |
|
|
489.1 |
|
|
Other managed receivables
(2)
|
158.9 |
|
|
217.5 |
|
|
Total ending managed receivables |
16,349.3 |
|
|
15,652.3 |
|
|
Accrued interest and fees |
81.7 |
|
|
67.3 |
|
|
Other |
7.7 |
|
|
3.1 |
|
|
Less: allowance for loan losses |
(477.5) |
|
|
(433.0) |
|
|
Auto loans receivable, net |
$ |
15,961.2 |
|
|
$ |
15,289.7 |
|
(1) Represents
receivables restricted as excess collateral for the non-recourse
funding vehicles.
(2)
Other managed receivables includes
receivables not funded through the non-recourse funding
vehicles.
Credit Quality.
When customers apply for financing, CAF’s proprietary scoring
models utilize 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 with the highest probability of
repayment are A-grade customers. 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. After origination, credit
grades are generally not updated.
CAF uses a combination of the initial credit grades and historical
performance to monitor the credit quality of the auto loans
receivable 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 August 31, 2022 |
|
Fiscal Year of Origination
(1)
|
|
|
|
|
|
(In millions) |
2023 |
|
2022 |
|
2021 |
|
2020 |
|
2019 |
|
Prior to 2019 |
|
Total |
|
%
(2)
|
|
Core managed receivables
(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A |
$ |
2,242.3 |
|
|
$ |
3,097.9 |
|
|
$ |
1,405.5 |
|
|
$ |
934.1 |
|
|
$ |
369.8 |
|
|
$ |
102.7 |
|
|
$ |
8,152.3 |
|
|
49.8 |
|
|
B |
1,533.9 |
|
|
2,227.8 |
|
|
1,010.7 |
|
|
645.1 |
|
|
326.3 |
|
|
128.2 |
|
|
5,872.0 |
|
|
35.9 |
|
|
C and other |
439.1 |
|
|
739.7 |
|
|
390.2 |
|
|
222.0 |
|
|
109.3 |
|
|
54.2 |
|
|
1,954.5 |
|
|
12.0 |
|
|
Total core managed receivables |
4,215.3 |
|
|
6,065.4 |
|
|
2,806.4 |
|
|
1,801.2 |
|
|
805.4 |
|
|
285.1 |
|
|
15,978.8 |
|
|
97.7 |
|
|
Other managed receivables
(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C and other |
155.0 |
|
|
143.2 |
|
|
18.9 |
|
|
26.8 |
|
|
17.9 |
|
|
8.7 |
|
|
370.5 |
|
|
2.3 |
|
|
Total ending managed receivables |
$ |
4,370.3 |
|
|
$ |
6,208.6 |
|
|
$ |
2,825.3 |
|
|
$ |
1,828.0 |
|
|
$ |
823.3 |
|
|
$ |
293.8 |
|
|
$ |
16,349.3 |
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 28, 2022 |
|
Fiscal Year of Origination
(1)
|
|
|
|
|
|
(In millions) |
2022 |
|
2021 |
|
2020 |
|
2019 |
|
2018 |
|
Prior to 2018 |
|
Total |
|
%
(2)
|
|
Core managed receivables
(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A |
$ |
3,885.5 |
|
|
$ |
1,788.3 |
|
|
$ |
1,266.1 |
|
|
$ |
574.1 |
|
|
$ |
203.4 |
|
|
$ |
32.3 |
|
|
$ |
7,749.7 |
|
|
49.5 |
|
|
B |
2,795.2 |
|
|
1,288.5 |
|
|
857.7 |
|
|
473.1 |
|
|
205.2 |
|
|
50.4 |
|
|
5,670.1 |
|
|
36.2 |
|
|
C and other |
919.1 |
|
|
496.2 |
|
|
294.8 |
|
|
156.7 |
|
|
73.8 |
|
|
29.6 |
|
|
1,970.2 |
|
|
12.6 |
|
|
Total core managed receivables |
7,599.8 |
|
|
3,573.0 |
|
|
2,418.6 |
|
|
1,203.9 |
|
|
482.4 |
|
|
112.3 |
|
|
15,390.0 |
|
|
98.3 |
|
|
Other managed receivables
(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C and other |
165.2 |
|
|
23.9 |
|
|
34.7 |
|
|
23.8 |
|
|
10.0 |
|
|
4.7 |
|
|
262.3 |
|
|
1.7 |
|
|
Total ending managed receivables |
$ |
7,765.0 |
|
|
$ |
3,596.9 |
|
|
$ |
2,453.3 |
|
|
$ |
1,227.7 |
|
|
$ |
492.4 |
|
|
$ |
117.0 |
|
|
$ |
15,652.3 |
|
|
100.0 |
|
(1) Classified
based on credit grade assigned when customers were initially
approved for financing.
(2) Percent
of total ending managed receivables.
(3) Represents
CAF's Tier 1 originations.
(4) Represents
CAF's Tier 2 and Tier 3 originations.
Allowance for Loan Losses.
The allowance for loan losses at August 31, 2022
represents the net credit losses expected over the remaining
contractual life of our managed receivables. The allowance for loan
losses is determined using a net loss timing curve, primarily based
on the composition of the portfolio of managed receivables and
historical gross loss and recovery trends. Due to the fact that
losses for receivables with less than 18 months of performance
history can be volatile, our net loss estimate weights both
historical losses by credit grade at origination and actual loss
data on the receivables to-date, along with forward loss curves, in
estimating future performance. Once the receivables have 18 months
of performance history, the net loss estimate reflects actual loss
experience of those receivables to date, along with forward loss
curves, to predict future performance. The forward loss curves are
constructed using historical performance data and show the average
timing of losses over the course of a receivable’s life. The net
loss estimate is calculated by applying the loss rates developed
using the methods described above to the amortized cost basis of
the managed receivables at inception of the loan.
The output of the net loss timing curve is adjusted to take into
account reasonable and supportable forecasts about the future.
Specifically, the change in U.S. unemployment rates and the
National Automobile Dealers Association used vehicle price index
are used to predict changes in gross loss and recovery rates,
respectively. An economic adjustment factor, based upon a single
macroeconomic scenario, is developed to capture the relationship
between changes in these forecasts and changes in gross loss and
recovery rates. This factor is applied to the output of the net
loss timing curve for the reasonable and supportable forecast
period of two years. After the end of this two-year period, we
revert to historical experience on a straight-line basis over a
period of 12 months. We periodically consider whether the use of
alternative metrics would result in improved model performance and
revise the models when appropriate. We also consider whether
qualitative adjustments are necessary for factors that are not
reflected in the quantitative methods but impact the measurement of
estimated credit losses. Such
adjustments include the uncertainty of the impacts of recent
economic trends on customer behavior. The change in the allowance
for loan losses is recognized through an adjustment to the
provision for loan losses.
Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31, 2022 |
|
(In millions) |
Core |
|
Other |
|
Total |
|
% (1)
|
|
Balance as of beginning of period |
$ |
390.4 |
|
|
$ |
67.8 |
|
|
$ |
458.2 |
|
|
2.85 |
|
|
Charge-offs |
(84.2) |
|
|
(11.9) |
|
|
(96.1) |
|
|
|
|
Recoveries |
35.9 |
|
|
4.0 |
|
|
39.9 |
|
|
|
|
Provision for loan losses |
54.0 |
|
|
21.5 |
|
|
75.5 |
|
|
|
|
Balance as of end of period |
$ |
396.1 |
|
|
$ |
81.4 |
|
|
$ |
477.5 |
|
|
2.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31, 2021 |
|
(In millions) |
Core |
|
Other |
|
Total |
|
%
(1)
|
|
Balance as of beginning of period |
$ |
348.1 |
|
|
$ |
31.4 |
|
|
$ |
379.5 |
|
|
2.62 |
|
|
Charge-offs |
(40.3) |
|
|
(3.4) |
|
|
(43.7) |
|
|
|
|
Recoveries |
25.1 |
|
|
1.7 |
|
|
26.8 |
|
|
|
|
Provision for loan losses |
27.1 |
|
|
8.4 |
|
|
35.5 |
|
|
|
|
Balance as of end of period |
$ |
360.0 |
|
|
$ |
38.1 |
|
|
$ |
398.1 |
|
|
2.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended August 31, 2022 |
|
(In millions) |
Core |
|
Other |
|
Total |
|
% (1)
|
|
Balance as of beginning of period |
$ |
377.5 |
|
|
$ |
55.5 |
|
|
$ |
433.0 |
|
|
2.77 |
% |
|
Charge-offs |
(145.6) |
|
|
(18.7) |
|
|
(164.3) |
|
|
|
|
Recoveries |
69.0 |
|
|
6.5 |
|
|
75.5 |
|
|
|
|
Provision for loan losses |
95.2 |
|
|
38.1 |
|
|
133.3 |
|
|
|
|
Balance as of end of period |
$ |
396.1 |
|
|
$ |
81.4 |
|
|
$ |
477.5 |
|
|
2.92 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended August 31, 2021 |
|
(In millions) |
Core |
|
Other |
|
Total |
|
% (1)
|
|
Balance as of beginning of period |
$ |
379.4 |
|
|
$ |
31.7 |
|
|
$ |
411.1 |
|
|
2.97 |
% |
|
Charge-offs |
(79.0) |
|
|
(6.5) |
|
|
(85.5) |
|
|
|
|
Recoveries |
57.3 |
|
|
4.1 |
|
|
61.4 |
|
|
|
|
Provision for loan losses |
2.3 |
|
|
8.8 |
|
|
11.1 |
|
|
|
|
Balance as of end of period |
$ |
360.0 |
|
|
$ |
38.1 |
|
|
$ |
398.1 |
|
|
2.66 |
% |
(1) Percent
of total ending managed receivables.
(2) Net
of costs incurred to recover vehicle.
During the first six months of fiscal 2023, the allowance for loan
losses increased $44.5 million, primarily reflecting growth in
receivables. The previously disclosed expansion of our Tier 2 and
Tier 3 originations within CAF's portfolio resulted in a 10 basis
point increase in the allowance as a percent of total ending
managed receivables during the period. While loss performance was
unfavorable compared to the prior year period, the prior year
performance fluctuated outside normal expectations. The allowance
for loan losses as of August 31, 2022 reflects the historical
loss performance experienced prior to the pandemic as well as
increases for our Tier 3 expansion and growing Tier 2
portfolio.
Past Due Receivables.
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.
Past Due Receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31, 2022 |
|
Core Receivables |
|
Other Receivables |
|
Total |
|
(In millions) |
A |
|
B |
|
C & Other |
|
Total |
|
C & Other |
|
$ |
|
%
(1)
|
|
Current |
$ |
8,119.0 |
|
|
$ |
5,548.4 |
|
|
$ |
1,644.0 |
|
|
$ |
15,311.4 |
|
|
$ |
279.4 |
|
|
$ |
15,590.8 |
|
|
95.36 |
|
|
Delinquent loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31-60 days past due |
20.8 |
|
|
199.0 |
|
|
173.0 |
|
|
392.8 |
|
|
48.4 |
|
|
441.2 |
|
|
2.70 |
|
|
61-90 days past due |
9.8 |
|
|
100.7 |
|
|
113.8 |
|
|
224.3 |
|
|
34.2 |
|
|
258.5 |
|
|
1.58 |
|
|
Greater than 90 days past due |
2.7 |
|
|
23.9 |
|
|
23.7 |
|
|
50.3 |
|
|
8.5 |
|
|
58.8 |
|
|
0.36 |
|
|
Total past due |
33.3 |
|
|
323.6 |
|
|
310.5 |
|
|
667.4 |
|
|
91.1 |
|
|
758.5 |
|
|
4.64 |
|
|
Total ending managed receivables |
$ |
8,152.3 |
|
|
$ |
5,872.0 |
|
|
$ |
1,954.5 |
|
|
$ |
15,978.8 |
|
|
$ |
370.5 |
|
|
$ |
16,349.3 |
|
|
100.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 28, 2022 |
|
Core Receivables |
|
Other Receivables |
|
Total |
|
(In millions) |
A |
|
B |
|
C & Other |
|
Total |
|
C & Other |
|
$ |
|
%
(1)
|
|
Current |
$ |
7,711.9 |
|
|
$ |
5,401.3 |
|
|
$ |
1,702.7 |
|
|
$ |
14,815.9 |
|
|
$ |
206.4 |
|
|
$ |
15,022.3 |
|
|
95.98 |
|
|
Delinquent loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31-60 days past due |
25.4 |
|
|
173.3 |
|
|
160.4 |
|
|
359.1 |
|
|
33.0 |
|
|
392.1 |
|
|
2.50 |
|
|
61-90 days past due |
9.2 |
|
|
75.6 |
|
|
85.2 |
|
|
170.0 |
|
|
19.1 |
|
|
189.1 |
|
|
1.21 |
|
|
Greater than 90 days past due |
3.2 |
|
|
19.9 |
|
|
21.9 |
|
|
45.0 |
|
|
3.8 |
|
|
48.8 |
|
|
0.31 |
|
|
Total past due |
37.8 |
|
|
268.8 |
|
|
267.5 |
|
|
574.1 |
|
|
55.9 |
|
|
630.0 |
|
|
4.02 |
|
|
Total ending managed receivables |
$ |
7,749.7 |
|
|
$ |
5,670.1 |
|
|
$ |
1,970.2 |
|
|
$ |
15,390.0 |
|
|
$ |
262.3 |
|
|
$ |
15,652.3 |
|
|
100.00 |
|
(1) Percent
of total ending managed receivables.
6.
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 generally designate these
derivative instruments as cash flow hedges for accounting
purposes. In certain cases, we may choose not to
designate a derivative instrument as a cash flow hedge for
accounting purposes due to uncertainty around the probability that
future hedged transactions will occur. 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 loans receivable,
and (ii) exposure to variable interest rates associated with our
term loans.
For the derivatives associated with our non-recourse funding
vehicles that are designated as cash flow hedges, the changes in
fair value are initially recorded in accumulated other
comprehensive income (loss) (“AOCI”). 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 $36.6 million will be
reclassified from AOCI as an increase to CAF income. Changes in
fair value related to derivatives that have not been designated as
cash flow hedges for accounting purposes are recognized in the
income statement in the period in which the change occurs. For the
three and six months ended August 31, 2022, we recognized
income of $9.4 million and $18.6 million, respectively,
in CAF income representing these changes in fair
value.
As of August 31, 2022 and February 28, 2022, we had
interest rate swaps outstanding with a combined notional amount of
$4.49 billion and $3.64 billion, respectively, that were
designated as cash flow hedges of interest rate risk. As of
August 31, 2022 and February 28, 2022, we had interest
rate swaps with a combined notional amount of $1.01 billion and
$578.3 million, respectively, outstanding that were not
designated as cash flow hedges for accounting
purposes.
See Note 7 for discussion of fair values of financial instruments
and Note 13 for the effect on comprehensive income.
7.
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, observable inputs, such as interest rates and yield
curves, and assumptions about risk.
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 loans receivable and 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 equity investments in
large-, mid- and small-cap domestic and international companies or
investment grade debt securities. 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, other assets, accounts payable or
other liabilities. 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 August 31, 2022 |
|
(In thousands) |
Level 1 |
|
Level 2 |
|
Total |
|
Assets: |
|
|
|
|
|
|
Money market securities |
$ |
698,000 |
|
|
$ |
— |
|
|
$ |
698,000 |
|
|
Mutual fund investments |
23,809 |
|
|
— |
|
|
23,809 |
|
|
|
|
|
|
|
|
Derivative instruments designated as hedges |
— |
|
|
76,580 |
|
|
76,580 |
|
|
Derivative instruments not designated as hedges |
— |
|
|
27,946 |
|
|
27,946 |
|
|
Total assets at fair value |
$ |
721,809 |
|
|
$ |
104,526 |
|
|
$ |
826,335 |
|
|
|
|
|
|
|
|
|
Percent of total assets at fair value |
87.4 |
% |
|
12.6 |
% |
|
100.0 |
% |
|
Percent of total assets |
2.7 |
% |
|
0.4 |
% |
|
3.1 |
% |
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value |
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
Percent of total liabilities |
— |
% |
|
— |
% |
|
— |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 28, 2022 |
|
(In thousands) |
Level 1 |
|
Level 2 |
|
Total |
|
Assets: |
|
|
|
|
|
|
Money market securities |
$ |
701,865 |
|
|
$ |
— |
|
|
$ |
701,865 |
|
|
Mutual fund investments |
24,022 |
|
|
— |
|
|
24,022 |
|
|
Derivative instruments designated as hedges |
— |
|
|
39,452 |
|
|
39,452 |
|
|
Derivative instruments not designated as hedges |
— |
|
|
9,339 |
|
|
9,339 |
|
|
Total assets at fair value |
$ |
725,887 |
|
|
$ |
48,791 |
|
|
$ |
774,678 |
|
|
|
|
|
|
|
|
|
Percent of total assets at fair value |
93.7 |
% |
|
6.3 |
% |
|
100.0 |
% |
|
Percent of total assets |
2.8 |
% |
|
0.2 |
% |
|
2.9 |
% |
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
Derivative instruments designated as hedges |
$ |
— |
|
|
$ |
(1,379) |
|
|
$ |
(1,379) |
|
|
Total liabilities at fair value |
$ |
— |
|
|
$ |
(1,379) |
|
|
$ |
(1,379) |
|
|
|
|
|
|
|
|
|
Percent of total liabilities |
— |
% |
|
— |
% |
|
— |
% |
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
loans receivable are presented net of an allowance for estimated
loan losses, which we believe approximates fair value. We believe
that the carrying value of our revolving credit facility and term
loans 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 August 31, 2022 and February 28,
2022, respectively, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
As of August 31, 2022 |
|
As of February 28, 2022 |
|
Carrying value |
$ |
500,000 |
|
|
$ |
500,000 |
|
|
Fair value |
$ |
479,642 |
|
|
$ |
517,396 |
|
8.
Cancellation Reserves
We recognize revenue for EPP products, on a net basis, at the time
of sale. We also record a reserve, or refund liability, 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 August 31 |
|
Six Months Ended August 31 |
|
(In millions) |
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Balance as of beginning of period |
$ |
148.7 |
|
|
$ |
138.4 |
|
|
$ |
144.7 |
|
|
$ |
124.5 |
|
|
Cancellations |
(27.4) |
|
|
(22.9) |
|
|
(55.1) |
|
|
(43.1) |
|
|
Provision for future cancellations |
27.5 |
|
|
28.8 |
|
|
59.2 |
|
|
62.9 |
|
|
Balance as of end of period |
$ |
148.8 |
|
|
$ |
144.3 |
|
|
$ |
148.8 |
|
|
$ |
144.3 |
|
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 August 31, 2022 and February 28, 2022,
the current portion of cancellation reserves was $82.1
million and $78.7 million, respectively.
9.
Income Taxes
We had $26.3 million of gross unrecognized tax benefits as of
August 31, 2022, and $24.8 million as of February 28,
2022. There were no significant changes to the gross
unrecognized tax benefits as reported for the fiscal year ended
February 28, 2022.
On August 16, 2022, federal legislation commonly referred to as the
Inflation Reduction Act of 2022 (“IRA”), was enacted. We have
evaluated the tax provisions of the IRA, the most significant of
which are the corporate alternative minimum tax and the share
repurchase tax. We do not expect the legislation to have a material
impact on our results of operations. As the IRS issues additional
guidance related to the IRA, we will evaluate any impact to our
consolidated financial statements.
10.
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
As of August 31 |
|
As of February 28 |
|
Debt Description
(1)
|
Maturity Date |
2022 |
|
2022 |
|
Revolving credit facility
(2)
|
June 2024 |
$ |
605,450 |
|
|
$ |
1,243,500 |
|
|
Term loan
(2)
|
June 2024 |
300,000 |
|
|
300,000 |
|
|
Term loan
(2)
|
October 2026 |
699,422 |
|
|
699,352 |
|
|
3.86% Senior notes |
April 2023 |
100,000 |
|
|
100,000 |
|
|
4.17% Senior notes |
April 2026 |
200,000 |
|
|
200,000 |
|
|
4.27% Senior notes |
April 2028 |
200,000 |
|
|
200,000 |
|
|
Financing obligations |
Various dates through February 2059 |
520,005 |
|
|
524,766 |
|
|
Non-recourse notes payable |
Various dates through February 2029 |
16,121,244 |
|
|
15,466,799 |
|
|
Total debt |
|
18,746,121 |
|
|
18,734,417 |
|
|
Less: current portion |
|
(672,296) |
|
|
(532,272) |
|
|
Less: unamortized debt issuance costs |
|
(27,607) |
|
|
(27,126) |
|
|
Long-term debt, net |
|
$ |
18,046,218 |
|
|
$ |
18,175,019 |
|
(1) Interest
is payable monthly, with the exception of our senior notes, which
are payable semi-annually.
(2) Borrowings
accrue interest at variable rates based on the Eurodollar rate
(LIBOR), or the successor benchmark rate, the federal funds rate,
or the prime rate, depending on the type of borrowing.
Revolving Credit Facility.
Borrowings under our $2.00 billion unsecured revolving credit
facility (the “credit facility”) are available for working capital
and general corporate purposes. 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. As of August 31, 2022, the
unused capacity of $1.39 billion was fully available to
us.
Term Loans.
Borrowings under our $300 million and $700 million term loans
are available for working capital and general corporate purposes.
The interest rate on our term loans was 3.27% as of August 31,
2022, and the loans were classified as long-term debt as no
repayments are scheduled to be made within the next 12
months.
Senior Notes.
Borrowings under our unsecured senior notes totaling $500 million
are available for working capital and general corporate purposes.
The 3.86% senior note matures in April 2023 and is therefore
classified as current. The remaining notes were classified as
long-term debt as no repayments are scheduled to be made within the
next 12 months.
Financing Obligations.
Financing obligations relate to stores subject to
sale-leaseback transactions that do not qualify for sale
accounting. The financing obligations were structured at
varying interest rates and generally have initial lease terms
ranging from 15 to 20 years with payments made
monthly. We have not entered into any new sale-leaseback
transactions since fiscal 2009. In the event the agreements are
modified or extended beyond their original term, the related
obligation is adjusted based on the present value of the revised
future payments, with a corresponding change to the assets subject
to these transactions. Upon modification, the amortization of the
obligation is reset, resulting in more of the payments being
applied to interest expense in the initial years following the
modification.
Non-Recourse Notes Payable.
The non-recourse notes payable relate to auto loans
receivable funded through non-recourse funding vehicles. 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 loans receivable. The current portion of non-recourse
notes payable represents principal payments that are due to be
distributed in the following period.
Notes payable related to our asset-backed term funding transactions
accrue interest predominantly at fixed rates and have scheduled
maturities through February 2029, but may mature earlier, depending
upon the repayment rate of the underlying auto loans
receivable.
Information on our funding vehicles of non-recourse notes payable
as of August 31, 2022 are as follows:
|
|
|
|
|
|
|
(In billions) |
Capacity |
|
Warehouse facilities: |
|
|
December 2022 expiration |
$ |
0.25 |
|
|
February 2023 expiration |
2.85 |
|
|
August 2023 expiration |
2.30 |
|
|
Combined warehouse facility limit |
$ |
5.40 |
|
|
Unused capacity |
$ |
2.40 |
|
|
|
|
|
Non-recourse notes payable outstanding: |
|
|
Warehouse facilities |
$ |
3.00 |
|
|
Asset-backed term funding transactions |
13.12 |
|
|
Non-recourse notes payable |
$ |
16.12 |
|
We generally enter into warehouse facility agreements for one-year
terms and typically renew the agreements annually. 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 Note 5 for additional information on the related auto loans
receivable.
Capitalized Interest.
We
capitalize interest in connection with the construction of certain
facilities. For the six months ended August 31,
2022 and 2021, we capitalized interest of $2.1 million
and $3.5 million, respectively.
Financial Covenants. The
credit facility, term loans and senior note agreements contain
representations and warranties, conditions and
covenants. We must also meet financial covenants in
conjunction with certain financing obligations. The
agreements governing our non-recourse funding vehicles contain
representations and warranties, financial covenants
and
performance triggers. As of August 31, 2022, we
were in compliance with all financial covenants and our
non-recourse funding vehicles were in compliance with the related
performance triggers.
11.
Stock and Stock-Based Incentive Plans
(A)Share
Repurchase Program
In April 2022, our board of directors (“board”) increased our share
repurchase authorization by $2.0 billion. As of August 31,
2022, a total of $4.0 billion of board authorizations for
repurchases of our common stock was outstanding, with no expiration
date, of which $2.45 billion remained available for
repurchase.
Common Stock Repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
August 31 |
|
August 31 |
|
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Number of shares repurchased
(in thousands)
|
1,729.6 |
|
|
1,754.1 |
|
|
3,373.9 |
|
|
2,751.7 |
|
|
Average cost per share |
$ |
94.24 |
|
|
$ |
125.44 |
|
|
$ |
95.01 |
|
|
$ |
125.22 |
|
|
Available for repurchase, as of end of period
(in millions)
|
$ |
2,453.9 |
|
|
$ |
991.5 |
|
|
$ |
2,453.9 |
|
|
$ |
991.5 |
|
(B)Share-Based
Compensation
Composition of Share-Based Compensation Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
August 31 |
|
August 31 |
|
(In thousands) |
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Cost of sales |
$ |
901 |
|
|
$ |
2,094 |
|
|
$ |
1,141 |
|
|
$ |
3,823 |
|
|
CarMax Auto Finance income |
(295) |
|
|
1,481 |
|
|
413 |
|
|
3,189 |
|
|
Selling, general and administrative expenses |
24,534 |
|
|
28,705 |
|
|
46,770 |
|
|
67,125 |
|
|
Share-based compensation expense, before income taxes |
$ |
25,140 |
|
|
$ |
32,280 |
|
|
$ |
48,324 |
|
|
$ |
74,137 |
|
Composition of Share-Based Compensation Expense – By Grant
Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
August 31 |
|
August 31 |
|
(In thousands) |
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Nonqualified stock options |
$ |
9,468 |
|
|
$ |
7,708 |
|
|
$ |
20,680 |
|
|
$ |
19,529 |
|
|
Cash-settled restricted stock units (RSUs) |
9,505 |
|
|
17,590 |
|
|
10,354 |
|
|
38,562 |
|
|
Stock-settled market stock units (MSUs) |
3,529 |
|
|
3,244 |
|
|
8,876 |
|
|
8,089 |
|
|
Other share-based incentives: |
|
|
|
|
|
|
|
|
Stock-settled performance stock units (PSUs) |
250 |
|
|
976 |
|
|
4,941 |
|
|
4,370 |
|
|
Restricted stock (RSAs) |
(35) |
|
|
263 |
|
|
309 |
|
|
305 |
|
|
Stock-settled deferred stock units (DSUs) |
1,850 |
|
|
1,925 |
|
|
1,850 |
|
|
1,925 |
|
|
Employee stock purchase plan |
573 |
|
|
574 |
|
|
1,314 |
|
|
1,357 |
|
|
Total other share-based incentives |
$ |
2,638 |
|
|
$ |
3,738 |
|
|
$ |
8,414 |
|
|
$ |
7,957 |
|
|
Share-based compensation expense, before income taxes |
$ |
25,140 |
|
|
$ |
32,280 |
|
|
$ |
48,324 |
|
|
$ |
74,137 |
|
(C)Stock
Incentive Plan Information
Share/Unit Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended August 31, 2022 |
|
Equity Classified |
|
Liability Classified |
|
(Shares/units in thousands) |
Options |
MSUs |
Other |
|
RSUs |
|
Outstanding as of February 28, 2022 |
5,796 |
|
393 |
|
170 |
|
|
1,163 |
|
|
Granted |
1,282 |
|
136 |
|
50 |
|
|
677 |
|
|
Exercised or vested and converted |
(204) |
|
(120) |
|
(80) |
|
|
(740) |
|
|
Cancelled |
(44) |
|
(5) |
|
(5) |
|
|
(46) |
|
|
Outstanding as of August 31, 2022 |
6,830 |
|
404 |
|
135 |
|
|
1,054 |
|
|
|
|
|
|
|
|
|
Weighted average grant date fair value per share/unit: |
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
$ |
33.26 |
|
$ |
126.73 |
|
$ |
95.58 |
|
|
$ |
91.20 |
|
|
Ending outstanding |
$ |
25.69 |
|
$ |
120.95 |
|
$ |
99.04 |
|
|
$ |
97.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31, 2022 |
|
|
|
Unrecognized compensation
(in millions)
|
$ |
68.0 |
|
$ |
21.5 |
|
$ |
3.5 |
|
|
|
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 |
|
Six Months Ended |
|
|
August 31 |
|
August 31 |
|
(In thousands except per share data) |
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Net earnings |
$ |
125,905 |
|
|
$ |
285,267 |
|
|
$ |
378,170 |
|
|
$ |
722,023 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
158,801 |
|
|
162,966 |
|
|
159,556 |
|
|
163,058 |
|
|
Dilutive potential common shares: |
|
|
|
|
|
|
|
|
Stock options |
1,125 |
|
|
2,271 |
|
|
1,151 |
|
|
2,400 |
|
|
Stock-settled stock units and awards |
292 |
|
|
406 |
|
|
308 |
|
|
511 |
|
|
Weighted average common shares and dilutive potential common
shares |
160,218 |
|
|
165,643 |
|
|
161,015 |
|
|
165,969 |
|
|
|
|
|
|
|
|
|
|
|
Basic net earnings per share |
$ |
0.79 |
|
|
$ |
1.75 |
|
|
$ |
2.37 |
|
|
$ |
4.43 |
|
|
Diluted net earnings per share |
$ |
0.79 |
|
|
$ |
1.72 |
|
|
$ |
2.35 |
|
|
$ |
4.35 |
|
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
August 31, 2022 and 2021, options to purchase
2,098,895 shares and 912,093 shares of common stock,
respectively, were not included. For the six months ended
August 31, 2022 and 2021, options to purchase 1,767,906 shares
and 600,617 shares of common stock, respectively, were not
included.
13.
Accumulated Other Comprehensive Income (Loss)
Changes in Accumulated Other Comprehensive Income (Loss) By
Component
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Net |
|
Net |
|
Accumulated |
|
|
Unrecognized |
|
Unrecognized |
|
Other |
|
|
Actuarial |
|
Hedge |
|
Comprehensive |
|
(In thousands, net of income taxes) |
Losses |
|
Gains |
|
Income (Loss) |
|
Balance as of February 28, 2022 |
$ |
(73,001) |
|
|
$ |
26,579 |
|
|
$ |
(46,422) |
|
|
Other comprehensive income before reclassifications |
— |
|
|
81,908 |
|
|
81,908 |
|
|
Amounts reclassified from accumulated other comprehensive income
(loss) |
962 |
|
|
(4,449) |
|
|
(3,487) |
|
|
Other comprehensive income |
962 |
|
|
77,459 |
|
|
78,421 |
|
|
Balance as of August 31, 2022 |
$ |
(72,039) |
|
|
$ |
104,038 |
|
|
$ |
31,999 |
|
Changes In and Reclassifications Out of Accumulated Other
Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31 |
|
Six Months Ended August 31 |
|
(In thousands) |
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Retirement Benefit Plans: |
|
|
|
|
|
|
|
|
Actuarial loss amortization reclassifications recognized in net
pension expense: |
|
|
|
|
|
|
|
|
Cost of sales |
$ |
273 |
|
|
$ |
359 |
|
|
$ |
538 |
|
|
$ |
716 |
|
|
CarMax Auto Finance income |
16 |
|
|
21 |
|
|
32 |
|
|
43 |
|
|
Selling, general and administrative expenses |
347 |
|
|
488 |
|
|
702 |
|
|
977 |
|
|
Total amortization reclassifications recognized in net pension
expense |
636 |
|
|
868 |
|
|
1,272 |
|
|
1,736 |
|
|
Tax expense |
(155) |
|
|
(210) |
|
|
(310) |
|
|
(419) |
|
|
Amortization reclassifications recognized in net pension expense,
net of tax |
481 |
|
|
658 |
|
|
962 |
|
|
1,317 |
|
|
Net change in retirement benefit plan unrecognized actuarial
losses, net of tax |
481 |
|
|
658 |
|
|
962 |
|
|
1,317 |
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedges (Note 6): |
|
|
|
|
|
|
|
|
Changes in fair value |
40,168 |
|
|
(665) |
|
|
110,210 |
|
|
(2,671) |
|
|
Tax (expense) benefit |
(10,315) |
|
|
175 |
|
|
(28,302) |
|
|
703 |