Estimated Useful Lives
|
|
|
|
|
|
|
Life
|
|
Buildings
|
25 years
|
|
Leasehold improvements
|
15 years
|
|
Furniture, fixtures and equipment
|
3 – 15 years
|
We review long-lived assets for impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. We recognize impairment when the sum of undiscounted estimated future cash flows expected to result from the use of the asset is less than the carrying value of the asset. See Note 7 for additional information on property and equipment.
Restricted Cash on Deposit in Reserve Accounts. The restricted cash on deposit in reserve accounts is for the benefit of holders of non-recourse notes payable, and these funds are not expected to be available to the company or its creditors. In the event that the cash generated by the related receivables in a given period was insufficient to pay the interest, principal and other required payments, the balances on deposit in the reserve accounts would be used to pay those amounts. Restricted cash on deposit in reserve accounts is invested in money market securities or bank deposit accounts and was $67.8 million as of February 29, 2020 and $61.1 million as of February 28, 2019.
Other Investments. Other investments includes restricted money market securities primarily held to satisfy certain insurance program requirements, investments held in a rabbi trust established to fund informally our executive deferred compensation plan and investments in equity securities. Money market securities and mutual funds are reported at fair value, and investments in equity securities are reported at cost less any impairment and adjusted for any observable changes in price. Gains and losses on these securities are reflected as a component of other (income) expense. Other investments totaled $156.7 million as of February 29, 2020 and $83.7 million as of February 28, 2019.
|
|
|
|
(K)
|
Financing Obligations
|
We generally account for sale-leaseback transactions as financing obligations. Accordingly, we record certain of the assets subject to these transactions on our consolidated balance sheets in property and equipment and the related sales proceeds as financing obligations in long-term debt. Depreciation is recognized on the assets over their estimated useful lives, generally 25 years. A portion of the periodic lease payments is recognized as interest expense and the remainder reduces the obligation. In the event the sale-leasebacks are modified or extended beyond their original term, the related obligation is increased based on the present value of the revised future minimum lease payments on the date of the modification, with a corresponding increase to the net carrying amount of the assets subject to these transactions. See Note 11 for additional information on financing obligations.
As of February 29, 2020 and February 28, 2019, accrued expenses and other current liabilities included accrued compensation and benefits of $142.9 million and $155.9 million, respectively; loss reserves for general liability and workers’ compensation insurance of $41.0 million and $37.8 million, respectively; and the current portion of cancellation reserves. See Note 8 for additional information on cancellation reserves.
|
|
|
|
(M)
|
Defined Benefit Plan Obligations
|
The recognized funded status of defined benefit retirement plan obligations is included both in accrued expenses and other current liabilities and in other liabilities. The current portion represents benefits expected to be paid from our benefit restoration plan over the next 12 months. The defined benefit retirement plan obligations are determined using a number of actuarial assumptions. Key assumptions used in measuring the plan obligations include the discount rate, rate of return on plan assets and mortality rate. See Note 10 for additional information on our benefit plans.
|
|
|
|
(N)
|
Insurance Liabilities
|
Insurance liabilities are included in accrued expenses and other current liabilities. We use a combination of insurance and self-insurance for a number of risks including workers’ compensation, general liability and employee-related health care costs, a portion of which is paid by associates. Estimated insurance liabilities are determined by considering historical claims experience, demographic factors and other actuarial assumptions.
Our revenue consists primarily of used and wholesale vehicle sales, as well as sales from EPP products and vehicle repair service. See Note 2 for additional information on our significant accounting policies related to revenue recognition.
Cost of sales includes the cost to acquire vehicles and the reconditioning and transportation costs associated with preparing the vehicles for resale. It also includes payroll, fringe benefits, and parts, labor and overhead costs associated with reconditioning and vehicle repair services. The gross profit earned by our service department for used vehicle reconditioning service is a reduction of cost of sales. We maintain a reserve to eliminate the internal profit on vehicles that have not been sold.
|
|
|
|
(Q)
|
Selling, General and Administrative Expenses
|
Selling, general and administrative (“SG&A”) expenses primarily include compensation and benefits, other than payroll related to reconditioning and vehicle repair services; depreciation, rent and other occupancy costs; advertising; and IT expenses, preopening and relocation costs, insurance, bad debt, travel, charitable contributions and other administrative expenses.
Advertising costs are expensed as incurred and substantially all are included in SG&A expenses. Total advertising expenses were $191.8 million in fiscal 2020, $167.0 million in fiscal 2019 and $158.6 million in fiscal 2018.
|
|
|
|
(S)
|
Store Opening Expenses
|
Costs related to store openings, including preopening costs, are expensed as incurred and are included in SG&A expenses.
|
|
|
|
(T)
|
Share-Based Compensation
|
Share-based compensation represents the cost related to share-based awards granted to employees and non-employee directors. We measure share-based compensation cost at the grant date, based on the estimated fair value of the award, and we recognize the cost on a straight-line basis, net of estimated forfeitures, over the grantee’s requisite service period, which is generally the vesting period of the award. We estimate the fair value of stock options using a binomial valuation model. Key assumptions used in estimating the fair value of options are dividend yield, expected volatility, risk-free interest rate and expected term. The fair values of restricted stock, stock-settled performance stock units and stock-settled deferred stock units are based on the volume-weighted average market value on the date of the grant. The fair value of stock-settled market stock units is determined using a Monte-Carlo simulation based on the expected market price of our common stock on the vesting date and the expected number of converted common shares. Cash-settled restricted stock units are liability awards with fair value measurement based on the volume-weighted average market price of CarMax common stock as of the end of each reporting period. Share-based compensation expense is recorded in either cost of sales, CAF income or SG&A expenses based on the recipients’ respective function.
We record deferred tax assets for awards that result in deductions on our income tax returns, based on the amount of compensation expense recognized and the statutory tax rate in the jurisdiction in which we will receive a deduction. Differences between the deferred tax assets recognized for financial reporting purposes and the actual tax deduction reported on the income tax return are recorded in income tax expense. See Note 12 for additional information on stock-based compensation.
|
|
|
|
(U)
|
Derivative Instruments and Hedging Activities
|
We enter into derivative instruments to manage certain risks arising from both our business operations and economic conditions that result in the future known receipt or payment of uncertain cash amounts, the values of which are impacted by interest rates. We recognize the derivatives at fair value on the consolidated balance sheets, and where applicable, such contracts covered by master netting agreements are reported net. Gross positive fair values are netted with gross negative fair values by counterparty. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to
designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. We may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting may not apply or we do not elect to apply hedge accounting. See Note 5 for additional information on derivative instruments and hedging activities.
We file a consolidated federal income tax return for a majority of our subsidiaries. Certain subsidiaries are required to file separate partnership or corporate federal income tax returns. Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes, measured by applying currently enacted tax laws. A deferred tax asset is recognized if it is more likely than not that a benefit will be realized. Changes in tax laws and tax rates are reflected in the income tax provision in the period in which the changes are enacted. We evaluate the need to record valuation allowances that would reduce deferred tax assets to the amount that will more likely than not be realized. When assessing the need for valuation allowances, we consider available loss carrybacks, tax planning strategies, future reversals of existing temporary differences and future taxable income.
We recognize uncertain tax liabilities when, despite our belief that our tax return positions are supportable, we believe that the tax positions may not be fully sustained upon review by tax authorities. Benefits from tax positions are measured at the highest tax benefit that is greater than 50% likely of being realized upon settlement. The current portion of these tax liabilities is included in accrued income taxes and any noncurrent portion is included in other liabilities. To the extent that the final tax outcome of these matters is different from the amounts recorded, the differences impact income tax expense in the period in which the determination is made. Interest and penalties related to income tax matters are included in SG&A expenses. See Note 9 for additional information on income taxes.
|
|
|
|
(W)
|
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 the 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. See Note 13 for additional information on net earnings per share.
|
|
|
|
(X)
|
Recent Accounting Pronouncements
|
Adopted in the Current Period.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASC 842, Leases. This standard, 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 standard 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 separate lease and nonlease components when accounting for all leases commencing, modified or reassessed subsequent to adoption of the new standard. Additionally, we elected 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 15 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 2018-13) 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.
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. In developing the estimate for lifetime expected credit loss, entities must incorporate historical experience, current conditions, and reasonable and supportable forecasts. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019.
We have designed an allowance for loan loss methodology to comply with these new requirements, which will be adopted for our fiscal year beginning March 1, 2020. We expect to record a $200 million to $250 million increase in the allowance for loan losses on our opening consolidated balance sheet as of March 1, 2020, with a corresponding net-of-tax adjustment to retained earnings. The expected increase in the allowance for loan losses is primarily the result of extending the loan loss forecast period from 12 months to the entire lifetime of the loan portfolio. The final adoption impact could vary based on the company’s continuing analysis of macroeconomic developments. We expect this new methodology could increase volatility in our quarterly provision for loan losses. This volatility is driven by estimating loan losses over a longer forecast period and the incorporation of economic adjustment factors, including changes in unemployment rates, and such volatility could be significant. We are finalizing testing of the effectiveness of our new allowance for loan loss methodology, as well as designing the relevant controls and governance structure.
In August 2018, the FASB issued an accounting pronouncement (FASB ASU 2018-14) related to disclosure requirements for defined benefit plans. The pronouncement eliminates, modifies and adds disclosure requirements for defined benefit plans. The pronouncement is effective for fiscal years ending after December 15, 2020, and we do not expect it to have a material effect on our consolidated financial statements.
In October 2018, the FASB issued an accounting pronouncement (FASB ASU 2018-17) related to related party guidance for variable interest entities. The amendments in this pronouncement are effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. We plan to adopt this pronouncement for our fiscal year beginning March 1, 2020, and we do not expect it to have a material effect on our consolidated financial statements.
In December 2019, the FASB issued an accounting pronouncement (FASB ASU 2019-12) related to simplifying the accounting for income taxes. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We do not expect it to have a material effect on our consolidated financial statements.
In March 2020, the FASB issued an accounting pronouncement (FASB ASU 2020-04) related to reference rate reform. The pronouncement provides optional guidance for a limited period of time to ease the potential burden of accounting for reference rate reform. This guidance is effective for all entities as of March 12, 2020 through December 31, 2022. We expect to utilize this optional guidance but do not expect it to have a material effect on our consolidated financial statements.
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 SG&A. We do not have any significant payment terms as payment is received at or shortly after the point of sale.
Disaggregation of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended February 29 or 28
|
|
(In millions)
|
2020
|
|
2019
|
|
2018
|
|
Used vehicle sales
|
$
|
17,169.5
|
|
|
$
|
15,172.8
|
|
|
$
|
14,392.4
|
|
|
Wholesale vehicle sales
|
2,500.0
|
|
|
2,393.0
|
|
|
2,181.2
|
|
|
Other sales and revenues:
|
|
|
|
|
|
|
Extended protection plan revenues
|
437.4
|
|
|
382.5
|
|
|
336.4
|
|
|
Third-party finance fees, net
|
(45.8
|
)
|
|
(43.4
|
)
|
|
(49.9
|
)
|
|
Service revenues
|
123.5
|
|
|
136.8
|
|
|
134.0
|
|
|
Other
|
135.4
|
|
|
131.4
|
|
|
126.2
|
|
|
Total other sales and revenues
|
650.5
|
|
|
607.3
|
|
|
546.7
|
|
|
Total net sales and operating revenues
|
$
|
20,320.0
|
|
|
$
|
18,173.1
|
|
|
$
|
17,120.2
|
|
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 17 for additional information on this warranty and its related obligation.
Wholesale Vehicle Sales. Wholesale vehicles are sold at our auctions, and revenue from the sale of these vehicles is recognized upon transfer of control of the vehicle to the customer. Dealers also pay a fee to us based on the sale price of the vehicles they purchase. This fee is recognized as revenue at the time of sale. While we provide condition disclosures on each wholesale vehicle sold, the vehicles are subject to a limited right of return. We record a reserve for estimated returns based on historical experience and trends. The reserve for estimated returns is presented gross on the consolidated balance sheets, with a return asset recorded in other current assets and a refund liability recorded in accrued expenses and other current liabilities.
EPP Revenues. We also sell ESP and GAP products on behalf of unrelated third parties, who are primarily responsible for fulfilling the contract, to customers who purchase a retail vehicle. The ESPs we currently offer on all used vehicles provide coverage up to 60 months (subject to mileage limitations), while GAP covers the customer for the term of their finance contract. We recognize revenue, on a net basis, at the time of sale. We also record a reserve, or refund liability, for estimated contract cancellations. The reserve for cancellations is evaluated for each product and is based on forecasted forward cancellation curves utilizing historical experience, recent trends and credit mix of the customer base. Our risk related to contract cancellations is limited to the revenue that we receive. Cancellations fluctuate depending on the volume of EPP sales, customer financing default or prepayment rates, and shifts in customer behavior, including those related to changes in the coverage or term of the product. The current portion of estimated cancellation reserves is recognized as a component of accrued expenses and other current liabilities with the remaining amount recognized in other liabilities. See Note 8 for additional information on cancellation reserves.
We are contractually entitled to receive profit-sharing revenues based on the performance of the ESPs administered by third parties. These revenues are a form of variable consideration included in EPP revenues to the extent that it is probable that it will not result in a significant revenue reversal. An estimate of the amount to which we expect to be entitled, subject to various constraints, is recognized upon satisfying the performance obligation of selling the ESP. These constraints include factors that are outside of the company’s influence or control and the length of time until settlement. We apply the expected value method, utilizing historical claims and cancellation data from CarMax customers, as well as external data and other qualitative assumptions. This estimate is reassessed each reporting period with changes reflected in other sales and revenues on our consolidated statements of earnings and other assets on our consolidated balance sheets. As of February 28, 2019, we had recognized a long-term contract asset of $25.7 million related to cumulative profit-sharing payments to which we expect to be entitled. There was no contract asset recognized as of February 29, 2020. In the fourth quarter of fiscal 2020, we received payments of $46.0 million, representing the profit-sharing accrued during fiscal 2019 and fiscal 2020, which was based on claims experience in calendar years 2016 through 2019. In future years, we expect EPP profit-sharing revenue will be less material, as it will reflect only a single incremental year versus four years of activity.
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.
CAF provides financing to qualified retail customers purchasing vehicles from CarMax. CAF provides us the opportunity to capture additional profits, cash flows and sales while managing our reliance on third-party finance sources. Management regularly analyzes CAF’s operating results by assessing profitability, the performance of the auto loans receivable including trends in credit losses and delinquencies, and CAF direct expenses. This information is used to assess CAF’s performance and make operating decisions including resource allocation.
We typically use securitizations or other funding arrangements to fund loans originated by CAF, as discussed in Note 1(F). CAF income primarily reflects the interest and fee income generated by the auto loans receivable less the interest expense associated with the debt issued to fund these receivables, a provision for estimated loan losses and direct CAF expenses.
CAF income does not include any allocation of indirect costs. Although CAF benefits from certain indirect overhead expenditures, we have not allocated indirect costs to CAF to avoid making subjective allocation decisions. Examples of indirect costs not allocated to CAF include retail store expenses and corporate expenses. In addition, except for auto loans receivable, which are disclosed in Note 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended February 29 or 28
|
|
(In millions)
|
2020
|
|
% (1)
|
|
2019
|
|
% (1)
|
|
2018
|
|
% (1)
|
|
Interest margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
$
|
1,104.1
|
|
|
8.4
|
|
|
$
|
972.9
|
|
|
8.0
|
|
|
$
|
856.6
|
|
|
7.6
|
|
|
Interest expense
|
(358.1
|
)
|
|
(2.7
|
)
|
|
(289.3
|
)
|
|
(2.4
|
)
|
|
(215.0
|
)
|
|
(1.9
|
)
|
|
Total interest margin
|
746.0
|
|
|
5.7
|
|
|
683.6
|
|
|
5.6
|
|
|
641.6
|
|
|
5.7
|
|
|
Provision for loan losses
|
(185.7
|
)
|
|
(1.4
|
)
|
|
(153.8
|
)
|
|
(1.3
|
)
|
|
(137.6
|
)
|
|
(1.2
|
)
|
|
Total interest margin after
|
|
|
|
|
|
|
|
|
|
|
|
|
provision for loan losses
|
560.3
|
|
|
4.3
|
|
|
529.8
|
|
|
4.4
|
|
|
504.0
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
—
|
|
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
|
0.4
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payroll and fringe benefit expense
|
(42.3
|
)
|
|
(0.3
|
)
|
|
(38.3
|
)
|
|
(0.3
|
)
|
|
(35.4
|
)
|
|
(0.3
|
)
|
|
Other direct expenses
|
(62.0
|
)
|
|
(0.5
|
)
|
|
(52.4
|
)
|
|
(0.4
|
)
|
|
(47.8
|
)
|
|
(0.4
|
)
|
|
Total direct expenses
|
(104.3
|
)
|
|
(0.8
|
)
|
|
(90.7
|
)
|
|
(0.7
|
)
|
|
(83.2
|
)
|
|
(0.7
|
)
|
|
CarMax Auto Finance income
|
$
|
456.0
|
|
|
3.5
|
|
|
$
|
438.7
|
|
|
3.6
|
|
|
$
|
421.2
|
|
|
3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average managed receivables
|
$
|
13,105.1
|
|
|
|
|
$
|
12,150.2
|
|
|
|
|
$
|
11,210.8
|
|
|
|
|
|
|
|
(1)
|
Percent of total average managed receivables.
|
Auto loans receivable include amounts due from customers related to retail vehicle sales financed through CAF and are presented net of an allowance for estimated loan losses. We generally use warehouse facilities to fund auto loans receivable originated by CAF until we elect to fund them through an asset-backed term funding transaction. The majority of the auto loans receivable serve as collateral for the related non-recourse notes payable of $13.61 billion as of February 29, 2020, and $12.54 billion as of February 28, 2019. See Notes 1(F) and 11 for additional information on securitizations and non-recourse notes payable.
Auto Loans Receivable, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 29 or 28
|
|
(In millions)
|
2020
|
|
2019
|
|
Asset-backed term funding
|
$
|
11,007.1
|
|
|
$
|
10,273.4
|
|
|
Warehouse facilities
|
2,181.7
|
|
|
1,877.0
|
|
|
Overcollateralization (1)
|
289.0
|
|
|
273.3
|
|
|
Other managed receivables (2)
|
140.0
|
|
|
86.5
|
|
|
Total ending managed receivables
|
13,617.8
|
|
|
12,510.2
|
|
|
Accrued interest and fees
|
56.2
|
|
|
49.6
|
|
|
Other
|
35.5
|
|
|
6.9
|
|
|
Less: allowance for loan losses
|
(157.8
|
)
|
|
(138.2
|
)
|
|
Auto loans receivable, net
|
$
|
13,551.7
|
|
|
$
|
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 loans receivable on an ongoing basis. We validate the accuracy of the scoring models periodically. Loan performance is reviewed on a recurring basis to identify whether the assigned grades adequately reflect the customers’ likelihood of repayment.
Ending Managed Receivables by Major Credit Grade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 29 or 28
|
|
(In millions)
|
2020 (1)
|
|
% (2)
|
|
2019 (1)
|
|
% (2)
|
|
A
|
$
|
6,915.9
|
|
|
50.8
|
|
$
|
6,225.6
|
|
|
49.8
|
|
B
|
4,841.2
|
|
|
35.6
|
|
4,488.2
|
|
|
35.9
|
|
C and other
|
1,860.7
|
|
|
13.6
|
|
1,796.4
|
|
|
14.3
|
|
Total ending managed receivables
|
$
|
13,617.8
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 29 or 28
|
|
(In millions)
|
2020
|
|
% (1)
|
|
2019
|
|
% (1)
|
|
Balance as of beginning of year
|
$
|
138.2
|
|
|
1.10
|
|
$
|
128.6
|
|
|
1.11
|
|
Charge-offs
|
(309.0
|
)
|
|
|
|
(274.2
|
)
|
|
|
|
Recoveries
|
142.9
|
|
|
|
|
130.0
|
|
|
|
|
Provision for loan losses
|
185.7
|
|
|
|
|
153.8
|
|
|
|
|
Balance as of end of year
|
$
|
157.8
|
|
|
1.16
|
|
$
|
138.2
|
|
|
1.10
|
|
|
|
|
(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 February 29 or 28
|
|
(In millions)
|
2020
|
|
% (1)
|
|
2019
|
|
% (1)
|
|
Total ending managed receivables
|
$
|
13,617.8
|
|
|
100.0
|
|
$
|
12,510.2
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
Delinquent loans:
|
|
|
|
|
|
|
|
|
31-60 days past due
|
$
|
296.4
|
|
|
2.18
|
|
$
|
276.5
|
|
|
2.21
|
|
61-90 days past due
|
138.3
|
|
|
1.01
|
|
141.4
|
|
|
1.13
|
|
Greater than 90 days past due
|
34.2
|
|
|
0.25
|
|
33.9
|
|
|
0.27
|
|
Total past due
|
$
|
468.9
|
|
|
3.44
|
|
$
|
451.8
|
|
|
3.61
|
|
|
|
|
(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 generally designate these derivative instruments as cash flow hedges for accounting purposes. In certain cases, we may choose not to designate a derivative instrument as a cash flow hedge for accounting purposes due to uncertainty around the probability that future hedged transactions will occur. Our derivative instruments are used to manage (i) differences in the amount of our known or expected cash receipts and our known or expected cash payments principally related to the funding of our auto loans receivable, and (ii) exposure to variable interest rates associated with our term loan.
For the derivatives associated with our non-recourse funding vehicles that are designated as cash flow hedges, the changes in fair value are initially recorded in accumulated other comprehensive 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 $13.6 million will be reclassified from AOCL as a decrease to CAF income. Changes in fair value related to derivatives that have not been designated as cash flow hedges for accounting purposes are recognized in the income statement in the period in which the change occurs.
As of February 29, 2020 and February 28, 2019, we had interest rate swaps outstanding with a combined notional amount of $2.62 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 14 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 loans receivable and other assets. They consist of highly liquid investments with original maturities of three months or less and are classified as Level 1.
Mutual Fund Investments. Mutual fund investments consist of publicly traded mutual funds that primarily include diversified equity investments in large-, mid- and small-cap domestic and international companies or investment grade debt securities. The investments, which are included in other assets, are held in a rabbi trust established to fund informally our executive deferred compensation plan and are classified as Level 1.
Derivative Instruments. The fair values of our derivative instruments are included in either other current assets, other assets, accounts payable or other liabilities. Our derivatives are not exchange-traded and are over-the-counter customized derivative instruments. All of our derivative exposures are with highly rated bank counterparties.
We measure derivative fair values assuming that the unit of account is an individual derivative instrument and that derivatives are sold or transferred on a stand-alone basis. We estimate the fair value of our derivatives using quotes determined by the derivative counterparties and third-party valuation services. Quotes from third-party valuation services and quotes received from bank counterparties project future cash flows and discount the future amounts to a present value using market-based expectations for interest rates and the contractual terms of the derivative instruments. The models do not require significant judgment and model inputs can typically be observed in a liquid market; however, because the models include inputs other than quoted prices in active markets, all derivatives are classified as Level 2.
Our derivative fair value measurements consider assumptions about counterparty and our own nonperformance risk. We monitor counterparty and our own nonperformance risk and, in the event that we determine that a party is unlikely to perform under terms of the contract, we would adjust the derivative fair value to reflect the nonperformance risk.
Items Measured at Fair Value on a Recurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 29, 2020
|
|
(In thousands)
|
Level 1
|
|
Level 2
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
Money market securities
|
$
|
273,203
|
|
|
$
|
—
|
|
|
$
|
273,203
|
|
|
Mutual fund investments
|
22,668
|
|
|
—
|
|
|
22,668
|
|
|
Derivative instruments
|
—
|
|
|
—
|
|
|
—
|
|
|
Total assets at fair value
|
$
|
295,871
|
|
|
$
|
—
|
|
|
$
|
295,871
|
|
|
|
|
|
|
|
|
|
Percent of total assets at fair value
|
100.0
|
%
|
|
—
|
%
|
|
100.0
|
%
|
|
Percent of total assets
|
1.4
|
%
|
|
—
|
%
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Derivative instruments
|
$
|
—
|
|
|
$
|
(23,992
|
)
|
|
$
|
(23,992
|
)
|
|
Total liabilities at fair value
|
$
|
—
|
|
|
$
|
(23,992
|
)
|
|
$
|
(23,992
|
)
|
|
|
|
|
|
|
|
|
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
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Fair Value of Financial Instruments
The carrying value of our cash and cash equivalents, accounts receivable, other restricted cash deposits and accounts payable approximates fair value due to the short-term nature and/or variable rates associated with these financial instruments. Auto loans receivable are presented net of an allowance for estimated loan losses. 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 February 29, 2020 and February 28, 2019, respectively, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
As of February 29, 2020
|
|
As of February 28, 2019
|
|
Carrying value
|
$
|
500,000
|
|
|
$
|
500,000
|
|
|
Fair value
|
$
|
546,197
|
|
|
$
|
488,590
|
|
|
|
|
|
7.
|
PROPERTY AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 29 or 28
|
|
(In thousands)
|
2020
|
|
2019
|
|
Land
|
$
|
874,904
|
|
|
$
|
789,125
|
|
|
Land held for development (1)
|
73,268
|
|
|
81,100
|
|
|
Buildings
|
2,186,945
|
|
|
2,211,929
|
|
|
Leasehold improvements
|
278,781
|
|
|
247,121
|
|
|
Furniture, fixtures and equipment
|
750,888
|
|
|
671,166
|
|
|
Construction in progress
|
171,236
|
|
|
125,010
|
|
|
Total property and equipment
|
4,336,022
|
|
|
4,125,451
|
|
|
Less: accumulated depreciation and amortization
|
(1,266,920
|
)
|
|
(1,297,393
|
)
|
|
Property and equipment, net
|
$
|
3,069,102
|
|
|
$
|
2,828,058
|
|
|
|
|
|
(1)
|
Land held for development represents land owned for potential store growth.
|
Depreciation expense was $190.6 million in fiscal 2020, $169.8 million in fiscal 2019 and $158.6 million in fiscal 2018.
We recognize revenue for EPP products, on a net basis, at the time of sale. We also record a reserve, or refund liability, for estimated contract cancellations. Cancellations of these services may result from early termination by the customer, or default or prepayment on the finance contract. The reserve for cancellations is evaluated for each product and is based on forecasted forward cancellation curves utilizing historical experience, recent trends and credit mix of the customer base.
Cancellation Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 29 or 28
|
|
(In millions)
|
2020
|
|
2019
|
|
Balance as of beginning of year
|
$
|
102.8
|
|
|
$
|
105.2
|
|
|
Cancellations
|
(74.2
|
)
|
|
(66.3
|
)
|
|
Provision for future cancellations
|
89.3
|
|
|
63.9
|
|
|
Balance as of end of year
|
$
|
117.9
|
|
|
$
|
102.8
|
|
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 February 29, 2020 and February 28, 2019, the current portion of cancellation reserves was $63.5 million and $55.6 million, respectively.
Tax Reform. The Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was enacted on December 22, 2017, and, among other changes, reduced the federal statutory tax rate from 35.0% to 21.0%. In accordance with U.S. GAAP for income taxes, as well as SEC Staff Accounting Bulletin No. 118 (“SAB 118”), the company made a reasonable estimate of the impacts of the 2017 Tax Act and recorded this estimate in its results for the year ended February 28, 2018. SAB 118 allows for a measurement period of up to one year, from the date of enactment, to complete the company’s accounting for the impacts of the 2017 Tax Act. As of February 28, 2019, our analysis under SAB 118 was completed and resulted in no material adjustments to the provisional amounts recorded as of February 28, 2018.
The provision for income taxes and effective tax rate for fiscal 2018 included a $32.7 million increase in tax expense related to the revaluation of our net deferred tax asset at the lower federal statutory tax rate. This increase was partially offset by a $20.8 million benefit from the reduction in the federal statutory tax rate in the fourth quarter of fiscal 2018.
Income Tax Provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended February 29 or 28
|
|
(In thousands)
|
2020
|
|
2019
|
|
2018
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
$
|
225,858
|
|
|
$
|
218,497
|
|
|
$
|
276,597
|
|
|
State
|
47,797
|
|
|
49,596
|
|
|
41,892
|
|
|
Total
|
273,655
|
|
|
268,093
|
|
|
318,489
|
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
146
|
|
|
3,601
|
|
|
81,486
|
|
|
State
|
(1,248
|
)
|
|
(1,301
|
)
|
|
(479
|
)
|
|
Total
|
(1,102
|
)
|
|
2,300
|
|
|
81,007
|
|
|
Income tax provision
|
$
|
272,553
|
|
|
$
|
270,393
|
|
|
$
|
399,496
|
|
Effective Income Tax Rate Reconciliation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended February 29 or 28
|
|
|
2020
|
|
2019
|
|
2018
|
|
Federal statutory income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
32.7
|
%
|
|
State and local income taxes, net of federal benefit
|
3.4
|
|
|
3.4
|
|
|
3.1
|
|
|
2017 Tax Act
|
—
|
|
|
(0.1
|
)
|
|
3.1
|
|
|
Share-based compensation
|
(1.1
|
)
|
|
(0.3
|
)
|
|
(1.3
|
)
|
|
Nondeductible and other items
|
0.7
|
|
|
0.7
|
|
|
0.2
|
|
|
Credits
|
(0.5
|
)
|
|
(0.4
|
)
|
|
(0.2
|
)
|
|
Effective income tax rate
|
23.5
|
%
|
|
24.3
|
%
|
|
37.6
|
%
|
The 2017 Tax Act above includes the following impacts for fiscal 2018:
|
|
|
|
•
|
Revaluation of deferred taxes that existed on December 22, 2017, the enactment date of the 2017 Tax Act.
|
|
|
|
|
•
|
Deferred taxes that were created after December 22, 2017. These items were recognized in fiscal 2018 at the federal statutory tax rate of 32.7% but will reverse at the newly enacted 21% federal rate.
|
Temporary Differences Resulting in Deferred Tax Assets and Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 29 or 28
|
|
(In thousands)
|
2020
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Accrued expenses and other
|
$
|
39,576
|
|
|
$
|
42,331
|
|
|
Partnership basis
|
89,359
|
|
|
71,455
|
|
|
Operating lease liabilities
|
119,558
|
|
|
—
|
|
|
Share-based compensation
|
51,039
|
|
|
48,818
|
|
|
Derivatives
|
10,346
|
|
|
—
|
|
|
Capital loss carry forward
|
917
|
|
|
677
|
|
|
Total deferred tax assets
|
310,795
|
|
|
163,281
|
|
|
Less: valuation allowance
|
(917
|
)
|
|
(677
|
)
|
|
Total deferred tax assets after valuation allowance
|
309,878
|
|
|
162,604
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Prepaid expenses
|
19,742
|
|
|
16,960
|
|
|
Property and equipment
|
67,589
|
|
|
59,537
|
|
|
Operating lease assets
|
114,212
|
|
|
—
|
|
|
Inventory
|
18,493
|
|
|
17,279
|
|
|
Profit-sharing revenues
|
—
|
|
|
6,599
|
|
|
Derivatives
|
—
|
|
|
883
|
|
|
Total deferred tax liabilities
|
220,036
|
|
|
101,258
|
|
|
Net deferred tax asset
|
$
|
89,842
|
|
|
$
|
61,346
|
|
Except for amounts for which a valuation allowance has been provided, we believe it is more likely than not that the results of future operations and the reversals of existing deferred taxable temporary differences will generate sufficient taxable income to realize the deferred tax assets. The valuation allowance as of February 29, 2020, relates to capital loss carryforwards that are not more likely than not to be utilized prior to their expiration.
Reconciliation of Unrecognized Tax Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended February 29 or 28
|
|
(In thousands)
|
2020
|
|
2019
|
|
2018
|
|
Balance at beginning of year
|
$
|
30,270
|
|
|
$
|
28,685
|
|
|
$
|
29,955
|
|
|
Increases for tax positions of prior years
|
3,493
|
|
|
2,035
|
|
|
—
|
|
|
Decreases for tax positions of prior years
|
(2,913
|
)
|
|
(266
|
)
|
|
(607
|
)
|
|
Increases based on tax positions related to the current year
|
4,170
|
|
|
2,498
|
|
|
3,342
|
|
|
Settlements
|
(326
|
)
|
|
(44
|
)
|
|
(304
|
)
|
|
Lapse of statute
|
(3,829
|
)
|
|
(2,638
|
)
|
|
(3,701
|
)
|
|
Balance at end of year
|
$
|
30,865
|
|
|
$
|
30,270
|
|
|
$
|
28,685
|
|
As of February 29, 2020, we had $30.9 million of gross unrecognized tax benefits, $9.2 million of which, if recognized, would affect our effective tax rate. It is reasonably possible that the amount of the unrecognized tax benefit will increase or decrease during the next 12 months; however, we do not expect the change to have a significant effect on our results of operations, financial condition or cash flows. As of February 28, 2019, we had $30.3 million of gross unrecognized tax benefits, $10.7 million of which, if recognized, would affect our effective tax rate. As of February 28, 2018, we had $28.7 million of gross unrecognized tax benefits, $9.6 million of which, if recognized, would affect our effective tax rate.
Our continuing practice is to recognize interest and penalties related to income tax matters in SG&A expenses. Our accrual for interest and penalties was $4.0 million, $3.2 million and $2.8 million as of February 29, 2020 and February 28, 2019 and 2018, respectively.
CarMax is subject to U.S. federal income tax as well as income tax of multiple states and local jurisdictions. With a few insignificant exceptions, we are no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to fiscal 2016.
|
|
|
|
(A)
|
Retirement Benefit Plans
|
We have two frozen noncontributory defined benefit plans: our pension plan (the “pension plan”) and our unfunded, nonqualified plan (the “restoration plan”), which restores retirement benefits for certain associates who are affected by Internal Revenue Code limitations on benefits provided under the pension plan. No additional benefits have accrued under these plans since they were frozen; however, we have a continuing obligation to fund the pension plan and will continue to recognize net periodic pension expense for both plans for benefits earned prior to being frozen. We use a fiscal year end measurement date for both the pension plan and the restoration plan.
Benefit Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 29 or 28
|
|
|
Pension Plan
|
|
Restoration Plan
|
|
Total
|
|
(In thousands)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Plan assets
|
$
|
168,835
|
|
|
$
|
166,020
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
168,835
|
|
|
$
|
166,020
|
|
|
Projected benefit obligation
|
298,441
|
|
|
231,677
|
|
|
12,498
|
|
|
11,082
|
|
|
310,939
|
|
|
242,759
|
|
|
Funded status recognized
|
$
|
(129,606
|
)
|
|
$
|
(65,657
|
)
|
|
$
|
(12,498
|
)
|
|
$
|
(11,082
|
)
|
|
$
|
(142,104
|
)
|
|
$
|
(76,739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
Current liability
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(615
|
)
|
|
$
|
(500
|
)
|
|
$
|
(615
|
)
|
|
$
|
(500
|
)
|
|
Noncurrent liability
|
(129,606
|
)
|
|
(65,657
|
)
|
|
(11,883
|
)
|
|
(10,582
|
)
|
|
(141,489
|
)
|
|
(76,239
|
)
|
|
Net amount recognized
|
$
|
(129,606
|
)
|
|
$
|
(65,657
|
)
|
|
$
|
(12,498
|
)
|
|
$
|
(11,082
|
)
|
|
$
|
(142,104
|
)
|
|
$
|
(76,739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
Restoration Plan
|
|
Total
|
|
(In thousands)
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
Total net pension (benefit) expense
|
(1,595)
|
|
(681
|
)
|
|
207
|
|
|
488
|
|
|
474
|
|
|
468
|
|
|
(1,107
|
)
|
|
(207
|
)
|
|
675
|
|
|
Total net actuarial loss (1)
|
67,385
|
|
4,478
|
|
|
2,880
|
|
|
1,476
|
|
|
82
|
|
|
376
|
|
|
68,861
|
|
|
4,560
|
|
|
3,256
|
|
|
|
|
|
(1)
|
Changes recognized in Accumulated Other Comprehensive Loss.
|
The projected benefit obligation (“PBO”) will change primarily due to interest cost and total net actuarial (gain) loss, and plan assets will change primarily as a result of the actual return on plan assets. Benefit payments, which reduce the PBO and plan assets, were not material in fiscal 2020 or 2019. Employer contributions, which increase plan assets, were $10.3 million in fiscal 2019; there were no employer contributions in fiscal 2020. The net actuarial (gain) loss in a fiscal year is recognized in accumulated other comprehensive loss and may later be recognized as a component of future pension expense. In fiscal 2021, we anticipate that $3.8 million in estimated actuarial losses of the pension plan will be amortized from accumulated other comprehensive loss. Estimated actuarial losses to be amortized from accumulated other comprehensive loss for the restoration plan are not expected to be significant.
Benefit Obligations. The accumulated benefit obligation (“ABO”) and PBO represent the obligations of the benefit plans for past service as of the measurement date. ABO is the present value of benefits earned to date with benefits computed based on current service and compensation levels. PBO is ABO increased to reflect expected future service and increased compensation levels. As a result of the freeze of plan benefits under our pension and restoration plans, the ABO and PBO balances are equal to one another at all subsequent dates.
Funding Policy. For the pension plan, we contribute amounts sufficient to meet minimum funding requirements as set forth in the employee benefit and tax laws, plus any additional amounts as we may determine to be appropriate. We expect to make contributions of $5.7 million to the pension plan in fiscal 2021. We expect the pension plan to make benefit payments of
approximately $5.2 million for each of the next three fiscal years, and $6.3 million for each of the subsequent two fiscal years. For the non-funded restoration plan, we contribute an amount equal to the benefit payments, which we expect to be approximately $0.6 million for each of the next five fiscal years.
Assumptions Used to Determine Benefit Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 29 or 28
|
|
|
Pension Plan
|
|
Restoration Plan
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Discount rate
|
2.85
|
%
|
|
4.20
|
%
|
|
2.85
|
%
|
|
4.20
|
%
|
Assumptions Used to Determine Net Pension Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended February 29 or 28
|
|
|
Pension Plan
|
|
Restoration Plan
|
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
Discount rate
|
4.20
|
%
|
|
4.10
|
%
|
|
4.25
|
%
|
|
4.20
|
%
|
|
4.10
|
%
|
|
4.25
|
%
|
|
Expected rate of return on plan assets
|
7.75
|
%
|
|
7.75
|
%
|
|
7.75
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Assumptions. Underlying both the calculation of the PBO and the net pension expense are actuarial calculations of each plan’s liability. These calculations use participant-specific information such as salary, age and years of service, as well as certain assumptions, the most significant being the discount rate, rate of return on plan assets and mortality rate. We evaluate these assumptions at least once a year and make changes as necessary.
The discount rate used for retirement benefit plan accounting reflects the yields available on high-quality, fixed income debt instruments. For our plans, we review high quality corporate bond indices in addition to a hypothetical portfolio of corporate bonds with maturities that approximate the expected timing of the anticipated benefit payments.
To determine the expected long-term return on plan assets, we consider the current and anticipated asset allocations, as well as historical and estimated returns on various categories of plan assets. We apply the estimated rate of return to a market-related value of assets, which reduces the underlying variability in the asset values. The use of expected long-term rates of return on pension plan assets could result in recognized asset returns that are greater or less than the actual returns of those pension plan assets in any given year. Over time, however, the expected long-term returns are anticipated to approximate the actual long-term returns, and therefore, result in a pattern of income and expense recognition that more closely matches the pattern of the services provided by the employees. Differences between actual and expected returns, which are a component of unrecognized actuarial gains/losses, are recognized over the average life expectancy of all plan participants.
Fair Value of Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 29 or 28
|
|
(In thousands)
|
2020
|
|
2019
|
|
Mutual funds (Level 1):
|
|
|
|
|
Equity securities
|
$
|
—
|
|
|
$
|
106,367
|
|
|
Equity securities – international
|
20,410
|
|
|
20,481
|
|
|
Fixed income securities
|
—
|
|
|
38,038
|
|
|
Collective funds (NAV):
|
|
|
|
|
Short-term investments
|
420
|
|
|
1,219
|
|
|
Equity securities
|
104,823
|
|
|
—
|
|
|
Fixed income securities
|
43,182
|
|
|
—
|
|
|
Investment payables, net
|
—
|
|
|
(85
|
)
|
|
Total
|
$
|
168,835
|
|
|
$
|
166,020
|
|
Plan Assets. Our pension plan assets are held in trust and a fiduciary committee sets the investment policies and strategies. Long-term strategic investment objectives include achieving reasonable returns while prudently balancing risk and return, and controlling costs. We target allocating approximately 75% of plan assets to equity and equity-related instruments and approximately 25% to
fixed income securities. Equity securities are currently composed of both collective funds and mutual funds that include highly diversified investments in large-, mid- and small-cap companies located in the United States and internationally. The fixed income securities are currently composed of collective funds that include investments in debt securities, corporate bonds, mortgage-backed securities and other debt obligations primarily in the United States. We do not expect any plan assets to be returned to us during fiscal 2021.
The fair values of the plan’s assets are provided by the plan’s trustee and the investment managers. Within the fair value hierarchy (see Note 6), the mutual funds are classified as Level 1 as quoted active market prices for identical assets are used to measure fair value. The collective funds are public investment vehicles valued using a net asset value (“NAV”) and, therefore, are outside of the fair value hierarchy. The collective funds may be liquidated with minimal restrictions.
|
|
|
|
(B)
|
Retirement Savings 401(k) Plan
|
We sponsor a 401(k) plan for all associates meeting certain eligibility criteria. The plan contains a company matching contribution as well as an additional discretionary company-funded contribution to those associates meeting certain age and service requirements. The total cost for company contributions was $47.4 million in fiscal 2020, $42.3 million in fiscal 2019 and $39.7 million in fiscal 2018.
|
|
|
|
(C)
|
Retirement Restoration Plan
|
We sponsor a non-qualified retirement plan for certain senior executives who are affected by Internal Revenue Code limitations on benefits provided under the Retirement Savings 401(k) Plan. Under this plan, these associates may continue to defer portions of their compensation for retirement savings. We match the associates’ contributions at the same rate provided under the 401(k) plan, and also may provide an annual discretionary company-funded contribution under the same terms of the 401(k) plan. This plan is unfunded with lump sum payments to be made upon the associate’s retirement. The total cost for this plan was not significant in fiscal 2020, fiscal 2019 and fiscal 2018.
|
|
|
|
(D)
|
Executive Deferred Compensation Plan
|
We sponsor an unfunded nonqualified deferred compensation plan to permit certain eligible associates to defer receipt of a portion of their compensation to a future date. This plan also includes a restorative company contribution designed to compensate the plan participants for any loss of company contributions under the Retirement Savings 401(k) Plan and the Retirement Restoration Plan due to a reduction in their eligible compensation resulting from deferrals into the Executive Deferred Compensation Plan. The total cost for this plan was not significant in fiscal 2020, fiscal 2019 and fiscal 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
As of February 29 or 28
|
|
Debt Description (1)
|
Maturity Date
|
2020
|
|
2019
|
|
Revolving credit facility (2) (3)
|
June 2024
|
$
|
452,740
|
|
|
$
|
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
|
536,739
|
|
|
495,626
|
|
|
Non-recourse notes payable
|
Various dates through July 2026
|
13,613,272
|
|
|
12,535,405
|
|
|
Total debt
|
|
15,402,751
|
|
|
14,197,560
|
|
|
Less: current portion
|
|
(433,456
|
)
|
|
(396,350
|
)
|
|
Less: unamortized debt issuance costs
|
|
(25,240
|
)
|
|
(24,676
|
)
|
|
Long-term debt, net
|
|
$
|
14,944,055
|
|
|
$
|
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 LIBOR, the federal funds rate, or the prime rate, depending on the type of borrowing.
|
|
|
|
|
(3)
|
During March 2020, we made net borrowings under this facility of approximately $675 million, following which more than $300 million in unused borrowing capacity remained.
|
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 the unused portions of the available funds. Borrowings under the credit facility are either due “on demand” or at maturity depending on the type of
borrowing. Borrowings with “on demand” repayment terms are presented as short-term debt while amounts due at maturity are presented as long-term debt as no repayments are expected to be made within the next 12 months. As of February 29, 2020, the unused capacity of $997.3 million was fully available to us.
The weighted average interest rate on outstanding short-term and long-term debt was 3.23% in fiscal 2020, 3.50% in fiscal 2019 and 2.49% in fiscal 2018.
Term Loan. Borrowings under our $300 million term loan are available for working capital and general corporate purposes. The interest rate on our term loan was 2.56% as of February 29, 2020, and the 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.
Future maturities of financing obligations were as follows:
|
|
|
|
|
|
|
|
(In thousands)
|
As of February 29, 2020
|
|
Fiscal 2021
|
$
|
52,504
|
|
|
Fiscal 2022
|
55,621
|
|
|
Fiscal 2023
|
52,343
|
|
|
Fiscal 2024
|
54,638
|
|
|
Fiscal 2025
|
53,310
|
|
|
Thereafter
|
887,650
|
|
|
Total payments
|
1,156,066
|
|
|
Less: interest
|
(619,327
|
)
|
|
Present value of financing obligations
|
$
|
536,739
|
|
Non-Recourse Notes Payable. The non-recourse notes payable relate to auto loans receivable funded through non-recourse funding vehicles. The timing of principal payments on the non-recourse notes payable is based on the timing of principal collections and defaults on the related auto loans receivable. The current portion of non-recourse notes payable represents principal payments that are due to be distributed in the following period.
Notes payable related to our asset-backed term funding transactions accrue interest predominantly at fixed rates and have scheduled maturities through July 2026, but may mature earlier, depending upon repayment rate of the underlying auto loans receivable.
Information on our funding vehicles of non-recourse notes payable as of February 29, 2020 are as follows:
|
|
|
|
|
|
|
|
(in billions)
|
Capacity
|
|
Warehouse facilities
|
|
|
August 2020 expiration
|
$
|
1.40
|
|
|
September 2020 expiration
|
0.15
|
|
|
February 2021 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
|
11.43
|
|
|
Non-recourse notes payable
|
$
|
13.61
|
|
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. While we believe the unused capacity in our warehouse facilities could support CAF activity for several months, particularly in the current sales environment, we are actively assessing alternatives in the event the market for asset-backed securities remains disrupted for an extended period of time.
See Notes 1(F) and 4 for additional information on the related auto loans receivable.
Capitalized Interest. We capitalize interest in connection with the construction of certain facilities. For fiscal 2020, fiscal 2019 and fiscal 2018, we capitalized interest of $7.0 million, $6.4 million, and $6.9 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 February 29, 2020, we were in compliance with all financial covenants and our non-recourse funding vehicles were in compliance with the related performance triggers. As of that date, our performance under these covenants could degrade such that, if the covenant ratios were to double, we would still remain in compliance.
|
|
|
|
12.
|
STOCK AND STOCK-BASED INCENTIVE PLANS
|
Under the terms of our Articles of Incorporation, the board of directors may determine the rights, preferences and terms of our authorized but unissued shares of preferred stock. We have authorized 20,000,000 shares of preferred stock, $20 par value. No shares of preferred stock are currently outstanding.
|
|
|
|
(B)
|
Share Repurchase Program
|
As of February 29, 2020, a total of $2 billion of board authorizations for repurchases of our common stock was outstanding, with no expiration date, of which $1.55 billion remained available for repurchase. Subsequent to the end of the fiscal year, our current stock repurchase program was suspended, although the repurchase authorization remains effective.
Common Stock Repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended February 29 or 28
|
|
|
2020
|
|
2019
|
|
2018
|
|
Number of shares repurchased (in thousands)
|
6,971.1
|
|
|
13,634.7
|
|
|
8,897.2
|
|
|
Average cost per share
|
$
|
80.56
|
|
|
$
|
66.22
|
|
|
$
|
64.46
|
|
|
Available for repurchase, as of end of year (in millions)
|
$
|
1,552.3
|
|
|
$
|
2,113.9
|
|
|
$
|
1,016.8
|
|
|
|
|
|
(C)
|
Stock Incentive Plans
|
We maintain long-term incentive plans for management, certain employees and the nonemployee members of our board of directors. The plans allow for the granting of equity-based compensation awards, including nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, stock- and cash-settled restricted stock units, stock grants or a combination of awards. To date, we have not awarded any incentive stock options.
As of February 29, 2020, a total of 59,350,000 shares of our common stock had been authorized to be issued under the long-term incentive plans. The number of unissued common shares reserved for future grants under the long-term incentive plans was 7,972,743 as of that date.
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 and stock-settled deferred stock units, 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 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 February 29, 2020, 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 February 29, 2020, 38,730 units were outstanding at a weighted average grant date fair value of $80.19.
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 February 29, 2020, there were 4,517 shares outstanding at a grant date value of $88.54.
Employee Stock Purchase Plan. We sponsor an employee stock purchase plan for all associates meeting certain eligibility criteria. We have authorized up to 8,000,000 shares of common stock with a total of 2,628,021 shares remaining available for issuance under the plan as of February 29, 2020. Associate contributions are limited to 10% of eligible compensation, up to a maximum that was increased in January 2020 from $7,500 per year to $10,000 per year. For each $1.00 contributed to the plan by associates, we match $0.15. Shares are acquired through open-market purchases. We purchased 174,325 shares at an average price per share of $85.64 during fiscal 2020, 185,856 shares at an average price per share of $67.66 during fiscal 2019 and 177,433 shares at an average price per share of $65.11 during fiscal 2018.
|
|
|
|
(D)
|
Share-Based Compensation
|
Composition of Share-Based Compensation Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended February 29 or 28
|
|
(In thousands)
|
2020
|
|
2019
|
|
2018
|
|
Cost of sales
|
$
|
6,382
|
|
|
$
|
2,952
|
|
|
$
|
2,552
|
|
|
CarMax Auto Finance income
|
4,940
|
|
|
3,804
|
|
|
3,167
|
|
|
Selling, general and administrative expenses
|
99,435
|
|
|
69,928
|
|
|
57,701
|
|
|
Share-based compensation expense, before income taxes
|
$
|
110,757
|
|
|
$
|
76,684
|
|
|
$
|
63,420
|
|
Composition of Share-Based Compensation Expense – By Grant Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended February 29 or 28
|
|
(In thousands)
|
2020
|
|
2019
|
|
2018
|
|
Nonqualified stock options
|
$
|
30,166
|
|
|
$
|
29,992
|
|
|
$
|
26,461
|
|
|
Cash-settled restricted stock units (RSUs)
|
60,739
|
|
|
29,141
|
|
|
23,539
|
|
|
Stock-settled market stock units (MSUs)
|
12,874
|
|
|
12,683
|
|
|
10,032
|
|
|
Other share-based incentives:
|
|
|
|
|
|
|
Stock-settled performance stock units (PSUs)
|
2,559
|
|
|
1,733
|
|
|
648
|
|
|
Stock-settled deferred stock units (DSUs)
|
2,500
|
|
|
1,155
|
|
|
—
|
|
|
Restricted stock (RSAs)
|
23
|
|
|
307
|
|
|
1,199
|
|
|
Employee stock purchase plan
|
1,896
|
|
|
1,673
|
|
|
1,541
|
|
|
Total other share-based incentives
|
6,978
|
|
|
4,868
|
|
|
3,388
|
|
|
Share-based compensation expense, before income taxes
|
$
|
110,757
|
|
|
$
|
76,684
|
|
|
$
|
63,420
|
|
Unrecognized Share-Based Compensation Expense – By Grant Type
|
|
|
|
|
|
|
|
|
|
|
|
As of February 29, 2020
|
|
|
|
|
Weighted Average
|
|
|
Unrecognized
|
|
Remaining
|
|
|
Compensation
|
|
Recognition Life
|
|
(Costs in millions)
|
Costs
|
|
(Years)
|
|
Nonqualified stock options
|
$
|
40.4
|
|
|
2.1
|
|
|
Stock-settled market stock units
|
12.7
|
|
|
1.1
|
|
|
Other share-based incentives:
|
|
|
|
|
Stock-settled performance stock units
|
5.0
|
|
|
1.2
|
|
|
Stock-settled deferred stock units
|
—
|
|
|
—
|
|
|
Restricted stock
|
0.4
|
|
|
2.8
|
|
|
Total other share-based incentives
|
5.4
|
|
|
0.9
|
|
|
Total
|
$
|
58.5
|
|
|
1.8
|
|
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 years ended February 29, 2020, February 28, 2019 or February 28, 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
|
1,601
|
|
|
78.74
|
|
|
|
|
|
|
|
Options exercised
|
(2,413
|
)
|
|
51.55
|
|
|
|
|
|
|
|
Options forfeited or expired
|
(63
|
)
|
|
67.15
|
|
|
|
|
|
|
|
Outstanding as of February 29, 2020
|
6,994
|
|
|
$
|
64.85
|
|
|
4.3
|
|
$
|
157,088
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of February 29, 2020
|
3,010
|
|
|
$
|
62.08
|
|
|
3.3
|
|
$
|
75,935
|
|
Stock Option Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended February 29 or 28
|
|
|
2020
|
|
2019
|
|
2018
|
|
Options granted
|
1,601,489
|
|
|
1,745,497
|
|
|
1,955,117
|
|
|
Weighted average grant date fair value per share
|
$
|
22.10
|
|
|
$
|
18.75
|
|
|
$
|
16.15
|
|
|
Cash received from options exercised (in millions)
|
$
|
124.4
|
|
|
$
|
58.1
|
|
|
$
|
73.5
|
|
|
Intrinsic value of options exercised (in millions)
|
$
|
78.6
|
|
|
$
|
37.1
|
|
|
$
|
57.1
|
|
|
Realized tax benefits (in millions)
|
$
|
21.8
|
|
|
$
|
10.2
|
|
|
$
|
21.8
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended February 29 or 28
|
|
|
2020
|
|
2019
|
|
2018
|
|
Dividend yield
|
|
|
|
0.0
|
%
|
|
|
|
|
0.0
|
%
|
|
|
|
|
0.0
|
%
|
|
Expected volatility factor (1)
|
26.8
|
%
|
-
|
32.6
|
%
|
|
26.1
|
%
|
-
|
34.1
|
%
|
|
27.3
|
%
|
-
|
34.2
|
%
|
|
Weighted average expected volatility
|
|
|
|
29.2
|
%
|
|
|
|
|
29.1
|
%
|
|
|
|
|
29.7
|
%
|
|
Risk-free interest rate (2)
|
1.5
|
%
|
-
|
2.4
|
%
|
|
1.7
|
%
|
-
|
3.0
|
%
|
|
0.7
|
%
|
-
|
2.3
|
%
|
|
Expected term (in years) (3)
|
|
|
|
4.6
|
|
|
|
|
|
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
|
562
|
|
|
$
|
78.62
|
|
|
Stock units vested and converted
|
(505
|
)
|
|
$
|
52.05
|
|
|
Stock units cancelled
|
(109
|
)
|
|
$
|
65.58
|
|
|
Outstanding as of February 29, 2020
|
1,557
|
|
|
$
|
66.85
|
|
Cash-Settled Restricted Stock Unit Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended February 29 or 28
|
|
|
2020
|
|
2019
|
|
2018
|
|
Stock units granted
|
562,321
|
|
|
629,942
|
|
|
628,095
|
|
|
Initial weighted average grant date fair value per share
|
$
|
78.62
|
|
|
$
|
63.07
|
|
|
$
|
58.39
|
|
|
Payments (before payroll tax withholdings) upon
|
|
|
|
|
|
|
vesting (in millions)
|
$
|
37.8
|
|
|
$
|
21.0
|
|
|
$
|
26.6
|
|
|
Realized tax benefits (in millions)
|
$
|
10.5
|
|
|
$
|
5.8
|
|
|
$
|
10.2
|
|
Expected Cash Settlement Range Upon Restricted Stock Unit Vesting
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 29, 2020
|
|
(In thousands)
|
Minimum (1)
|
|
Maximum (1)
|
|
Fiscal 2021
|
$
|
21,342
|
|
|
$
|
56,912
|
|
|
Fiscal 2022
|
23,470
|
|
|
62,586
|
|
|
Fiscal 2023
|
26,662
|
|
|
71,099
|
|
|
Total expected cash settlements
|
$
|
71,474
|
|
|
$
|
190,597
|
|
|
|
|
|
(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
|
131
|
|
|
$
|
98.67
|
|
|
Stock units vested and converted
|
(154
|
)
|
|
$
|
64.36
|
|
|
Stock units cancelled
|
(9
|
)
|
|
$
|
86.34
|
|
|
Outstanding as of February 29, 2020
|
477
|
|
|
$
|
84.05
|
|
Stock-Settled Market Stock Unit Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended February 29 or 28
|
|
|
2020
|
|
2019
|
|
2018
|
|
Stock units granted
|
131,311
|
|
|
205,868
|
|
|
163,618
|
|
|
Weighted average grant date fair value per share
|
$
|
98.67
|
|
|
$
|
82.09
|
|
|
$
|
74.09
|
|
|
Realized tax benefits (in millions)
|
$
|
4.0
|
|
|
$
|
1.4
|
|
|
$
|
7.0
|
|
|
|
|
|
13.
|
NET EARNINGS PER SHARE
|
Basic and Dilutive Net Earnings Per Share Reconciliations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended February 29 or 28
|
|
(In thousands except per share data)
|
2020
|
|
2019
|
|
2018
|
|
Net earnings
|
$
|
888,433
|
|
|
$
|
842,413
|
|
|
$
|
664,112
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
164,836
|
|
|
174,463
|
|
|
182,660
|
|
|
Dilutive potential common shares:
|
|
|
|
|
|
|
Stock options
|
1,580
|
|
|
1,028
|
|
|
1,390
|
|
|
Stock-settled restricted stock units
|
404
|
|
|
393
|
|
|
420
|
|
|
Weighted average common shares and dilutive
|
|
|
|
|
|
|
potential common shares
|
166,820
|
|
|
175,884
|
|
|
184,470
|
|
|
|
|
|
|
|
|
|
Basic net earnings per share
|
$
|
5.39
|
|
|
$
|
4.83
|
|
|
$
|
3.64
|
|
|
Diluted net earnings per share
|
$
|
5.33
|
|
|
$
|
4.79
|
|
|
$
|
3.60
|
|
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 fiscal 2020, fiscal 2019 and fiscal 2018, options to purchase 1,355,679 shares, 4,009,566 shares and 2,993,200 shares of common stock, respectively, were not included.
|
|
|
|
14.
|
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, 2017
|
$
|
(55,521
|
)
|
|
$
|
(1,034
|
)
|
|
$
|
(56,555
|
)
|
|
Other comprehensive (loss) income before reclassifications
|
(2,546
|
)
|
|
12,381
|
|
|
9,835
|
|
|
Amounts reclassified from accumulated other
|
|
|
|
|
|
|
comprehensive loss
|
1,175
|
|
|
1,813
|
|
|
2,988
|
|
|
Other comprehensive (loss) income
|
(1,371
|
)
|
|
14,194
|
|
|
12,823
|
|
|
Amounts transferred from accumulated other
|
|
|
|
|
|
|
comprehensive loss to retained earnings (1)
|
(11,605
|
)
|
|
1,025
|
|
|
(10,580
|
)
|
|
Balance as of February 28, 2018
|
(68,497
|
)
|
|
14,185
|
|
|
(54,312
|
)
|
|
Other comprehensive loss before reclassifications
|
(3,459
|
)
|
|
(6,703
|
)
|
|
(10,162
|
)
|
|
Amounts reclassified from accumulated other
|
|
|
|
|
|
|
comprehensive loss
|
1,478
|
|
|
(5,014
|
)
|
|
(3,536
|
)
|
|
Other comprehensive loss
|
(1,981
|
)
|
|
(11,717
|
)
|
|
(13,698
|
)
|
|
Balance as of February 28, 2019
|
(70,478
|
)
|
|
2,468
|
|
|
(68,010
|
)
|
|
Other comprehensive loss before reclassifications
|
(52,254
|
)
|
|
(34,631
|
)
|
|
(86,885
|
)
|
|
Amounts reclassified from accumulated other
|
|
|
|
|
|
|
comprehensive loss
|
1,430
|
|
|
3,394
|
|
|
4,824
|
|
|
Other comprehensive loss
|
(50,824
|
)
|
|
(31,237
|
)
|
|
(82,061
|
)
|
|
Balance as of February 29, 2020
|
$
|
(121,302
|
)
|
|
$
|
(28,769
|
)
|
|
$
|
(150,071
|
)
|
|
|
|
|
(1)
|
Reclassification due to the adoption of ASU 2018-02 in fiscal 2018.
|
Changes In and Reclassifications Out of Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended February 29 or 28
|
|
(In thousands)
|
2020
|
|
2019
|
|
2018
|
|
Retirement Benefit Plans (Note 10):
|
|
|
|
|
|
|
Actuarial loss arising during the year
|
$
|
(68,861
|
)
|
|
$
|
(4,560
|
)
|
|
$
|
(3,256
|
)
|
|
Tax benefit
|
16,607
|
|
|
1,101
|
|
|
710
|
|
|
Actuarial loss arising during the year, net of tax
|
(52,254
|
)
|
|
(3,459
|
)
|
|
(2,546
|
)
|
|
Actuarial loss amortization reclassifications recognized in net pension expense:
|
|
|
|
|
|
|
Cost of sales
|
797
|
|
|
812
|
|
|
749
|
|
|
CarMax Auto Finance income
|
49
|
|
|
51
|
|
|
46
|
|
|
Selling, general and administrative expenses
|
1,028
|
|
|
1,086
|
|
|
1,020
|
|
|
Total amortization reclassifications recognized in net pension expense
|
1,874
|
|
|
1,949
|
|
|
1,815
|
|
|
Tax expense
|
(444
|
)
|
|
(471
|
)
|
|
(640
|
)
|
|
Amortization reclassifications recognized in net
|
|
|
|
|
|
|
pension expense, net of tax
|
1,430
|
|
|
1,478
|
|
|
1,175
|
|
|
Net change in retirement benefit plan unrecognized
|
|
|
|
|
|
|
actuarial losses, net of tax
|
(50,824
|
)
|
|
(1,981
|
)
|
|
(1,371
|
)
|
|
|
|
|
|
|
|
|
Cash Flow Hedges (Note 5):
|
|
|
|
|
|
|
Changes in fair value
|
(47,083
|
)
|
|
(9,103
|
)
|
|
17,953
|
|
|
Tax benefit (loss)
|
12,452
|
|
|
2,400
|
|
|
(5,572
|
)
|
|
Changes in fair value, net of tax
|
(34,631
|
)
|
|
(6,703
|
)
|
|
12,381
|
|
|
Reclassifications to CarMax Auto Finance income
|
4,614
|
|
|
(6,809
|
)
|
|
3,009
|
|
|
Tax (expense) benefit
|
(1,220
|
)
|
|
1,795
|
|
|
(1,196
|
)
|
|
Reclassification of hedge losses (gains), net of tax
|
3,394
|
|
|
(5,014
|
)
|
|
1,813
|
|
|
Net change in cash flow hedge unrecognized losses, net of tax
|
(31,237
|
)
|
|
(11,717
|
)
|
|
14,194
|
|
|
Total other comprehensive (loss) income, net of tax
|
$
|
(82,061
|
)
|
|
$
|
(13,698
|
)
|
|
$
|
12,823
|
|
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 $48.8 million as of February 29, 2020 and $21.4 million as of February 28, 2019.
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 11.
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)
|
Year Ended February 29, 2020
|
|
Operating lease cost (1)
|
$
|
57,656
|
|
|
Finance lease cost:
|
|
|
Depreciation of lease assets
|
5,769
|
|
|
Interest on lease liabilities
|
7,678
|
|
|
Total finance lease cost
|
13,447
|
|
|
Total lease cost
|
$
|
71,103
|
|
(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 February 29, 2020
|
|
Assets:
|
|
|
|
Operating lease assets
|
Operating lease assets
|
$
|
449,094
|
|
|
Finance lease assets
|
Property and equipment, net (1)
|
75,320
|
|
|
Total lease assets
|
|
$
|
524,414
|
|
|
Liabilities:
|
|
|
|
Current:
|
|
|
|
Operating leases
|
Current portion of operating lease liabilities
|
$
|
30,980
|
|
|
Finance leases
|
Accrued expenses and other current liabilities
|
5,066
|
|
|
Long-term:
|
|
|
|
Operating leases
|
Operating lease liabilities, excluding current portion
|
440,671
|
|
|
Finance leases
|
Other liabilities
|
79,327
|
|
|
Total lease liabilities
|
|
$
|
556,044
|
|
(1) Finance lease assets are recorded net of accumulated depreciation of $9.1 million as of February 29, 2020.
Lease term and discount rate information related to leases was as follows:
|
|
|
|
|
|
|
Lease Term and Discount Rate
|
As of February 29, 2020
|
|
Weighted Average Remaining Lease Term (in years)
|
|
|
Operating leases
|
19.98
|
|
|
Finance leases
|
13.55
|
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
Operating leases
|
5.40
|
%
|
|
Finance leases
|
10.32
|
%
|
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
|
|
|
(In thousands)
|
Year Ended February 29, 2020
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows from operating leases
|
$
|
57,145
|
|
|
Operating cash flows from finance leases
|
$
|
4,027
|
|
|
Financing cash flows from finance leases
|
$
|
4,151
|
|
|
|
|
|
Lease assets obtained in exchange for lease obligations:
|
|
Operating leases
|
$
|
27,136
|
|
|
Finance leases
|
$
|
53,111
|
|
Maturities of lease liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 29, 2020
|
|
(In thousands)
|
Operating Leases (1)
|
|
Finance Leases (1)
|
|
Fiscal 2021
|
$
|
54,577
|
|
|
$
|
13,053
|
|
|
Fiscal 2022
|
51,049
|
|
|
13,849
|
|
|
Fiscal 2023
|
48,441
|
|
|
14,070
|
|
|
Fiscal 2024
|
47,238
|
|
|
16,729
|
|
|
Fiscal 2025
|
46,136
|
|
|
12,994
|
|
|
Thereafter
|
570,667
|
|
|
90,742
|
|
|
Total lease payments
|
818,108
|
|
|
161,437
|
|
|
Less: interest
|
(346,457
|
)
|
|
(77,044
|
)
|
|
Present value of lease liabilities
|
$
|
471,651
|
|
|
$
|
84,393
|
|
(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.
As previously disclosed in our 2019 Annual Report and under the previous lease accounting standard, rent expense for all operating leases was $56.9 million in fiscal 2019 and $52.4 million in fiscal 2018.
|
|
|
|
16.
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended February 29 or 28
|
|
(In thousands)
|
2020
|
|
2019
|
|
2018
|
|
Cash paid for interest
|
$
|
85,607
|
|
|
$
|
74,204
|
|
|
$
|
69,431
|
|
|
Cash paid for income taxes
|
$
|
286,008
|
|
|
$
|
220,669
|
|
|
$
|
353,977
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
Increase (decrease) in accrued capital expenditures
|
$
|
3,840
|
|
|
$
|
(3,066
|
)
|
|
$
|
1,220
|
|
|
Increase in financing obligations
|
$
|
48,942
|
|
|
$
|
35,848
|
|
|
$
|
12,051
|
|
See Note 15 for supplemental cash flow information related to leases.
|
|
|
|
17.
|
COMMITMENTS AND CONTINGENCIES
|
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 lawsuit was remanded back to the Superior Court of California, County of Alameda on June 4, 2019. The McElhannon lawsuit seeks unspecified damages, restitution, statutory and/or civil penalties, interest, cost and attorneys’ fees.
CarMax has reached a memorandum of understanding and expects to finalize a global agreement settling the Weiss, Gomez and McElhannon lawsuits on a class basis. Once final, the settlement agreement will be submitted for approval to the Superior Court of California, County of Placer as part of the Weiss lawsuit. In anticipation of the consolidation of claims under the global settlement agreement, on March 11, 2020, the Gomez and McElhannon lawsuits were dismissed as the claims of the plaintiffs will be addressed in the global settlement. The monetary settlement under this agreement is for an immaterial amount that has been fully accrued.
The Sabanovich lawsuit is not included in the global settlement agreement. 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.
As previously reported, the company has cooperated with representatives from multiple California municipality district attorney offices in an inquiry by those offices into the handling, storage and disposal of certain types of hazardous waste at our store locations in those municipalities. CarMax and the district attorney offices have reached a settlement agreement, filed a Stipulation for Entry of Final Judgement and Permanent Injunction with the Superior Court of California, County of Orange on February 27, 2020, and await final entry of the settlement by the court. The settlement includes an immaterial monetary payment covering penalties, costs, and supplemental environmental projects as well as certain injunctive relief.
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.
Gain Contingency. The company is a class member in a consolidated and settled class action lawsuit (In re: Takata Airbag Product Liability Litigation (U.S. District Court, Southern District of Florida)) against Toyota, Mazda, Subaru, BMW, Honda, Nissan and Ford related to the economic loss associated with defective Takata airbags installed as original equipment in certain model vehicles from model years 2000-2018. On April 10, 2020, we were informed that CarMax will receive $40.3 million in net recoveries
from the Toyota, Mazda, Subaru, BMW, Honda and Nissan settlement funds. On April 15, 2020, we received that amount in settlement of this matter and recorded the gain at the time of receipt. CarMax remains a class member for the Ford settlement fund. We are unable to make a reasonable estimate of the amount or range of gain that could result from CarMax’s participation in the Ford settlement fund.
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 sell at 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 $10.5 million as of February 29, 2020 and $7.4 million as of February 28, 2019, and is included in accrued expenses and other current liabilities.
At various times we may have certain purchase obligations that are enforceable and legally binding primarily related to real estate purchases, advertising and third-party outsourcing services. As of February 29, 2020, we have material purchase obligations of $197.5 million, of which $65.3 million are expected to be fulfilled in fiscal 2021.
|
|
|
|
18.
|
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
|
Fiscal Year
|
|
(In thousands, except per share data)
|
2020
|
|
2020
|
|
2020
|
|
2020
|
|
2020
|
|
Net sales and operating revenues
|
$
|
5,366,318
|
|
|
$
|
5,201,151
|
|
|
$
|
4,790,028
|
|
|
$
|
4,962,490
|
|
|
$
|
20,319,987
|
|
|
Gross profit
|
$
|
742,383
|
|
|
$
|
693,453
|
|
|
$
|
613,647
|
|
|
$
|
672,857
|
|
|
$
|
2,722,340
|
|
|
CarMax Auto Finance income
|
$
|
115,959
|
|
|
$
|
114,131
|
|
|
$
|
114,033
|
|
|
$
|
111,907
|
|
|
$
|
456,030
|
|
|
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
expenses
|
$
|
489,660
|
|
|
$
|
480,831
|
|
|
$
|
484,848
|
|
|
$
|
484,728
|
|
|
$
|
1,940,067
|
|
|
Net earnings
|
$
|
266,744
|
|
|
$
|
233,599
|
|
|
$
|
173,156
|
|
|
$
|
214,934
|
|
|
$
|
888,433
|
|
|
Net earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.60
|
|
|
$
|
1.41
|
|
|
$
|
1.05
|
|
|
$
|
1.32
|
|
|
$
|
5.39
|
|
|
Diluted
|
$
|
1.59
|
|
|
$
|
1.40
|
|
|
$
|
1.04
|
|
|
$
|
1.30
|
|
|
$
|
5.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
|
Fiscal Year
|
|
(In thousands, except per share data)
|
2019
|
|
2019
|
|
2019
|
|
2019
|
|
2019
|
|
Net sales and operating revenues
|
$
|
4,792,592
|
|
|
$
|
4,766,035
|
|
|
$
|
4,295,871
|
|
|
$
|
4,318,602
|
|
|
$
|
18,173,100
|
|
|
Gross profit
|
$
|
661,340
|
|
|
$
|
650,636
|
|
|
$
|
569,237
|
|
|
$
|
599,378
|
|
|
$
|
2,480,591
|
|
|
CarMax Auto Finance income
|
$
|
115,593
|
|
|
$
|
109,667
|
|
|
$
|
109,725
|
|
|
$
|
103,705
|
|
|
$
|
438,690
|
|
|
Selling, general and administrative
|
|
|
|
|
|
|
|
|
|
|
expenses
|
$
|
438,234
|
|
|
$
|
453,554
|
|
|
$
|
409,520
|
|
|
$
|
428,967
|
|
|
$
|
1,730,275
|
|
|
Net earnings
|
$
|
238,656
|
|
|
$
|
220,890
|
|
|
$
|
190,311
|
|
|
$
|
192,556
|
|
|
$
|
842,413
|
|
|
Net earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.34
|
|
|
$
|
1.25
|
|
|
$
|
1.09
|
|
|
$
|
1.14
|
|
|
$
|
4.83
|
|
|
Diluted
|
$
|
1.33
|
|
|
$
|
1.24
|
|
|
$
|
1.09
|
|
|
$
|
1.13
|
|
|
$
|
4.79
|
|
On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. In the following weeks, several U.S. states and localities issued lockdown orders impacting the operations of our stores and consumer demand. Since then, the COVID-19 situation within the U.S. has rapidly
escalated and approximately half of our stores have been closed or have run under limited operations. Based upon the fluidity of the current environment, we expect that stores will continue to re-open or close in accordance with government mandates or public health concerns. Consumer demand has deteriorated and sales have dropped significantly; most of our stores that remain open are selling 50% or less of what they sold last year, a trend that continued into April 2020. While we cannot reasonably estimate the duration or severity of this pandemic, we expect it to have a material impact on the company’s business, results of operations, financial position and liquidity.
During March 2020, we made net borrowings of approximately $675 million under our revolving credit facility to further bolster our liquidity position and provide additional financial flexibility in light of the uncertainty surrounding COVID-19. As of the date of this filing, more than $300 million in unused borrowing capacity remained. In addition, we halted our stock repurchase program, although the repurchase authorization remains effective. We have also decided to temporarily pause our store expansion strategy and our remodels until the COVID-19 situation stabilizes.
In April 2020, we announced approximately 15,500 associates have been placed on furlough, effective April 18, 2020. The majority of furloughed associates are employed at stores that are currently closed due to government mandates. Prior to the effective date of any furlough, we provided transition pay to each impacted associate. In addition, for furloughed associates enrolled in our medical plan, we are paying the current cost of the associate’s portion of the medical plan, plus the employer portion, until further notice. We are also providing resources to help associates understand the changes and take advantage of the assistance available under the new CARES Act, which should provide significant financial support for most furloughed employees. Additionally, our president and CEO is forgoing 50% of his salary, each member of our senior leadership team is taking a reduction in pay until further notice and our board of directors has unanimously determined to forgo their cash retainer indefinitely.