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 largest retailer of used vehicles in the United States. We operate in
two
reportable segments: CarMax Sales Operations and CarMax Auto Finance (“CAF”). Our CarMax Sales Operations segment consists of all aspects of our auto merchandising and service operations, excluding financing provided by CAF. Our CAF segment consists solely of our own finance operation that provides financing to customers buying retail vehicles from CarMax.
We deliver an unrivaled customer experience by offering a broad selection of quality used vehicles and related products and services at competitive, no-haggle prices using a customer-friendly sales process in an attractive, modern sales facility, as well as through carmax.com and our mobile apps. We provide customers with a range of related products and services, including the appraisal and purchase of vehicles directly from consumers; the financing of retail vehicle purchases through CAF and third-party finance providers; the sale of extended protection plan (“EPP”) products, which include extended service plans (“ESPs”) and guaranteed asset protection (“GAP”); and vehicle repair service. Vehicles purchased through the appraisal process that do not meet our retail standards are sold to licensed dealers through on-site wholesale auctions.
Basis of Presentation and Use of Estimates.
The accompanying interim unaudited consolidated financial statements include the accounts of CarMax and our wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. These consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, such interim consolidated financial statements reflect all normal recurring adjustments considered necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year.
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, 2019
(the “2019 Annual Report”), with the exception of those related to recent accounting pronouncements adopted in the current fiscal year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in our 2019 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. Certain prior year amounts have been reclassified to conform to the current year’s presentation. Amounts and percentages may not total due to rounding.
In connection with our adoption of Accounting Standards Update (“ASU”) 2016-02,
Leases
(“ASC 842”) during the current fiscal year, certain prior period amounts have been reclassified to conform to the current period's presentation. In the consolidated balance sheets, financing obligations have been reclassified to current portion of long-term debt and long-term debt, excluding current portion. Also, capital lease obligations have been reclassified to accrued expenses and other current liabilities and other liabilities. In the consolidated statements of cash flows, payments on financing obligations have been reclassified to payments on long-term debt. See Notes 9 and 13 for additional information on financing obligations and leases, respectively.
Recent Accounting Pronouncements.
Adopted in the Current Period
.
In February 2016, the Financing Accounting Standards Board (“FASB”) issued ASU 2016-02,
Leases
. This pronouncement, along with subsequent ASUs issued to clarify certain provisions of ASU 2016-02, requires lessees to record most leases on their balance sheet and disclose key information about those lease arrangements. Under the new guidance, lease classification as either a finance lease or an operating lease will affect the pattern and classification of expense recognition in the income statement. The classification criteria to distinguish between finance and operating leases is generally consistent with the classification criteria to distinguish between capital and operating leases under previous lease accounting guidance,
Leases
(“ASC 840”). This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018.
We adopted ASC 842 for our fiscal year beginning March 1, 2019 using the modified retrospective transition approach applied at the beginning of the period of adoption, which did not result in a cumulative-effect adjustment to retained earnings. Comparative periods presented in the financial statements continue to be presented in accordance with ASC 840. As permitted under the
standard, we have elected the package of practical expedients, under which we did not reassess our prior conclusions regarding lease identification, lease classification or initial direct costs for contracts existing as of the transition date. We have also elected the practical expedient to not assess whether existing or expired land easements not previously accounted for as leases are or contain a lease under ASC 842. We have not elected the hindsight practical expedient.
The adoption of ASC 842 resulted in the recognition of
$452 million
of operating lease assets, which included an adjustment for deferred rent, and
$474 million
of operating lease liabilities on our opening consolidated balance sheet. We did not subsequently remeasure any leases based on changes in assessment of the lease term due to adoption of the standard. The adoption of the new standard did not have a material impact on our sale-leaseback transactions previously accounted for as financing obligations, nor did it have a material effect on our expense recognition pattern or, in turn, our consolidated statements of operations. The new standard does not impact our compliance with current debt covenants. As an accounting policy, we plan to separate lease and nonlease components when accounting for all leases commencing, modified or reassessed subsequent to adoption of the new standard. Additionally, we plan to elect the short-term lease exemption for all qualifying leases. We have implemented new business processes, accounting policies, systems and internal controls as part of adopting the new standard. See Note 13 for additional information on leases.
In August 2017, the FASB issued an accounting pronouncement (FASB ASU 2017-12) related to the accounting for derivatives and hedging. The pronouncement expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. It also includes certain targeted improvements to simplify the application of current guidance related to hedge accounting. We prospectively adopted this pronouncement for our fiscal year beginning March 1, 2019, and it did not have a material effect on our consolidated financial statements.
In June 2018, the FASB issued an accounting pronouncement (FASB ASU 2018-07) to expand the scope of
Compensation - Stock Compensation (Topic 718)
, to include share-based payment transactions for acquiring goods and services from nonemployees. We adopted this pronouncement for our fiscal year beginning March 1, 2019, and it did not have a material effect on our consolidated financial statements.
In August 2018, the FASB issued an accounting pronouncement (FASB ASU 2018-15) related to a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is considered a service contract. This pronouncement aligns the requirements for capitalizing implementation costs in such arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. We early adopted this pronouncement for our fiscal year beginning March 1, 2019, prospectively for all implementation costs incurred after the date of adoption. As a result of the adoption, we began capitalizing certain implementation costs that were previously expensed as incurred. Such amounts were immaterial to our consolidated financial statements.
In October 2018, the FASB issued an accounting pronouncement (FASB ASU 2018-16) to permit the use of the Overnight Index Swap Rate based on the Secured Overnight Financing Rate as a U.S. benchmark interest rate for hedge accounting purposes under
Derivatives and Hedging (Topic 815)
. For entities that have not already adopted ASU 2017-12, the amendments in this pronouncement are required to be adopted concurrently with the amendments in ASU 2017-12. We adopted this pronouncement for our fiscal year beginning March 1, 2019, concurrently with the adoption of ASU 2017-12, and it did not have a material effect on our consolidated financial statements.
Effective in Future Periods
.
In June 2016, the FASB issued an accounting pronouncement (FASB ASU 2016-13) related to the measurement of credit losses on financial instruments. This pronouncement, along with subsequent ASUs issued to clarify certain provisions of ASU 2016-13, changes the impairment model for most financial assets and will require the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. We plan to adopt this pronouncement for our fiscal year beginning March 1, 2020. We are currently evaluating the effect on our consolidated financial statements, as well as the impacts on our business processes, systems and internal controls, and expect that the standard will have a material impact on our calculation of the allowance for loan losses.
2.
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 May 31
|
(In millions)
|
2019
|
|
2018
|
Used vehicle sales
|
$
|
4,540.7
|
|
|
$
|
4,021.0
|
|
Wholesale vehicle sales
|
662.4
|
|
|
617.7
|
|
Other sales and revenues:
|
|
|
|
Extended protection plan revenues
|
111.3
|
|
|
100.1
|
|
Third-party finance fees, net
|
(15.5
|
)
|
|
(14.5
|
)
|
Service revenues
|
34.0
|
|
|
36.5
|
|
Other
|
33.4
|
|
|
31.8
|
|
Total other sales and revenues
|
163.2
|
|
|
153.9
|
|
Total net sales and operating revenues
|
$
|
5,366.3
|
|
|
$
|
4,792.6
|
|
Used Vehicle Sales.
We sell used vehicles at our retail stores, and revenue from the sale of these 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 7-day, 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 accounted for as warranty obligations. See Note 15 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 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 7 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 the ESP transaction price 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 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. Profit-sharing payments by the ESP provider begin when the underlying ESPs reach a specified level of claims history. As of
May 31, 2019
and February 28, 2019, a long-term contract asset of
$25.7 million
related to cumulative profit-sharing payments to which we expect to be entitled was included in other assets on our consolidated balance sheets.
Third-Party Finance 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.
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 at our two new car franchise locations and sales of accessories. Revenue in this category is recognized upon transfer of control to the customer.
3.
CarMax Auto Finance
CAF provides financing to qualified retail customers purchasing vehicles from CarMax. CAF provides us the opportunity to capture additional profits, cash flows and sales while managing our reliance on third-party finance sources. Management regularly analyzes CAF's operating results by assessing profitability, the performance of the auto loan receivables, including trends in credit losses and delinquencies, and CAF direct expenses. This information is used to assess CAF's performance and make operating decisions, including resource allocation.
We typically use securitizations or other funding arrangements to fund loans originated by CAF. CAF income primarily reflects the interest and fee income generated by the auto loan receivables less the interest expense associated with the debt issued to fund these receivables, a provision for estimated loan losses and direct CAF expenses.
CAF income does not include any allocation of indirect costs. Although CAF benefits from certain indirect overhead expenditures, we have not allocated indirect costs to CAF to avoid making subjective allocation decisions. Examples of indirect costs not allocated to CAF include retail store expenses and corporate expenses. In addition, except for auto loan receivables, which are disclosed in Note 4, CAF assets are not separately reported nor do we allocate assets to CAF because such allocation would not be useful to management in making operating decisions.
Components of CAF Income
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31
|
(In millions)
|
2019
|
|
%
(1)
|
|
2018
|
|
%
(1)
|
Interest margin:
|
|
|
|
|
|
|
|
Interest and fee income
|
$
|
266.2
|
|
|
8.4
|
|
|
$
|
232.3
|
|
|
7.9
|
|
Interest expense
|
(87.4
|
)
|
|
(2.8
|
)
|
|
(63.8
|
)
|
|
(2.2
|
)
|
Total interest margin
|
178.8
|
|
|
5.6
|
|
|
168.5
|
|
|
5.7
|
|
Provision for loan losses
|
(38.2
|
)
|
|
(1.2
|
)
|
|
(30.9
|
)
|
|
(1.0
|
)
|
Total interest margin after provision for loan losses
|
140.6
|
|
|
4.4
|
|
|
137.6
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
Direct expenses:
|
|
|
|
|
|
|
|
Payroll and fringe benefit expense
|
(10.1
|
)
|
|
(0.3
|
)
|
|
(9.6
|
)
|
|
(0.3
|
)
|
Other direct expenses
|
(14.5
|
)
|
|
(0.5
|
)
|
|
(12.4
|
)
|
|
(0.4
|
)
|
Total direct expenses
|
(24.6
|
)
|
|
(0.8
|
)
|
|
(22.0
|
)
|
|
(0.7
|
)
|
CarMax Auto Finance income
|
$
|
116.0
|
|
|
3.7
|
|
|
$
|
115.6
|
|
|
3.9
|
|
|
|
|
|
|
|
|
|
Total average managed receivables
|
$
|
12,707.3
|
|
|
|
|
|
$
|
11,775.4
|
|
|
|
|
|
|
(1)
|
Annualized percentage of total average managed receivables.
|
4.
Auto Loan Receivables
Auto loan receivables include amounts due from customers related to retail vehicle sales financed through CAF and are presented net of an allowance for estimated loan losses. We generally use warehouse facilities to fund auto loan receivables originated by CAF until we elect to fund them through an asset-backed term funding transaction, such as a term securitization or alternative funding arrangement. We recognize transfers of auto loan receivables into the warehouse facilities and asset-backed term funding transactions (together, “non-recourse funding vehicles”) as secured borrowings, which result in recording the auto loan receivables and the related non-recourse notes payable on our consolidated balance sheets. The majority of the auto loan receivables serve as collateral for the related non-recourse notes payable of
$12.89 billion
as of
May 31, 2019
and
$12.54 billion
as of
February 28, 2019
. See Note 9 for additional information on non-recourse notes payable.
Auto Loan Receivables, Net
|
|
|
|
|
|
|
|
|
|
As of May 31
|
|
As of February 28
|
(In millions)
|
2019
|
|
2019
|
Asset-backed term funding
|
$
|
10,298.3
|
|
|
$
|
10,273.4
|
|
Warehouse facilities
|
2,178.0
|
|
|
1,877.0
|
|
Overcollateralization
(1)
|
291.9
|
|
|
273.3
|
|
Other managed receivables
(2)
|
91.2
|
|
|
86.5
|
|
Total ending managed receivables
|
12,859.4
|
|
|
12,510.2
|
|
Accrued interest and fees
|
56.7
|
|
|
49.6
|
|
Other
|
8.2
|
|
|
6.9
|
|
Less allowance for loan losses
|
(147.0
|
)
|
|
(138.2
|
)
|
Auto loan receivables, net
|
$
|
12,777.3
|
|
|
$
|
12,428.5
|
|
|
|
(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 rely on the customers’ credit history and certain application information to evaluate and rank their risk. We obtain credit histories and other credit data that includes information such as number, age, type of and payment history for prior or existing credit accounts. The application information that is used includes income, collateral value and down payment. The scoring models yield credit grades that represent the relative likelihood of repayment. Customers assigned a grade of “A” are determined to have the highest probability of repayment, and customers assigned a lower grade are determined to have a lower probability of repayment. For loans that are approved, the credit grade influences the terms of the agreement, such as the required loan-to-value ratio and interest rate.
CAF uses a combination of the initial credit grades and historical performance to monitor the credit quality of the auto loan receivables on an ongoing basis. We validate the accuracy of the scoring models periodically. Loan performance is reviewed on a recurring basis to identify whether the assigned grades adequately reflect the customers’ likelihood of repayment.
Ending Managed Receivables by Major Credit Grade
|
|
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|
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|
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|
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|
|
As of May 31
|
|
As of February 28
|
(In millions)
|
2019
(1)
|
|
%
(2)
|
|
2019
(1)
|
|
%
(2)
|
A
|
$
|
6,385.2
|
|
|
49.7
|
|
$
|
6,225.6
|
|
|
49.8
|
B
|
4,641.0
|
|
|
36.1
|
|
4,488.2
|
|
|
35.9
|
C and other
|
1,833.2
|
|
|
14.2
|
|
1,796.4
|
|
|
14.3
|
Total ending managed receivables
|
$
|
12,859.4
|
|
|
100.0
|
|
$
|
12,510.2
|
|
|
100.0
|
|
|
(1)
|
Classified based on credit grade assigned when customers were initially approved for financing.
|
|
|
(2)
|
Percent of total ending managed receivables.
|
Allowance for Loan Losses
|
|
|
|
|
|
|
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|
|
|
|
|
|
Three Months Ended May 31
|
(In millions)
|
2019
|
|
%
(1)
|
|
2018
|
|
%
(1)
|
Balance as of beginning of period
|
$
|
138.2
|
|
|
1.10
|
|
$
|
128.6
|
|
|
1.11
|
Charge-offs
|
(65.9
|
)
|
|
|
|
(58.9
|
)
|
|
|
Recoveries
|
36.5
|
|
|
|
|
33.7
|
|
|
|
Provision for loan losses
|
38.2
|
|
|
|
|
30.9
|
|
|
|
Balance as of end of period
|
$
|
147.0
|
|
|
1.14
|
|
$
|
134.3
|
|
|
1.13
|
|
|
(1)
|
Percent
of total ending managed receivables.
|
The allowance for loan losses represents an estimate of the amount of net losses inherent in our portfolio of managed receivables as of the applicable reporting date and expected to become evident during the following 12 months. The allowance is primarily based on the composition of the portfolio of managed receivables, historical loss trends and forecasted forward loss curves. We also take into account recent trends in delinquencies and defaults, recovery rates and the economic environment. The provision for loan losses is the periodic expense of maintaining an adequate allowance.
Past Due Receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May 31
|
|
As of February 28
|
(In millions)
|
2019
|
|
%
(1)
|
|
2019
|
|
%
(1)
|
Total ending managed receivables
|
$
|
12,859.4
|
|
|
100.0
|
|
$
|
12,510.2
|
|
|
100.0
|
Delinquent loans:
|
|
|
|
|
|
|
|
31-60 days past due
|
$
|
276.7
|
|
|
2.2
|
|
$
|
276.5
|
|
|
2.2
|
61-90 days past due
|
124.0
|
|
|
1.0
|
|
141.4
|
|
|
1.1
|
Greater than 90 days past due
|
31.1
|
|
|
0.2
|
|
33.9
|
|
|
0.3
|
Total past due
|
$
|
431.8
|
|
|
3.4
|
|
$
|
451.8
|
|
|
3.6
|
|
|
(1)
|
Percent of total ending managed receivables.
|
5.
Derivative Instruments and Hedging Activities
We use derivatives to manage certain risks arising from both our business operations and economic conditions, particularly with regard to issuances of debt. Primary exposures include LIBOR and other rates used as benchmarks in our securitizations and other debt financing. We enter into derivative instruments to manage exposures related to the future known receipt or payment of uncertain cash amounts, the values of which are impacted by interest rates, and designate these derivative instruments as cash flow hedges for accounting purposes. Our derivative instruments are used to manage (i) differences in the amount of our known or expected cash receipts and our known or expected cash payments principally related to the funding of our auto loan receivables, and (ii) exposure to variable interest rates associated with our term loan.
For the derivatives associated with our non-recourse funding vehicles, changes in fair value are initially recorded in accumulated other comprehensive loss (“AOCL”). For the majority of these derivatives, the amounts are subsequently reclassified into CAF income in the period that the hedged forecasted transaction affects earnings, which occurs as interest expense is recognized on those future issuances of debt. During the next 12 months, we estimate that an additional
$5.0 million
will be reclassified in AOCL as a decrease to CAF income.
As of
May 31, 2019
and
February 28, 2019
, we had interest rate swaps outstanding with a combined notional amount of
$2.47 billion
and
$2.23 billion
, respectively, that were designated as cash flow hedges of interest rate risk.
See Note 6 for discussion of fair values of financial instruments and Note 12 for the effect on comprehensive income.
6.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market or, if none exists, the most advantageous market, for the specific asset or liability at the measurement date (referred to as the “exit price”). The fair value should be based on assumptions that market participants would use, including a consideration of nonperformance risk.
We assess the inputs used to measure fair value using the three-tier hierarchy. The hierarchy indicates the extent to which inputs used in measuring fair value are observable in the market.
|
|
Level 1
|
Inputs include unadjusted quoted prices in active markets for identical assets or liabilities that we can access at the measurement date.
|
|
|
Level 2
|
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets in active markets, quoted prices from identical or similar assets in inactive markets and observable inputs such as interest rates and yield curves.
|
|
|
Level 3
|
Inputs that are significant to the measurement that are not observable in the market and include management's judgments about the assumptions market participants would use in pricing the asset or liability (including assumptions about risk).
|
Our fair value processes include controls that are designed to ensure that fair values are appropriate. Such controls include model validation, review of key model inputs, analysis of period-over-period fluctuations and reviews by senior management.
Valuation Methodologies
Money Market Securities.
Money market securities are cash equivalents, which are included in cash and cash equivalents, restricted cash from collections on auto loan receivables 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 May 31, 2019
|
(In thousands)
|
Level 1
|
|
Level 2
|
|
Total
|
Assets:
|
|
|
|
|
|
Money market securities
|
$
|
415,713
|
|
|
$
|
—
|
|
|
$
|
415,713
|
|
Mutual fund investments
|
21,329
|
|
|
—
|
|
|
21,329
|
|
Derivative instruments
|
—
|
|
|
593
|
|
|
593
|
|
Total assets at fair value
|
$
|
437,042
|
|
|
$
|
593
|
|
|
$
|
437,635
|
|
|
|
|
|
|
|
Percent of total assets at fair value
|
99.9
|
%
|
|
0.1
|
%
|
|
100.0
|
%
|
Percent of total assets
|
2.2
|
%
|
|
—
|
%
|
|
2.2
|
%
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Derivative instruments
|
$
|
—
|
|
|
$
|
(13,213
|
)
|
|
$
|
(13,213
|
)
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
(13,213
|
)
|
|
$
|
(13,213
|
)
|
|
|
|
|
|
|
Percent of total liabilities
|
—
|
%
|
|
0.1
|
%
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 28, 2019
|
(In thousands)
|
Level 1
|
|
Level 2
|
|
Total
|
Assets:
|
|
|
|
|
|
Money market securities
|
$
|
372,448
|
|
|
$
|
—
|
|
|
$
|
372,448
|
|
Mutual fund investments
|
19,263
|
|
|
—
|
|
|
19,263
|
|
Derivative instruments
|
—
|
|
|
1,844
|
|
|
1,844
|
|
Total assets at fair value
|
$
|
391,711
|
|
|
$
|
1,844
|
|
|
$
|
393,555
|
|
|
|
|
|
|
|
Percent of total assets at fair value
|
99.5
|
%
|
|
0.5
|
%
|
|
100.0
|
%
|
Percent of total assets
|
2.1
|
%
|
|
—
|
%
|
|
2.1
|
%
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Derivative instruments
|
$
|
—
|
|
|
$
|
(6,120
|
)
|
|
$
|
(6,120
|
)
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
(6,120
|
)
|
|
$
|
(6,120
|
)
|
|
|
|
|
|
|
Percent of total liabilities
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
There were
no
transfers between Levels 1 and 2 for the
three
months ended
May 31, 2019
. As of
May 31, 2019
and
February 28, 2019
, we had
no
Level 3 assets.
Fair Value of Financial Instruments
The carrying value of our cash and cash equivalents, accounts receivable, other restricted cash deposits and accounts payable approximates fair value due to the short-term nature and/or variable rates associated with these financial instruments. Auto loan receivables are presented net of an allowance for estimated loan losses. We believe that the carrying value of our revolving credit facility and term loan approximates fair value due to the variable rates associated with these obligations. The fair value of our senior unsecured notes, which are not carried at fair value on our consolidated balance sheets, was determined using Level 2 inputs based on quoted market prices. The carrying value and fair value of the senior unsecured notes as of
May 31, 2019
and
February 28, 2019
, respectively, are as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
As of May 31, 2019
|
|
As of February 28, 2019
|
Carrying value
|
$
|
500,000
|
|
|
$
|
500,000
|
|
Fair value
|
$
|
513,199
|
|
|
$
|
488,590
|
|
7.
Cancellation Reserves
We recognize revenue for EPP products, on a net basis, at the time of sale. We also record a reserve for estimated contract cancellations. Cancellations of these services may result from early termination by the customer, or default or prepayment on the finance contract. The reserve for cancellations is evaluated for each product and is based on forecasted forward cancellation curves utilizing historical experience, recent trends and credit mix of the customer base.
Cancellation Reserves
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31
|
(In millions)
|
2019
|
|
2018
|
Balance as of beginning of period
|
$
|
102.8
|
|
|
$
|
105.2
|
|
Cancellations
|
(18.8
|
)
|
|
(16.6
|
)
|
Provision for future cancellations
|
25.5
|
|
|
20.1
|
|
Balance as of end of period
|
$
|
109.5
|
|
|
$
|
108.7
|
|
The current portion of estimated cancellation reserves is recognized as a component of accrued expenses and other current liabilities with the remaining amount recognized in other liabilities. As of
May 31, 2019
and
February 28, 2019
, the current portion of cancellation reserves was
$58.7 million
and
$55.6 million
, respectively.
8.
Income Taxes
We had
$29.7 million
of gross unrecognized tax benefits as of
May 31, 2019
, and
$30.3 million
as of
February 28, 2019
. There were no significant changes to the gross unrecognized tax benefits as reported for the year ended
February 28, 2019
.
9.
Debt
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
As of May 31
|
|
As of February 28
|
Debt Description
(1)
|
Maturity Date
|
2019
|
|
2019
|
Revolving credit facility
(2)
|
August 2020
|
$
|
274,371
|
|
|
$
|
366,529
|
|
Term loan
(3)
|
August 2020
|
300,000
|
|
|
300,000
|
|
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
|
516,029
|
|
|
495,626
|
|
Non-recourse notes payable
|
Various dates through October 2025
|
12,893,596
|
|
|
12,535,405
|
|
Total debt
|
|
14,483,996
|
|
|
14,197,560
|
|
Less: current portion
|
|
(432,342
|
)
|
|
(396,350
|
)
|
Less: unamortized debt issuance costs
|
|
(23,940
|
)
|
|
(24,676
|
)
|
Long-term debt, net
|
|
$
|
14,027,714
|
|
|
$
|
13,776,534
|
|
|
|
(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), the federal funds rate, or the prime rate, depending on the type of borrowing. In June 2019, the credit facility was amended to increase the credit limit to
$1.45 billion
and extend the maturity date to June 2024.
|
|
|
(3)
|
Borrowings accrue interest at variable rates based on the Eurodollar rate (LIBOR), the federal funds rate, or the prime rate, depending on the type of borrowing. In June 2019, the term loan was amended to extend the maturity date to June 2024.
|
Revolving Credit Facility.
Borrowings under our
$1.20 billion
unsecured revolving credit facility (the “credit facility”), which was amended to increase the credit limit to
$1.45 billion
in June 2019, are available for working capital and general corporate purposes. We pay a commitment fee on 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 no repayments are expected to be made within the next 12 months. As of
May 31, 2019
, the unused capacity of
$925.6 million
was fully available to us.
Term Loan.
Borrowings under our
$300 million
term loan are available for working capital and general corporate purposes. The term loan was 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. These 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 did 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 loan receivables 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 loan receivables. 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
October 2025
, but may mature earlier, depending upon the repayment rate of the underlying auto loan receivables.
Information on our funding vehicles for non-recourse notes payable as of
May 31, 2019
, are as follows:
|
|
|
|
|
(in billions)
|
Capacity
|
Warehouse facilities
|
|
August 2019 expiration
|
$
|
1.40
|
|
September 2019 expiration
|
0.15
|
|
February 2020 expiration
|
1.95
|
|
Combined warehouse facility limit
|
$
|
3.50
|
|
Unused capacity
|
$
|
1.32
|
|
|
|
Non-recourse notes payable outstanding:
|
|
Warehouse facilities
|
$
|
2.18
|
|
Asset-backed term funding transactions
|
10.71
|
|
Non-recourse notes payable
|
$
|
12.89
|
|
We enter into warehouse facility agreements for one-year terms and generally 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 4 for additional information on the related auto loan receivables.
Capitalized Interest.
We capitalize interest in connection with the construction of certain facilities. For the
three
months ended
May 31, 2019
and
2018
, we capitalized interest of
$1.6 million
and
$1.4 million
, respectively.
Financial Covenants.
The credit facility, term loan and senior note agreements contain representations and warranties, conditions and covenants. We must also meet financial covenants in conjunction with certain financing obligations. The agreements governing our non-recourse funding vehicles contain representations and warranties, financial covenants and performance triggers. As of
May 31, 2019
, we were in compliance with all financial covenants and our non-recourse funding vehicles were in compliance with the related performance triggers.
10.
Stock and Stock-Based Incentive Plans
(A) Share Repurchase Program
As of
May 31, 2019
, a total of
$2 billion
of board authorizations for repurchases of our common stock was outstanding, with no expiration date, of which
$1.91 billion
remained available for repurchase.
Common Stock Repurchases
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
May 31
|
|
2019
|
|
2018
|
Number of shares repurchased
(in thousands)
|
2,953.1
|
|
|
3,307.6
|
|
Average cost per share
|
$
|
69.35
|
|
|
$
|
62.69
|
|
Available for repurchase, as of end of period
(in millions)
|
$
|
1,909.1
|
|
|
$
|
809.5
|
|
(B) Stock Incentive Plans
We maintain long-term incentive plans for management, certain employees and the nonemployee members of our board of directors. The plans allow for the granting of equity-based compensation awards, including nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, stock- and cash-settled restricted stock units, stock grants or a combination of awards. To date, we have
no
t awarded any incentive stock options.
The majority of associates who receive share-based compensation awards primarily receive cash-settled restricted stock units. Senior management and other key associates receive awards of nonqualified stock options, stock-settled restricted stock units and/or restricted stock awards. Nonemployee directors receive awards of nonqualified stock options, stock grants, stock-settled restricted stock units and/or restricted stock awards. Excluding stock grants, all share-based compensation awards, including any associated dividend rights, are subject to forfeiture.
Nonqualified Stock Options.
Nonqualified stock options are awards that allow the recipient to purchase shares of our common stock at a fixed price. Stock options are granted at an exercise price equal to the fair market value of our common stock on the grant date. The stock options generally vest annually in equal amounts over
4 years
. These options expire
7 years
after the date of the grant.
Cash-Settled Restricted Stock Units.
Also referred to as restricted stock units, or RSUs, these are awards that entitle the holder to a cash payment equal to the fair market value of a share of our common stock for each unit granted. Conversion generally occurs at the end of a
three
-year vesting period. However, the cash payment per RSU will not be greater than
200%
or less than
75%
of the fair market value of a share of our common stock on the grant date. The initial grant date fair values are based on the volume-weighted average prices of our common stock on the grant dates. RSUs are liability awards and do not have voting rights.
Stock-Settled Market Stock Units.
Also referred to as market stock units, or MSUs, these are restricted stock unit awards with market conditions granted to eligible key associates that are converted into between
zero
and
two
shares of common stock for each unit granted. Conversion generally occurs at the end of a three-year vesting period. The conversion ratio is calculated by dividing the average closing price of our stock during the final
40
trading days of the
three
-year vesting period by our stock price on the grant date, with the resulting quotient capped at
two
. This quotient is then multiplied by the number of MSUs granted to yield the number of shares awarded. The grant date fair values are determined using a Monte-Carlo simulation and are based on the expected market price of our common stock on the vesting date and the expected number of converted common shares. MSUs do not have voting rights.
Other Share-Based Incentives
Stock-Settled Performance Stock Units
.
Also referred to as performance stock units, or PSUs, these are restricted stock unit awards with performance conditions granted to eligible key associates that are converted into between
zero
and
two
shares of common stock for each unit granted. Conversion generally occurs at the end of a
three
-year vesting period. For the fiscal 2018 grants, the conversion ratio is based on the company reaching certain target levels set by the board of directors for cumulative three-year pretax diluted earnings per share at the end of the three-year period, with the resulting quotient subject to meeting a minimum
25%
threshold and capped at
200%
. For the fiscal 2020 grants, the conversion ratio is based on the company reaching certain target levels set by the board of directors for annual pretax diluted earnings per share excluding any unrealized gains or losses on equity investments in private companies at the end of the each one-year period for one-third of the granted units, with the resulting quotients subject to meeting a minimum
25%
threshold and capped at
200%
. These quotients are then multiplied by the number
of PSUs granted to yield the number of shares awarded. The grant date fair values are based on the volume-weighted average prices of our common stock on the grant dates. PSUs do not have voting rights. As of
May 31, 2019
,
128,487
units were outstanding at a weighted average grant date fair value per share of
$68.32
.
Stock-Settled Deferred Stock Units
.
Also referred to as deferred stock units, or DSUs, these are restricted stock unit awards granted to non-employee members of our board of directors that are converted into
one
share of common stock for each unit granted. Conversion occurs at the end of the
one
-year vesting period unless the director has exercised the option to defer conversion until separation of service to the company. The grant date fair values are based on the volume-weighted average prices of our common stock on the grant dates. DSUs have no voting rights. As of
May 31, 2019
,
24,712
units were outstanding at a grant date fair value of
$72.58
.
Restricted Stock Awards
. Restricted stock awards, or RSAs, are awards of our common stock that are subject to specified restrictions that generally lapse after a
one
- to
three
-year period from the date of the grant. The grant date fair values are based on the volume-weighted average prices of our common stock on the grant dates. Participants holding restricted stock are entitled to vote on matters submitted to holders of our common stock for a vote. As of
May 31, 2019
, there were
no
units outstanding.
(C) Share-Based Compensation
Composition of Share-Based Compensation Expense
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
May 31
|
(In thousands)
|
2019
|
|
2018
|
Cost of sales
|
$
|
2,825
|
|
|
$
|
1,291
|
|
CarMax Auto Finance income
|
1,805
|
|
|
1,197
|
|
Selling, general and administrative expenses
|
40,893
|
|
|
26,977
|
|
Share-based compensation expense, before income taxes
|
$
|
45,523
|
|
|
$
|
29,465
|
|
Composition of Share-Based Compensation Expense – By Grant Type
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
May 31
|
(In thousands)
|
2019
|
|
2018
|
Nonqualified stock options
|
$
|
11,842
|
|
|
$
|
11,115
|
|
Cash-settled restricted stock units (RSUs)
|
26,113
|
|
|
12,354
|
|
Stock-settled market stock units (MSUs)
|
4,409
|
|
|
4,636
|
|
Other share-based incentives:
|
|
|
|
Stock-settled performance stock units (PSUs)
|
2,209
|
|
|
406
|
|
Restricted stock (RSAs)
|
—
|
|
|
487
|
|
Stock-settled deferred stock units (DSUs)
|
452
|
|
|
—
|
|
Employee stock purchase plan
|
498
|
|
|
467
|
|
Total other share-based incentives
|
$
|
3,159
|
|
|
$
|
1,360
|
|
Share-based compensation expense, before income taxes
|
$
|
45,523
|
|
|
$
|
29,465
|
|
Unrecognized Share-Based Compensation Expense – By Grant Type
|
|
|
|
|
|
|
|
As of May 31, 2019
|
|
|
|
Weighted Average
|
|
Unrecognized
|
|
Remaining
|
|
Compensation
|
|
Recognition Life
|
(Costs in millions)
|
Costs
|
|
(Years)
|
Nonqualified stock options
|
$
|
59.0
|
|
|
2.8
|
Stock-settled market stock units
|
21.4
|
|
|
1.9
|
Other share-based incentives:
|
|
|
|
Stock-settled performance stock units
|
2.4
|
|
|
0.1
|
Stock-settled deferred stock units
|
0.2
|
|
|
1.9
|
Total other share-based incentives
|
2.6
|
|
|
1.6
|
Total
|
$
|
83.0
|
|
|
2.5
|
We recognize compensation expense for stock options, MSUs, PSUs, DSUs and RSAs on a straight-line basis (net of estimated forfeitures) over the requisite service period, which is generally the vesting period of the award. The PSU expense is adjusted for any change in management’s assessment of the performance target level that is probable of being achieved. The variable expense associated with RSUs is recognized over their vesting period (net of estimated forfeitures) and is calculated based on the volume-weighted average price of our common stock on the last trading day of each reporting period.
The total costs for matching contributions for our employee stock purchase plan are included in share-based compensation expense. There were
no
capitalized share-based compensation costs as of or for the three months ended
May 31, 2019
or
2018
.
Stock Option Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
Number of
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
(Shares and intrinsic value in thousands)
|
Shares
|
|
Price
|
|
Life (Years)
|
|
Value
|
Outstanding as of February 28, 2019
|
7,869
|
|
|
$
|
57.96
|
|
|
|
|
|
|
Options granted
|
1,575
|
|
|
78.61
|
|
|
|
|
|
|
Options exercised
|
(727
|
)
|
|
45.76
|
|
|
|
|
|
|
Options forfeited or expired
|
—
|
|
|
—
|
|
|
|
|
|
Outstanding as of May 31, 2019
|
8,717
|
|
|
$
|
62.71
|
|
|
4.7
|
|
$
|
136,236
|
|
|
|
|
|
|
|
|
|
Exercisable as of May 31, 2019
|
4,488
|
|
|
$
|
58.98
|
|
|
3.7
|
|
$
|
86,617
|
|
Stock Option Information
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31
|
|
2019
|
|
2018
|
Options granted
|
1,574,735
|
|
|
1,720,387
|
|
Weighted average grant date fair value per share
|
$
|
22.08
|
|
|
$
|
18.71
|
|
Cash received from options exercised
(in millions)
|
$
|
33.3
|
|
|
$
|
9.1
|
|
Intrinsic value of options exercised
(in millions)
|
$
|
19.4
|
|
|
$
|
4.2
|
|
Realized tax benefits
(in millions)
|
$
|
5.3
|
|
|
$
|
1.2
|
|
For stock options, the fair value of each award is estimated as of the date of grant using a binomial valuation model. In computing the value of the option, the binomial model considers characteristics of fair-value option pricing that are not available for consideration under a closed-form valuation model (for example, the Black-Scholes model), such as the contractual term of the option, the probability that the option will be exercised prior to the end of its contractual life and the probability of termination or retirement of the option holder. For this reason, we believe that the binomial model provides a fair value that is more representative
of actual experience and future expected experience than the value calculated using a closed-form model. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by the recipients of share-based awards.
Assumptions Used to Estimate Option Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31
|
|
2019
|
|
2018
|
Dividend yield
|
|
|
|
0.0
|
%
|
|
|
|
|
0.0
|
%
|
Expected volatility factor
(1)
|
27.3
|
%
|
-
|
29.5
|
%
|
|
29.0
|
%
|
-
|
31.4
|
%
|
Weighted average expected volatility
|
|
|
|
29.3
|
%
|
|
|
|
|
29.1
|
%
|
Risk-free interest rate
(2)
|
2.3
|
%
|
-
|
2.4
|
%
|
|
1.7
|
%
|
-
|
2.9
|
%
|
Expected term (in years)
(3)
|
|
|
|
4.6
|
|
|
|
|
|
4.6
|
|
|
|
(1)
|
Measured using historical daily price changes of our stock for a period corresponding to the term of the options and the implied volatility derived from the market prices of traded options on our stock.
|
|
|
(2)
|
Based on the U.S. Treasury yield curve at the time of grant.
|
|
|
(3)
|
Represents the estimated number of years that options will be outstanding prior to exercise.
|
Cash-Settled Restricted Stock Unit Activity
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Average
|
|
Number of
|
|
Grant Date
|
(Units in thousands)
|
Units
|
|
Fair Value
|
Outstanding as of February 28, 2019
|
1,609
|
|
|
$
|
58.00
|
|
Stock units granted
|
563
|
|
|
$
|
78.61
|
|
Stock units vested and converted
|
(491
|
)
|
|
$
|
51.66
|
|
Stock units cancelled
|
(31
|
)
|
|
$
|
61.05
|
|
Outstanding as of May 31, 2019
|
1,650
|
|
|
$
|
66.86
|
|
Cash-Settled Restricted Stock Unit Information
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31
|
|
2019
|
|
2018
|
Stock units granted
|
562,586
|
|
|
628,547
|
|
Initial weighted average grant date fair value per share
|
$
|
78.61
|
|
|
$
|
63.04
|
|
Payments (before payroll tax withholdings) upon vesting
(in millions)
|
$
|
36.5
|
|
|
$
|
20.0
|
|
Realized tax benefits
(in millions)
|
$
|
10.0
|
|
|
$
|
5.6
|
|
Expected Cash Settlement Range Upon Restricted Stock Unit Vesting
|
|
|
|
|
|
|
|
|
|
As of May 31, 2019
|
(In thousands)
|
Minimum
(1)
|
|
Maximum
(1)
|
Fiscal 2021
|
$
|
26,783
|
|
|
$
|
71,420
|
|
Fiscal 2022
|
21,645
|
|
|
57,721
|
|
Fiscal 2023
|
23,835
|
|
|
63,561
|
|
Total expected cash settlements
|
$
|
72,263
|
|
|
$
|
192,702
|
|
|
|
(1)
|
Net of estimated forfeitures.
|
Stock-Settled Market Stock Unit Activity
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Average
|
|
Number of
|
|
Grant Date
|
(Units in thousands)
|
Units
|
|
Fair Value
|
Outstanding as of February 28, 2019
|
509
|
|
|
$
|
74.36
|
|
Stock units granted
|
128
|
|
|
$
|
98.43
|
|
Stock units vested and converted
|
(148
|
)
|
|
$
|
63.97
|
|
Stock units cancelled
|
—
|
|
|
$
|
—
|
|
Outstanding as of May 31, 2019
|
489
|
|
|
$
|
83.83
|
|
Stock-Settled Market Stock Unit Information
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31
|
|
2019
|
|
2018
|
Stock units granted
|
128,376
|
|
|
202,043
|
|
Weighted average grant date fair value per share
|
$
|
98.43
|
|
|
$
|
81.86
|
|
Realized tax benefits
(in millions)
|
$
|
3.8
|
|
|
$
|
1.4
|
|
11.
Net Earnings Per Share
Basic net earnings per share is computed by dividing net earnings available for basic common shares by the weighted average number of shares of common stock outstanding. Diluted net earnings per share is computed by dividing net earnings available for diluted common shares by the sum of weighted average number of shares of common stock outstanding and dilutive potential common stock. Diluted net earnings per share is calculated using the “if-converted” treasury stock method.
Basic and Dilutive Net Earnings Per Share Reconciliations
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
May 31
|
(In thousands except per share data)
|
2019
|
|
2018
|
Net earnings
|
$
|
266,744
|
|
|
$
|
238,656
|
|
|
|
|
|
Weighted average common shares outstanding
|
166,324
|
|
|
178,139
|
|
Dilutive potential common shares:
|
|
|
|
Stock options
|
1,000
|
|
|
925
|
|
Stock-settled stock units and awards
|
319
|
|
|
357
|
|
Weighted average common shares and dilutive potential common shares
|
167,643
|
|
|
179,421
|
|
|
|
|
|
Basic net earnings per share
|
$
|
1.60
|
|
|
$
|
1.34
|
|
Diluted net earnings per share
|
$
|
1.59
|
|
|
$
|
1.33
|
|
Certain options to purchase shares of common stock were outstanding and not included in the calculation of diluted net earnings per share because their inclusion would have been antidilutive. On a weighted average basis, for the three months ended
May 31, 2019
and
2018
, options to purchase
3,083,172
shares and
3,434,764
shares of common stock, respectively, were not included.
12.
Accumulated Other Comprehensive Loss
Changes in Accumulated Other Comprehensive Loss By Component
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Net
|
|
Net
|
|
Accumulated
|
|
Unrecognized
|
|
Unrecognized
|
|
Other
|
|
Actuarial
|
|
Hedge Gains
|
|
Comprehensive
|
(In thousands, net of income taxes)
|
Losses
|
|
(Losses)
|
|
Loss
|
Balance as of February 28, 2019
|
$
|
(70,478
|
)
|
|
$
|
2,468
|
|
|
$
|
(68,010
|
)
|
Other comprehensive loss before reclassifications
|
—
|
|
|
(13,200
|
)
|
|
(13,200
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
355
|
|
|
(351
|
)
|
|
4
|
|
Other comprehensive income (loss)
|
355
|
|
|
(13,551
|
)
|
|
(13,196
|
)
|
Balance as of May 31, 2019
|
$
|
(70,123
|
)
|
|
$
|
(11,083
|
)
|
|
$
|
(81,206
|
)
|
Changes In and Reclassifications Out of Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31
|
(In thousands)
|
2019
|
|
2018
|
Retirement Benefit Plans:
|
|
|
|
Actuarial loss amortization reclassifications recognized in net pension expense:
|
|
|
|
Cost of sales
|
$
|
197
|
|
|
$
|
201
|
|
CarMax Auto Finance income
|
12
|
|
|
13
|
|
Selling, general and administrative expenses
|
259
|
|
|
273
|
|
Total amortization reclassifications recognized in net pension expense
|
468
|
|
|
487
|
|
Tax expense
|
(113
|
)
|
|
(118
|
)
|
Amortization reclassifications recognized in net pension expense, net of tax
|
355
|
|
|
369
|
|
Net change in retirement benefit plan unrecognized actuarial losses, net of tax
|
355
|
|
|
369
|
|
|
|
|
|
Cash Flow Hedges (Note 5):
|
|
|
|
Changes in fair value
|
(17,942
|
)
|
|
(387
|
)
|
Tax benefit
|
4,742
|
|
|
102
|
|
Changes in fair value, net of tax
|
(13,200
|
)
|
|
(285
|
)
|
Reclassifications to CarMax Auto Finance income
|
(477
|
)
|
|
(1,109
|
)
|
Tax benefit
|
126
|
|
|
292
|
|
Reclassification of hedge gains, net of tax
|
(351
|
)
|
|
(817
|
)
|
Net change in cash flow hedge unrecognized losses, net of tax
|
(13,551
|
)
|
|
(1,102
|
)
|
Total other comprehensive loss, net of tax
|
$
|
(13,196
|
)
|
|
$
|
(733
|
)
|
Changes in the funded status of our retirement plans and changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognized in accumulated other comprehensive loss. The cumulative balances are net of deferred taxes of
$26.1 million
as of
May 31, 2019
and $
21.4 million
as of
February 28, 2019
.
13.
Leases
Our leases primarily consist of operating and finance leases related to retail stores, office space, land and equipment. We also have stores subject to sale-leaseback transactions that did not qualify for sale accounting and are accounted for as financing obligations. For more information on these financing obligations see Note 9.
The initial term for real property leases is typically
5
to
20
years. For equipment leases, the initial term generally ranges from
3
to
8
years. Most leases include one or more options to renew, with renewal terms that can extend the lease term from
1
to
20
years or more. We include options to renew (or terminate) in our lease term, and as part of our right-of-use ("ROU") assets and lease liabilities, when it is reasonably certain that we will exercise that option.
ROU assets and the related lease liabilities are initially measured at the present value of future lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our collateralized incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments. We include variable lease payments in the initial measurement of ROU assets and lease liabilities only to the extent they depend on an index or rate. Changes in such indices or rates are accounted for in the period the change occurs, and do not result in the remeasurement of the ROU asset or liability. We are also responsible for payment of certain real estate taxes, insurance and other expenses on our leases. These amounts are generally considered to be variable and are not included in the measurement of the ROU asset and lease liability. We generally account for non-lease components, such as maintenance, separately from lease components. For certain equipment leases, we apply a portfolio approach to account for the lease assets and liabilities.
Our lease agreements do not contain any material residual value guarantees or material restricted covenants. Leases with a term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
The components of lease expense were as follows:
|
|
|
|
|
(In thousands)
|
Three Months Ended May 31, 2019
|
Operating lease cost
(1)
|
$
|
14,555
|
|
Finance lease cost:
|
|
Depreciation of lease assets
|
1,098
|
|
Interest on lease liabilities
|
1,477
|
|
Total finance lease cost
|
2,575
|
|
Total lease cost
|
$
|
17,130
|
|
(1)
Includes short-term leases and variable lease costs, which are immaterial.
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
(In thousands)
|
Classification
|
As of May 31, 2019
|
Assets:
|
|
|
Operating lease assets
|
Operating lease assets
|
$
|
466,380
|
|
Finance lease assets
|
Property and equipment, net
(1)
|
71,560
|
|
Total lease assets
|
|
$
|
537,940
|
|
Liabilities:
|
|
|
Current:
|
|
|
Operating leases
|
Current portion of operating lease liabilities
|
$
|
29,822
|
|
Finance leases
|
Accrued expenses and other current liabilities
|
3,357
|
|
Long-term:
|
|
|
Operating leases
|
Operating lease liabilities, excluding current portion
|
458,788
|
|
Finance leases
|
Other liabilities
|
71,717
|
|
Total lease liabilities
|
|
$
|
563,684
|
|
(1)
Finance lease assets are recorded net of accumulated depreciation of
$4.4 million
as of May 31, 2019.
Lease term and discount rate information related to leases was as follows:
|
|
|
|
Lease Term and Discount Rate
|
As of May 31, 2019
|
Weighted Average Remaining Lease Term
(in years)
|
|
Operating leases
|
20.55
|
|
Finance leases
|
14.49
|
|
|
|
Weighted Average Discount Rate
|
|
Operating leases
|
5.41
|
%
|
Finance leases
|
10.53
|
%
|
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
(In thousands)
|
Three Months Ended May 31, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows from operating leases
|
$
|
14,370
|
|
Operating cash flows from finance leases
|
766
|
|
Financing cash flows from finance leases
|
745
|
|
|
|
Lease assets obtained in exchange for lease obligations:
|
Operating leases
|
21,629
|
|
Finance leases
|
43,261
|
|
Maturities of lease liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
As of May 31, 20
19
|
(In thousands)
|
Operating Leases
(1)
|
|
Finance Leases
(1)
|
Fiscal 2020
, remaining
|
$
|
41,018
|
|
|
$
|
6,437
|
|
Fiscal 2021
|
52,938
|
|
|
12,032
|
|
Fiscal 2022
|
49,841
|
|
|
12,253
|
|
Fiscal 2023
|
47,416
|
|
|
12,450
|
|
Fiscal 202
4
|
46,295
|
|
|
15,085
|
|
Thereafter
|
621,894
|
|
|
95,087
|
|
Total lease pa
yments
|
859,402
|
|
|
153,344
|
|
Less: interest
|
(370,792
|
)
|
|
(78,270
|
)
|
Present value of lease liabilities
|
$
|
488,610
|
|
|
$
|
75,074
|
|
(1)
Lease payments exclude
$36.9 million
of legally binding minimum lease payments for leases signed but not yet commenced.
As previously disclosed in our 2019 Annual Report and under the previous lease accounting standard, future minimum lease obligations were as follows:
|
|
|
|
|
|
|
|
|
|
As of February 28, 2019
|
|
Capital
|
|
Operating Lease
|
(In thousands)
|
Leases
(1)
|
|
Commitments
(1)
|
Fiscal 2020
|
$
|
5,139
|
|
|
$
|
55,295
|
|
Fiscal 2021
|
6,055
|
|
|
52,142
|
|
Fiscal 2022
|
6,185
|
|
|
48,886
|
|
Fiscal 2023
|
6,288
|
|
|
46,235
|
|
Fiscal 2024
|
5,186
|
|
|
45,067
|
|
Fiscal 2025 and thereafter
|
11,445
|
|
|
595,047
|
|
Total minimum lease payments
|
40,298
|
|
|
$
|
842,672
|
|
Less amounts representing interest
|
(8,518
|
)
|
|
|
Present value of net minimum lease payments
|
$
|
31,780
|
|
|
|
(1)
Excludes taxes, insurance and other costs payable directly by us. These costs vary from year to year and are incurred in the ordinary course of business.
14.
Supplemental Cash Flow Information
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31
|
(In thousands)
|
2019
|
|
2018
|
Non-cash investing and financing activities:
|
|
|
|
|
|
Increase in accrued capital expenditures
|
$
|
2,868
|
|
|
$
|
645
|
|
Increase in financing obligations
|
$
|
22,000
|
|
|
$
|
9,704
|
|
See Note 13 for supplemental cash flow information related to leases.
15.
Contingent Liabilities
Litigation
.
CarMax entities are defendants in four proceedings asserting wage and hour claims with respect to CarMax sales consultants and non-exempt employees in California. The asserted claims include failure to pay minimum wage, provide meal periods and rest breaks, pay statutory/contractual wages, reimburse for work-related expenses and provide accurate itemized wage statements; unfair competition; and Private Attorney General Act claims. On September 4, 2015, Craig Weiss et al., v. CarMax Auto Superstores California, LLC, and CarMax Auto Superstores West Coast, Inc., a putative class action, was filed in the Superior Court of California, County of Placer. The Weiss lawsuit seeks civil penalties, fines, cost of suit, and the recovery of attorneys’ fees. On June 29, 2016, Ryan Gomez et al. v. CarMax Auto Superstores California, LLC, and CarMax Auto Superstores West Coast, Inc., a putative class action, was filed in the Superior Court of the State of California, Los Angeles. The Gomez lawsuit seeks declaratory relief, unspecified damages, restitution, statutory penalties, interest, cost and attorneys’ fees. On October 31, 2017, Joshua Sabanovich v. CarMax Superstores California, LLC et. al., a putative class action, was filed in the Superior Court of California, County of Stanislaus. The Sabanovich lawsuit seeks unspecified damages, restitution, statutory penalties, interest, cost and attorneys’ fees. On November 21, 2018, Derek Mcelhannon et al v. CarMax Auto Superstores California, LLC and CarMax Auto Superstores West Coast, Inc., a putative class action, was filed in Superior Court of California, County of Alameda. On February 1, 2019, the Mcelhannon lawsuit was removed to the U.S. District Court, Northern District of California, San Francisco Division. The Mcelhannon lawsuit seeks unspecified damages, restitution, statutory and/or civil penalties, interest, cost and attorneys’ fees. Based upon our evaluation of information currently available, we believe that the ultimate resolution of the foregoing proceedings will not have a material adverse effect, either individually or in the aggregate, on our financial condition, results of operations or cash flows.
On September 7, 2016, James Rowland v. CarMax Auto Superstores California, LLC, and CarMax Auto Superstores West Coast, Inc., a putative class action asserting wage and hour claims, was filed in the U.S. District Court, Eastern District of California,
Sacramento Division. On April 11, 2019, the court dismissed the Rowland lawsuit, including the class claims, and compelled arbitration of the plaintiff’s claims on an individualized basis.
On April 25, 2017 and October 11, 2018, the company met with representatives from multiple California municipality district attorney offices as part of an informal inquiry by those offices into the handling, storage and disposal of certain types of hazardous waste at our store locations in those municipalities. We are unable to make a reasonable estimate of the amount or range of loss that could result from an unfavorable outcome in these matters.
We are involved in various other legal proceedings in the normal course of business. Based upon our evaluation of information currently available, we believe that the ultimate resolution of any such proceedings will not have a material adverse effect, either individually or in the aggregate, on our financial condition, results of operations or cash flows.
Other Matters.
In accordance with the terms of real estate lease agreements, we generally agree to indemnify the lessor from certain liabilities arising as a result of the use of the leased premises, including environmental liabilities and repairs to leased property upon termination of the lease. Additionally, in accordance with the terms of agreements entered into for the sale of properties, we generally agree to indemnify the buyer from certain liabilities and costs arising subsequent to the date of the sale, including environmental liabilities and liabilities resulting from the breach of representations or warranties made in accordance with the agreements. We do not have any known material environmental commitments, contingencies or other indemnification issues arising from these arrangements.
As part of our customer service strategy, we guarantee the used vehicles we retail with a 90-day/4,000 mile limited warranty. A vehicle in need of repair within this period will be repaired free of charge. As a result, each vehicle sold has an implied liability associated with it. Accordingly, based on historical trends, we record a provision for estimated future repairs during the guarantee period for each vehicle sold. The liability for this guarantee was
$8.8 million
as of
May 31, 2019
, and
$7.4 million
as of
February 28, 2019
, and is included in accrued expenses and other current liabilities.
ITEM 2.