Quarterly Report (10-q)

Date : 10/04/2019 @ 3:21PM
Source : Edgar (US Regulatory)
Stock : CarMax Group (KMX)
Quote : 99.475  -0.675 (-0.67%) @ 4:53PM
CarMax share price Chart

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number:  1-31420
 
CARMAX, INC.
(Exact name of registrant as specified in its charter)
 
Virginia
 
54-1821055
(State or other jurisdiction of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
12800 Tuckahoe Creek Parkway
 
23238
Richmond,
Virginia
 
 
(Address of Principal Executive Offices)
 
(Zip Code)
(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:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
KMX
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. 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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.
Class
 
Outstanding as of September 30, 2019
Common Stock, par value $0.50
 
164,430,050

Page 1



CARMAX, INC. AND SUBSIDIARIES
 
TABLE OF CONTENTS
 
 
Page
No.
PART I.
FINANCIAL INFORMATION 
 
 
 
 
 
 
Item 1.
Financial Statements:
 
 
 
 
 
 
 
Consolidated Statements of Earnings (Unaudited) –
 
 
 
Three and Six Months Ended August 31, 2019 and 2018
3
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income (Unaudited) –
 
 
 
Three and Six Months Ended August 31, 2019 and 2018
4
 
 
 
 
 
 
Consolidated Balance Sheets (Unaudited) –
 
 
 
August 31, 2019 and February 28, 2019
5
 
 
 
 
 
 
Consolidated Statements of Cash Flows (Unaudited) –
 
 
 
Six Months Ended August 31, 2019 and 2018
6
 
 
 
 
 
 
Consolidated Statements of Shareholders' Equity (Unaudited) –
 
 
 
Three and Six Months Ended August 31, 2019 and 2018
7
 
 
 
 
 
 
Notes to Consolidated Financial Statements (Unaudited)
8
 
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and
 
 
 
Results of Operations
 24
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
39
 
 
 
 
 
Item 4.
Controls and Procedures
39
 
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
 
 
Item 1.
Legal Proceedings
40
 
 
 
 
 
Item 1A.
Risk Factors
40
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
40
 
 
 
 
 
Item 6.
Exhibits
41
 
 
 
 
SIGNATURES
42
 
 


Page 2



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
 
 
 
 
Three Months Ended August 31
 
Six Months Ended August 31
(In thousands except per share data)
2019
%(1)
 
2018
%(1)
 
2019
%(1)
 
2018
%(1)
SALES AND OPERATING REVENUES:
 
 
 
 
 
 
 
 
 
 
 
Used vehicle sales
$
4,346,295

83.6
 
$
3,975,368

83.4

 
$
8,886,952

84.1

 
$
7,996,415

83.7
Wholesale vehicle sales
678,286

13.0
 
627,990

13.2

 
1,340,735

12.7

 
1,245,641

13.0
Other sales and revenues
176,570

3.4
 
162,677

3.4

 
339,782

3.2

 
316,571

3.3
NET SALES AND OPERATING REVENUES
5,201,151

100.0
 
4,766,035

100.0

 
10,567,469

100.0

 
9,558,627

100.0
COST OF SALES:
 
 
 
 
 
 
 
 
 
 
 
Used vehicle cost of sales
3,889,917

74.8
 
3,546,383

74.4

 
7,933,741

75.1

 
7,127,992

74.6
Wholesale vehicle cost of sales
560,906

10.8
 
516,913

10.8

 
1,097,396

10.4

 
1,019,858

10.7
Other cost of sales
56,875

1.1
 
52,103

1.1

 
100,496

1.0

 
98,801

1.0
TOTAL COST OF SALES
4,507,698

86.7
 
4,115,399

86.3

 
9,131,633

86.4

 
8,246,651

86.3
GROSS PROFIT 
693,453

13.3
 
650,636

13.7

 
1,435,836

13.6

 
1,311,976

13.7
CARMAX AUTO FINANCE INCOME 
114,131

2.2
 
109,667

2.3

 
230,090

2.2

 
225,260

2.4
Selling, general and administrative expenses
480,831

9.2
 
453,554

9.5

 
970,491

9.2

 
891,788

9.3
Interest expense
21,073

0.4
 
17,950

0.4

 
38,857

0.4

 
36,002

0.4
Other expense (income)
143

 
(686
)

 
(216
)

 
277

Earnings before income taxes
305,537

5.9
 
289,485

6.1

 
656,794

6.2

 
609,169

6.4
Income tax provision
71,938

1.4
 
68,595

1.4

 
156,451

1.5

 
149,623

1.6
NET EARNINGS 
$
233,599

4.5
 
$
220,890

4.6

 
$
500,343

4.7

 
$
459,546

4.8
WEIGHTED AVERAGE COMMON SHARES:
 
 
 
 
 
 
 
 
 
 
 
Basic
165,354

 
 
176,284



 
165,839

 

 
177,211

 
Diluted
167,272

 
 
178,200



 
167,458

 

 
178,811

 
NET EARNINGS PER SHARE:
 
 
 
 
 
 
 
 

 
 
 
Basic
$
1.41

 
 
$
1.25



 
$
3.02

 

 
$
2.59

 
Diluted
$
1.40

 
 
$
1.24



 
$
2.99

 

 
$
2.57

 
 
(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.

Page 3



CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
 
 
Three Months Ended August 31
 
Six Months Ended August 31
(In thousands)
2019
 
2018
 
2019
 
2018
NET EARNINGS
$
233,599

 
$
220,890

 
$
500,343

 
$
459,546

Other comprehensive (loss) income, net of taxes
 
 
 
 
 
 

Net change in retirement benefit plan unrecognized actuarial losses
356

 
370

 
711

 
739

Net change in cash flow hedge unrecognized losses
(10,780
)
 
240

 
(24,331
)
 
(862
)
Other comprehensive (loss) income, net of taxes
(10,424
)
 
610

 
(23,620
)
 
(123
)
TOTAL COMPREHENSIVE INCOME
$
223,175

 
$
221,500

 
$
476,723

 
$
459,423

 
  
 






































See accompanying notes to consolidated financial statements.

Page 4



CARMAX, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
 
As of August 31
 
As of February 28
(In thousands except share data)
2019
 
2019
ASSETS
 

 
 

CURRENT ASSETS:
 

 
 

Cash and cash equivalents
$
40,737

 
$
46,938

Restricted cash from collections on auto loan receivables
483,374

 
440,669

Accounts receivable, net
141,091

 
139,850

Inventory
2,604,750

 
2,519,455

Other current assets
114,987

 
67,101

TOTAL CURRENT ASSETS 
3,384,939

 
3,214,013

Auto loan receivables, net
13,065,959

 
12,428,487

Property and equipment, net of accumulated depreciation of $1,199,375 and $1,297,393 as of August 31, 2019 and February 28, 2019, respectively
2,981,260

 
2,828,058

Deferred income taxes
66,048

 
61,346

Operating lease assets
456,449

 

Other assets
185,599

 
185,963

TOTAL ASSETS 
$
20,140,254

 
$
18,717,867

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 
CURRENT LIABILITIES:
 

 
 
Accounts payable
$
628,507

 
$
593,171

Accrued expenses and other current liabilities
301,503

 
318,204

Accrued income taxes
1,389

 
3,784

Current portion of operating lease liabilities
30,066

 

Short-term debt
915

 
1,129

Current portion of long-term debt
10,762

 
10,177

Current portion of non-recourse notes payable
423,562

 
385,044

TOTAL CURRENT LIABILITIES 
1,396,704

 
1,311,509

Long-term debt, excluding current portion
1,689,079

 
1,649,244

Non-recourse notes payable, excluding current portion
12,695,050

 
12,127,290

Operating lease liabilities, excluding current portion
448,640

 

Other liabilities
299,224

 
272,796

TOTAL LIABILITIES 
16,528,697

 
15,360,839

 
 
 
 
Commitments and contingent liabilities


 


SHAREHOLDERS’ EQUITY:
 
 
 
Common stock, $0.50 par value; 350,000,000 shares authorized; 164,885,648 and 167,478,924 shares issued and outstanding as of August 31, 2019 and February 28, 2019, respectively
82,442

 
83,739

Capital in excess of par value
1,313,290

 
1,237,153

Accumulated other comprehensive loss
(91,630
)
 
(68,010
)
Retained earnings
2,307,455

 
2,104,146

TOTAL SHAREHOLDERS’ EQUITY 
3,611,557

 
3,357,028

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 
$
20,140,254

 
$
18,717,867



See accompanying notes to consolidated financial statements.

Page 5



CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended August 31
(In thousands)
2019
 
2018
OPERATING ACTIVITIES:
 
 
 
Net earnings
$
500,343

 
$
459,546

Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
103,468

 
90,311

Share-based compensation expense
68,887

 
54,234

Provision for loan losses
83,693

 
70,863

Provision for cancellation reserves
45,471

 
38,699

Deferred income tax provision
3,812

 
2,539

Other
3,718

 
1,358

Net (increase) decrease in:
 
 
 
Accounts receivable, net
(1,241
)
 
28,438

Inventory
(85,295
)
 
33,339

Other current assets
(48,452
)
 
22,161

Auto loan receivables, net
(721,165
)
 
(675,614
)
Other assets
15,421

 
(7,167
)
Net (decrease) increase in:
 
 
 
Accounts payable, accrued expenses and other
 
 
 
  current liabilities and accrued income taxes
(26,632
)
 
57,639

Other liabilities
(67,484
)
 
(65,461
)
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
(125,456
)
 
110,885

INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(171,347
)
 
(171,111
)
Proceeds from disposal of property and equipment
3

 
565

Purchases of investments
(8,244
)
 
(5,306
)
Sales of investments
720

 
904

NET CASH USED IN INVESTING ACTIVITIES
(178,868
)
 
(174,948
)
FINANCING ACTIVITIES:
 
 
 
(Decrease) increase in short-term debt, net
(214
)
 
3,169

Proceeds from issuances of long-term debt
3,293,500

 
1,300,600

Payments on long-term debt
(3,284,866
)
 
(1,460,584
)
Cash paid for debt issuance costs
(10,862
)
 
(8,189
)
Payments on finance lease obligations
(1,694
)
 
(335
)
Issuances of non-recourse notes payable
5,748,000

 
5,486,502

Payments on non-recourse notes payable
(5,141,901
)
 
(4,878,974
)
Repurchase and retirement of common stock
(341,929
)
 
(381,347
)
Equity issuances
86,521

 
47,502

NET CASH PROVIDED BY FINANCING ACTIVITIES
346,555

 
108,344

Increase in cash, cash equivalents, and restricted cash
42,231

 
44,281

Cash, cash equivalents, and restricted cash at beginning of year
595,377

 
554,898

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
$
637,608

 
$
599,179

 
 
 
 
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS:
Cash and cash equivalents
$
40,737

 
$
37,147

Restricted cash from collections on auto loan receivables
483,374

 
447,642

Restricted cash included in other assets
113,497

 
114,390

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD
$
637,608

 
$
599,179


See accompanying notes to consolidated financial statements.

Page 6



CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Unaudited)

 
Three and Six Months Ended August 31, 2019
 
 
 
 
 
 
 
 
 
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, 2019
167,479

 
$
83,739

 
$
1,237,153

 
$
2,104,146

 
$
(68,010
)
 
$
3,357,028

Net earnings

 

 

 
266,744

 

 
266,744

Other comprehensive loss

 

 

 

 
(13,196
)
 
(13,196
)
Share-based compensation expense

 

 
18,912

 

 

 
18,912

Repurchases of common stock
(2,953
)
 
(1,476
)
 
(21,991
)
 
(181,368
)
 

 
(204,835
)
Exercise of common stock options
727

 
363

 
32,888

 

 

 
33,251

Stock incentive plans, net shares issued
142

 
71

 
(5,220
)
 

 

 
(5,149
)
Balance as of May 31, 2019
165,395

 
$
82,697

 
$
1,261,742

 
$
2,189,522

 
$
(81,206
)
 
$
3,452,755

Net earnings

 

 

 
233,599

 

 
233,599

Other comprehensive loss

 

 

 

 
(10,424
)
 
(10,424
)
Share-based compensation expense

 

 
10,757

 

 

 
10,757

Repurchases of common stock
(1,526
)
 
(763
)
 
(11,933
)
 
(115,666
)
 

 
(128,362
)
Exercise of common stock options
1,008

 
504

 
52,766

 

 

 
53,270

Stock incentive plans, net shares issued
9

 
4

 
(42
)
 

 

 
(38
)
Balance as of August 31, 2019
164,886

 
$
82,442

 
$
1,313,290

 
$
2,307,455

 
$
(91,630
)
 
$
3,611,557

 
 
 
 
 
 
 
 
 
 
 
 
 
Three and Six Months Ended August 31, 2018
 
 
 
 
 
 
 
 
 
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, 2018
179,748

 
$
89,874

 
$
1,234,047

 
$
2,047,240

 
$
(54,312
)
 
$
3,316,849

Net earnings

 

 

 
238,656

 

 
238,656

Other comprehensive loss

 

 

 

 
(733
)
 
(733
)
Share-based compensation expense

 

 
16,645

 

 

 
16,645

Repurchases of common stock
(3,308
)
 
(1,654
)
 
(22,824
)
 
(182,926
)
 

 
(207,404
)
Exercise of common stock options
212

 
106

 
8,946

 

 

 
9,052

Stock incentive plans, net shares issued
68

 
34

 
(2,202
)
 

 

 
(2,168
)
Adoption of ASU 2014-09

 

 

 
12,864

 

 
12,864

Balance as of May 31, 2018
176,720

 
$
88,360

 
$
1,234,612

 
$
2,115,834

 
$
(55,045
)
 
$
3,383,761

Net earnings

 

 

 
220,890

 

 
220,890

Other comprehensive income

 

 

 

 
610

 
610

Share-based compensation expense

 

 
9,695

 

 

 
9,695

Repurchases of common stock
(2,291
)
 
(1,146
)
 
(16,334
)
 
(153,746
)
 

 
(171,226
)
Exercise of common stock options
860

 
430

 
38,019

 

 

 
38,449

Stock incentive plans, net shares issued
1

 
1

 
(62
)
 

 

 
(61
)
Balance as of August 31, 2018
175,290

 
$
87,645

 
$
1,265,930

 
$
2,182,978

 
$
(54,435
)
 
$
3,482,118


See accompanying notes to consolidated financial statements.

Page 7



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 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 August 2018, the FASB issued an accounting pronouncement (FASB ASU 2018-13) related to disclosure requirements for fair value measurements. The pronouncement eliminates, modifies and adds disclosure requirements for fair value measurements. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We early adopted this pronouncement during the second quarter of fiscal 2020, 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

Page 8



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 August 31
 
Six Months Ended August 31
(In millions)
2019
 
2018
 
2019
 
2018
Used vehicle sales
$
4,346.3

 
$
3,975.4

 
$
8,887.0

 
$
7,996.4

Wholesale vehicle sales
678.3

 
628.0

 
1,340.7

 
1,245.6

Other sales and revenues:
 
 
 
 
 
 
 
Extended protection plan revenues
113.3

 
98.5

 
224.6

 
198.6

Third-party finance fees, net
(10.3
)
 
(9.7
)
 
(25.8
)
 
(24.2
)
Service revenues
33.4

 
36.1

 
67.3

 
72.7

Other
40.2

 
37.8

 
73.7

 
69.5

Total other sales and revenues
176.6

 
162.7

 
339.8

 
316.6

Total net sales and operating revenues
$
5,201.2

 
$
4,766.0

 
$
10,567.5

 
$
9,558.6



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 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

Page 9



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 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. Profit-sharing payments by the ESP provider begin when the underlying ESPs reach a specified level of claims history. As of August 31, 2019 and February 28, 2019, we recognized a contract asset of $32.2 million and $25.7 million, respectively, related to cumulative profit-sharing payments to which we expect to be entitled. During the current quarter, this amount was reclassified from other assets to other current assets on our consolidated balance sheets, as we expect to begin receiving ESP profit-sharing payments in the first calendar quarter of 2020. While the initial payment could be up to $50 million, the revenue recognized to-date represents the amount for which we have determined it is probable it will not result in a significant revenue reversal. The first payment reflects the accumulation of profit-sharing for four years under our current contracts with the providers, while any subsequent profit-sharing payments we receive will only reflect one year of incremental earnings.

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.


Page 10



Components of CAF Income


Three Months Ended August 31
 
Six Months Ended August 31
(In millions)
2019
 
(1)
 
2018
 
(1)
 
2019
 
(1)
 
2018
 
(1)
Interest margin:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest and fee income
$
275.7

 
8.5

 
$
242.2

 
8.0

 
$
541.9

 
8.4

 
$
474.5

 
8.0

Interest expense
(90.6
)
 
(2.8
)
 
(69.1
)
 
(2.3
)
 
(178.0
)
 
(2.8
)
 
(132.9
)
 
(2.2
)
Total interest margin
185.1

 
5.7

 
173.1

 
5.7

 
363.9

 
5.7

 
341.6

 
5.7

Provision for loan losses
(45.5
)
 
(1.4
)
 
(40.0
)
 
(1.3
)
 
(83.7
)
 
(1.3
)
 
(70.9
)
 
(1.2
)
Total interest margin after provision for loan losses
139.6

 
4.3

 
133.1

 
4.4

 
280.2

 
4.4

 
270.7

 
4.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total other expense

 

 
(0.3
)
 

 

 

 
(0.3
)
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Direct expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Payroll and fringe benefit expense
(10.4
)
 
(0.3
)
 
(9.6
)
 
(0.3
)
 
(20.5
)
 
(0.3
)
 
(19.2
)
 
(0.3
)
Other direct expenses
(15.1
)
 
(0.5
)
 
(13.5
)
 
(0.4
)
 
(29.6
)
 
(0.5
)
 
(25.9
)
 
(0.4
)
Total direct expenses
(25.5
)
 
(0.8
)
 
(23.1
)
 
(0.8
)
 
(50.1
)
 
(0.8
)
 
(45.1
)
 
(0.8
)
CarMax Auto Finance income
$
114.1

 
3.5

 
$
109.7

 
3.6

 
$
230.1

 
3.6

 
$
225.3

 
3.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total average managed receivables
$
13,012.1

 


 
$
12,067.5

 


 
$
12,859.7

 
 
 
$
11,921.4

 
 

(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 $13.14 billion as of August 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 August 31
 
As of February 28
(In millions)
2019
 
2019
Asset-backed term funding
$
10,452.9

 
$
10,273.4

Warehouse facilities
2,265.0

 
1,877.0

Overcollateralization (1)
295.2

 
273.3

Other managed receivables (2)
118.4

 
86.5

Total ending managed receivables
13,131.5

 
12,510.2

Accrued interest and fees
59.3

 
49.6

Other
25.6

 
6.9

Less allowance for loan losses
(150.4
)
 
(138.2
)
Auto loan receivables, net
$
13,066.0

 
$
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

Page 11



likelihood of repayment.  Customers assigned a grade of “A” are determined to have the highest probability of repayment, and customers assigned a lower grade are determined to have a lower probability of repayment.  For loans that are approved, the credit grade influences the terms of the agreement, such as the required loan-to-value ratio and interest rate.

CAF uses a combination of the initial credit grades and historical performance to monitor the credit quality of the auto loan receivables on an ongoing basis.  We validate the accuracy of the scoring models periodically.  Loan performance is reviewed on a recurring basis to identify whether the assigned grades adequately reflect the customers’ likelihood of repayment.

Ending Managed Receivables by Major Credit Grade
 
As of August 31
 
As of February 28
(In millions)
2019 (1)
 
% (2)
 
2019 (1)
 
% (2)
A
$
6,533.6

 
49.8
 
$
6,225.6

 
49.8
B
4,753.5

 
36.2
 
4,488.2

 
35.9
C and other
1,844.4

 
14.0
 
1,796.4

 
14.3
Total ending managed receivables
$
13,131.5

 
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
 
Three Months Ended August 31
 
Six Months Ended August 31
(In millions)
2019
 
% (1)
 
2018
 
% (1)
 
2019
 
% (1)
 
2018
 
% (1)
Balance as of beginning of period
$
147.0

 
1.14
 
$
134.3

 
1.13
 
$
138.2

 
1.10
 
$
128.6

 
1.11
Charge-offs
(76.3
)
 
 
 
(64.9
)
 

 
(142.2
)
 
 
 
(123.8
)
 
 
Recoveries
34.2

 
 
 
28.7

 

 
70.7

 
 
 
62.4

 
 
Provision for loan losses
45.5

 
 
 
40.0

 

 
83.7

 
 
 
70.9

 
 
Balance as of end of period
$
150.4

 
1.15
 
$
138.1

 
1.13
 
$
150.4

 
1.15
 
$
138.1

 
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 August 31
 
As of February 28
(In millions)
2019
 
% (1)
 
2019
 
% (1)
Total ending managed receivables
$
13,131.5

 
100.0
 
$
12,510.2

 
100.0
Delinquent loans:
 
 
 
 
 
 
 
31-60 days past due
$
292.0

 
2.2
 
$
276.5

 
2.2
61-90 days past due
140.8

 
1.1
 
141.4

 
1.1
Greater than 90 days past due
33.7

 
0.3
 
33.9

 
0.3
Total past due
$
466.5

 
3.6
 
$
451.8

 
3.6

(1)  
Percent of total ending managed receivables. 


Page 12



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 $10.8 million will be reclassified in AOCL as a decrease to CAF income.
 
As of August 31, 2019 and February 28, 2019, we had interest rate swaps outstanding with a combined notional amount of $2.53 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.

Page 13



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, 2019
(In thousands)
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Money market securities
$
272,991

 
$

 
$
272,991

Mutual fund investments
21,663

 

 
21,663

Derivative instruments

 
1

 
1

Total assets at fair value
$
294,654

 
$
1

 
$
294,655

 
 
 
 
 
 
Percent of total assets at fair value
100.0
%
 
 %
 
100.0
 %
Percent of total assets
1.5
%
 
 %
 
1.5
 %
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Derivative instruments
$

 
$
(15,747
)
 
$
(15,747
)
Total liabilities at fair value
$

 
$
(15,747
)
 
$
(15,747
)
 
 
 
 
 
 
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
%
 
%
 
%



Page 14



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 August 31, 2019 and February 28, 2019, respectively, are as follows:
(In thousands)
As of August 31, 2019
 
As of February 28, 2019
Carrying value
$
500,000

 
$
500,000

Fair value
$
532,508

 
$
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 August 31
 
Six Months Ended August 31
(In millions)
2019
 
2018
 
2019
 
2018
Balance as of beginning of period
$
109.5

 
$
108.7

 
$
102.8

 
$
105.2

Cancellations
(17.9
)
 
(16.7
)
 
(36.7
)
 
(33.3
)
Provision for future cancellations
20.0

 
18.6

 
45.5

 
38.7

Balance as of end of period
$
111.6

 
$
110.6

 
$
111.6

 
$
110.6


 
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, 2019 and February 28, 2019, the current portion of cancellation reserves was $59.9 million and $55.6 million, respectively.

8.    Income Taxes
 
We had $30.1 million of gross unrecognized tax benefits as of August 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.


Page 15



9.    Debt

(In thousands)
 
As of August 31
 
As of February 28
Debt Description (1)
Maturity Date
2019
 
2019
Revolving credit facility (2)
June 2024
$
379,515

 
$
366,529

Term loan (2)
June 2024
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
522,897

 
495,626

Non-recourse notes payable
Various dates through January 2026
13,141,504

 
12,535,405

Total debt
 
14,843,916

 
14,197,560

Less: current portion
 
(435,239
)
 
(396,350
)
Less: unamortized debt issuance costs
 
(24,548
)
 
(24,676
)
Long-term debt, net
 
$
14,384,129

 
$
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.

Revolving Credit Facility. Borrowings under our $1.45 billion unsecured revolving credit facility (the “credit facility”) 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 August 31, 2019, the unused capacity of $1.07 billion 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 January 2026, but may mature earlier, depending upon the repayment rate of the underlying auto loan receivables. 


Page 16



Information on our funding vehicles for non-recourse notes payable as of August 31, 2019, are as follows:
(in billions)
Capacity
Warehouse facilities
 
September 2019 expiration (1)
$
0.15

February 2020 expiration
1.95

August 2020 expiration
1.40

Combined warehouse facility limit
$
3.50

Unused capacity
$
1.24

 
 
Non-recourse notes payable outstanding:
 
Warehouse facilities
$
2.26

Asset-backed term funding transactions
10.88

Non-recourse notes payable
$
13.14



 (1) 
In September 2019, the expiration date was extended to September 2020.

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 six months ended August 31, 2019 and 2018, we capitalized interest of $3.3 million and $3.1 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 August 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 August 31, 2019, a total of $2.0 billion of board authorizations for repurchases of our common stock was outstanding, with no expiration date, of which $1.78 billion remained available for repurchase.

Common Stock Repurchases
 
Three Months Ended
 
Six Months Ended
 
August 31
 
August 31
 
2019
 
2018
 
2019
 
2018
Number of shares repurchased (in thousands)
1,525.5

 
2,291.7

 
4,478.6

 
5,599.3

Average cost per share
$
84.13

 
$
74.70

 
$
74.38

 
$
67.61

Available for repurchase, as of end of period (in millions)
$
1,780.8

 
$
638.3

 
$
1,780.8

 
$
638.3



Page 17



(B) Share-Based Compensation

Composition of Share-Based Compensation Expense
 
Three Months Ended
 
Six Months Ended
 
August 31
 
August 31
(In thousands)
2019
 
2018
 
2019
 
2018
Cost of sales
$
1,340

 
$
1,603

 
$
4,165

 
$
2,894

CarMax Auto Finance income
1,044

 
1,237

 
2,849

 
2,434

Selling, general and administrative expenses
21,903

 
22,775

 
62,796

 
49,752

Share-based compensation expense, before income taxes
$
24,287

 
$
25,615

 
$
69,810

 
$
55,080



Composition of Share-Based Compensation Expense – By Grant Type
 
Three Months Ended
 
Six Months Ended
 
August 31
 
August 31
(In thousands)
2019
 
2018
 
2019
 
2018
Nonqualified stock options
$
6,321

 
$
6,493

 
$
18,163

 
$
17,608

Cash-settled restricted stock units (RSUs)
13,105

 
15,540

 
39,218

 
27,894

Stock-settled market stock units (MSUs)
3,052

 
2,643

 
7,461

 
7,279

Other share-based incentives:
 
 
 
 
 
 
 
Stock-settled performance stock units (PSUs)
(576
)
 
320

 
1,633

 
726

Restricted stock (RSAs)

 
(54
)
 

 
433

Stock-settled deferred stock units (DSUs)
1,960

 
294

 
2,412

 
294

Employee stock purchase plan
425

 
379

 
923

 
846

Total other share-based incentives
$
1,809

 
$
939

 
$
4,968

 
$
2,299

Share-based compensation expense, before income taxes
$
24,287

 
$
25,615

 
$
69,810

 
$
55,080



(C) Stock Incentive Plan Information

Share/Unit Activity
 
Six Months Ended August 31, 2019
 
Equity Classified
Liability Classified
(Shares/units in thousands)
Options
MSUs
Other
RSUs
Outstanding as of February 28, 2019
7,869

509

164

1,609

Granted
1,588

129

83

562

Exercised or vested and converted
(1,735
)
(149
)
(81
)
(496
)
Cancelled
(16
)
(5
)

(69
)
Outstanding as of August 31, 2019
7,706

484

166

1,606

 
 
 
 
 
Weighted average grant date fair value per share/unit:
 
 
 
 
 
 
 
 
 
Granted
$
22.09

$
98.50

$
80.55

$
78.61

Ending outstanding
$
18.11

$
83.89

$
70.97

$
66.86