Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-K
x
|
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the fiscal year ended February 28, 2010
OR
¨
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period to
Commission
File Number: 1-31420
CARMAX,
INC.
(Exact
name of registrant as specified in its charter)
VIRGINIA
(State
or other jurisdiction of
incorporation
or organization)
|
54-1821055
(I.R.S.
Employer
Identification
No.)
|
12800
TUCKAHOE CREEK PARKWAY, RICHMOND, VIRGINIA
(Address
of principal executive offices)
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23238
(Zip
Code)
|
Registrant’s
telephone number, including area code: (804) 747-0422
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
Common Stock, par value $0.50
Rights to Purchase Series A Preferred
Stock,
par value $20.00
|
Name
of each exchange on which registered
New
York Stock Exchange
New
York Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act.
Yes x
No ¨
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes ¨ No
x
1
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes ¨ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x | Accelerated filer ¨ |
Non-accelerated filer ¨ (do not check if a smaller reporting company) | Smaller reporting company ¨ |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes ¨ No x
The
aggregate market value of the registrant’s common stock held by non-affiliates
as of August 31, 2009, computed by reference to the closing price of the
registrant’s common stock on the New York Stock Exchange on that date, was $3.8
billion.
On March
31, 2010, there were 223,126,563 outstanding shares of CarMax, Inc. common
stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the CarMax, Inc. Notice of 2010 Annual Meeting of Shareholders and Proxy
Statement are incorporated by reference in Part III of this Form
10-K.
2
FORM
10-K
FOR
FISCAL YEAR ENDED FEBRUARY 28, 2010
TABLE
OF CONTENTS
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Page
No.
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PART
I
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Item
1.
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Business
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4
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Item
1A.
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Risk
Factors
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11
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Item
1B.
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Unresolved
Staff Comments
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14
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Item
2.
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Properties
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14
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Item
3.
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Legal
Proceedings
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15
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Item
4.
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Reserved
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15
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PART
II
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Item
5.
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Market
for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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16
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Item
6.
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Selected
Financial Data
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18
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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19
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Item
7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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39
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Item
8.
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Consolidated
Financial Statements and Supplementary Data
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40
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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75
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Item
9A.
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Controls
and Procedures
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75
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Item
9B.
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Other
Information
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75
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PART
III
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||||
Item
10.
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Directors,
Executive Officers and Corporate Governance
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76
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Item
11.
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Executive
Compensation
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77
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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77
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Item
13.
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Certain
Relationships and Related Transactions and Director Independence
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77
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Item
14.
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Principal
Accountant Fees and Services
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77
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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78
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Signatures
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79
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3
PART
I
In this
document, “we,” “our,” “us,” “CarMax” and “the company” refer to CarMax, Inc.
and its wholly owned subsidiaries, unless the context requires
otherwise.
FORWARD-LOOKING
AND CAUTIONARY STATEMENTS
This
Annual Report on Form 10-K and, in particular, the description of our business
set forth in Item 1 and our Management’s Discussion and Analysis of Financial
Condition and Results of Operations set forth in Item 7 contain a number of
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
statements regarding:
Ÿ
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Our
projected future sales growth, comparable store unit sales growth,
margins, earnings and earnings per
share.
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Ÿ
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Our
expectations of factors that could affect CarMax Auto Finance
income.
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Ÿ
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Our
expected future expenditures, cash needs and financing
sources.
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Ÿ
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The
projected number, timing and cost of new store
openings.
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Ÿ
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Our
sales and marketing plans.
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Ÿ
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Our
assessment of the potential outcome and financial impact of litigation and
the potential impact of unasserted
claims.
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Ÿ
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Our
assessment of competitors and potential
competitors.
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Ÿ
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Our
assessment of the effect of recent legislation and accounting
pronouncements.
|
In
addition, any statements contained in or incorporated by reference into this
report that are not statements of historical fact should be considered
forward-looking statements. You can identify these forward-looking
statements by use of words such as “anticipate,” “believe,” “could,” “estimate,”
“expect,” “intend,” “may,” “outlook,” “plan,” “predict,” “should,” “will” and
other similar expressions, whether in the negative or affirmative. We
cannot guarantee that we will achieve the plans, intentions or expectations
disclosed in the forward-looking statements. There are a number of
important risks and uncertainties that could cause actual results to differ
materially from those indicated by our forward-looking
statements. These risks and uncertainties include, without
limitation, those set forth in Item 1A under the heading “Risk
Factors.” We caution investors not to place undue reliance on any
forward-looking statements as these statements speak only as of the date when
made. We undertake no obligation to update any forward-looking
statements made in this report.
BUSINESS
OVERVIEW
CarMax
Background. CarMax, Inc. was incorporated under the laws of
the Commonwealth of Virginia in 1996. CarMax, Inc. is a holding
company and our operations are conducted through our
subsidiaries. Our home office is located at 12800 Tuckahoe Creek
Parkway, Richmond, Virginia.
Under the
ownership of Circuit City Stores, Inc. (“Circuit City”), we began operations in
1993 with the opening of our first CarMax superstore in Richmond,
Virginia. In 1997, Circuit City completed the initial public offering
of a tracking stock, Circuit City Stores, Inc.–CarMax Group common stock, which
was intended to track separately the performance of the CarMax
operations. On October 1, 2002, the CarMax business was separated
from Circuit City through a tax-free transaction, becoming an independent,
publicly traded company.
CarMax
Business. We are the nation’s largest retailer of used cars,
based on the 357,129 used vehicles we retailed during the fiscal year ended
February 28, 2010. As of the end of fiscal 2010, we operated 100 used
car superstores in 46 metropolitan markets. In addition, we sold
197,382 wholesale vehicles in fiscal 2010 through on-site auctions.
We were
the first used vehicle retailer to offer a large selection of high quality used
vehicles at competitively low, “no-haggle” prices using a customer-friendly
sales process in an attractive, modern sales facility. The CarMax
consumer offer provides customers the opportunity to shop for vehicles the same
way they shop for items at other “big-box” retailers, and it is structured
around four customer benefits: low, no-haggle prices; a broad selection; high
quality vehicles; and a customer-friendly sales process. Our strategy
is to revolutionize the auto retailing market by addressing the major sources of
customer dissatisfaction with traditional auto retailers and to maximize
operating efficiencies through the use of standardized operating procedures and
store formats enhanced by sophisticated, proprietary management information
systems.
4
We
purchase, recondition and sell used vehicles. All of the used
vehicles we retail are thoroughly reconditioned to meet our high standards, and
each vehicle must pass a comprehensive inspection before being offered for
sale. In fiscal 2010, approximately 90% of the used vehicles we
retailed were 1 to 6 years old with fewer than 60,000 miles. We
also offer a selection of used vehicles at each superstore that are more than 6
years old or have more than 60,000 miles, if they meet similar quality
standards.
We also
sell new vehicles at five locations under franchise agreements with four new car
manufacturers (Chrysler, General Motors, Nissan and Toyota). In
fiscal 2010, new vehicles comprised 2% of our total retail vehicle unit
sales.
We
provide customers with a full range of related products and services, including
the financing of vehicle purchases through CarMax Auto Finance (“CAF”), our own
finance operation, and third-party financing providers; the sale of extended
service plans, guaranteed asset protection and accessories; the appraisal and
purchase of vehicles directly from consumers; and vehicle repair
service.
The
CarMax consumer offer enables customers to evaluate separately each component of
the sales process and to make informed decisions based on comprehensive
information about the options, terms and associated prices of each
component. The customer can accept or decline any individual element
of the offer without affecting the price or terms of any other component of the
offer. Our no-haggle pricing and our commission structure, which is
generally based on a fixed dollars-per-unit standard, allow sales consultants to
focus solely on meeting customer needs.
We have
separated the practice of trading in a used vehicle in conjunction with the
purchase of another vehicle into two distinct and independent
transactions. We will appraise a consumer’s vehicle and make an offer
to buy that vehicle regardless of whether the owner is purchasing a vehicle from
us. Historically, we have acquired the majority of our retail used
vehicle inventory through this unique in-store appraisal process. We
also acquire a significant portion of our used vehicle inventory through
wholesale auctions and, to a lesser extent, directly from other sources,
including wholesalers, dealers and fleet owners. Vehicles purchased
through our in-store appraisal process that do not meet our retail standards are
sold to licensed dealers through on-site wholesale auctions.
Our
proprietary inventory management and pricing system tracks each vehicle
throughout the sales process. Using the information provided by this
system and applying statistical modeling techniques, we are able to optimize our
inventory mix, anticipate future inventory needs at each store, evaluate sales
consultant and buyer performance and refine our vehicle pricing
strategy. Because of the pricing discipline afforded by the inventory
management and pricing system, generally more than 99% of the entire used car
inventory offered at retail is sold at retail.
Industry and
Competition. The U.S. used car marketplace is highly
fragmented and competitive. According to industry sources, as of
December 31, 2009, there were approximately 18,600 franchised automotive
dealerships, who sell both new and used vehicles. In addition, used
vehicles were sold by approximately 36,500 independent used vehicle dealers, as
well as millions of private individuals. Our primary competitors are
the franchised auto dealers, who sell the majority of late-model used
vehicles. Independent used car dealers predominantly sell older,
higher mileage cars than we do. The number of franchised and
independent auto dealers has gradually declined over the last
decade. The rate of dealership closures accelerated in 2008 and 2009
due to the recessionary environment, the sharp decline in industry sales, the
challenging credit conditions and the bankruptcies of General Motors and
Chrysler. Despite the recent acceleration in dealership closures, the
automotive retail environment remains highly fragmented.
Based on
industry data, there were approximately 35 million used cars sold in the U.S. in
calendar year 2009, of which approximately 15 million were estimated to be
late-model, 1 to 6 year old vehicles. While we are the
largest retailer of used vehicles in the U.S., selling more than two times as
many used vehicles as the next largest retailer in calendar 2009, we still
represented only approximately 2% of the total late-model used units
sold. Over the last several years, competition has been affected by
the increasing use of Internet-based marketing for both used vehicles and
vehicle financing. In both the used and new vehicle markets, we seek
to distinguish ourselves from traditional dealerships through our consumer
offer, sales approach and other innovative operating strategies.
We
believe that our principal competitive advantages in used vehicle retailing are
our ability to provide a high degree of customer satisfaction with the
car-buying experience; our competitively low prices; our breadth of selection of
the most popular makes and models available both on site and via our website,
carmax.com; the quality of our vehicles; our proprietary information systems;
and the locations of our retail stores. Upon request by a customer,
we will transfer virtually any used vehicle in our nationwide inventory to a
local superstore. Transfer
fees may apply, depending on the distance the vehicle needs to
travel. In fiscal 2010, more than 25% of our vehicles sold were
transferred at customer request. Our
Certified Quality Inspection assures that every vehicle we offer for sale meets
our stringent standards. We back every vehicle with a 5-day,
money-back guarantee and at least a 30-day limited warranty. Other
competitive advantages include our ability to offer or arrange customer
financing with competitive terms and the comprehensiveness and cost of the
extended service plans we offer. We believe that we are competitive
in all of these areas and that we enjoy advantages over competitors that employ
traditional high-pressure, negotiation-oriented sales techniques.
5
Our sales
consultants play a significant role in ensuring a customer-friendly sales
process. A sales consultant is paid a commission based on a fixed
dollars-per-unit standard, thereby earning the same dollar sales commission
regardless of the gross profit on the vehicle being sold. The sales
consultant normally receives no commission on the finance
process. This ensures that the sales consultant’s primary objective
is helping customers find the right vehicles for their needs at prices they can
afford. In contrast, sales and finance personnel at traditional
dealerships typically receive higher commissions for negotiating higher prices
and interest rates, and for steering customers toward vehicles with higher gross
profit.
In the
new vehicle market, we compete with other franchised
dealers. Historically, the new vehicle market has been served
primarily by dealerships employing traditional automotive selling
methods. We believe our customer-friendly, low-pressure sales methods
are points of competitive differentiation.
In our
wholesale auctions, we compete with other automotive auction
houses. We believe our principal competitive advantages include our
high vehicle sales rate, our conditional announcement and arbitration policies,
our broad geographic distribution and our dealer-friendly
practices. Because we own the cars that we auction, we generally sell
between 97% and 100% of the vehicles offered, which is substantially higher than
the sales rate at most other auto auctions. Our policy of making
conditional announcements, noting mechanical and other issues found during our
appraisal process, is also not a typical practice used at other auctions of
older, higher mileage vehicles. Together, these factors make our
auctions attractive to dealers, resulting in a high dealer-to-car attendance
ratio.
Marketing and
Advertising. Our marketing strategies are focused on
developing awareness of the advantages of shopping at our stores and on
attracting customers who are already considering buying or selling a
vehicle. We use market awareness and customer satisfaction surveys to
help tailor our marketing efforts to the purchasing habits and preferences of
customers in each market area. Our marketing strategies are
implemented primarily through television and radio broadcasts, carmax.com,
Internet search engines and online classified listings. Television
and radio broadcast advertisements are designed to build consumer awareness of
the CarMax name, carmax.com and key components of the CarMax
offer. Broadcast and Internet advertisements are designed to drive
customers to our stores and to carmax.com.
We
continue to adjust our marketing programs in response to the evolving media
landscape. We have customized our marketing program based on
awareness levels in each market. We are building awareness and
driving traffic to our stores and carmax.com by listing every retail vehicle on
AutoTrader.com, cars.com and usedcars.com. We believe using these
online classified services allows our vehicles to appear on sites that are
visited by a majority of buyers of late-model used vehicles who use the Internet
in their shopping process. Our advertising on the Internet also
includes advertisements on search engines, such as Google and
Yahoo!
Our
website, carmax.com, is a marketing tool for communicating the CarMax consumer
offer in detail, a sophisticated search engine for finding the right vehicle and
a sales channel for customers who prefer to complete a part of the shopping and
sales process online. The website offers complete inventory and
pricing search capabilities. Information on each of the thousands of
cars available in our nationwide inventory is updated
daily. Carmax.com includes detailed information, such as vehicle
photos, prices, features, specifications and store locations, as well as
advanced feature-based search capabilities, and sorting and comparison tools
that allow consumers to easily compare vehicles. The site also
includes features such as detailed vehicle reviews, payment calculators and
email alerts when new inventory arrives. Virtually any used vehicle
in our nationwide inventory can be transferred at customer request to their
local superstore. Customers can contact sales consultants online via
carmax.com, by telephone or by fax. Customers can work with these
sales consultants from the comfort of home, including applying for financing,
and they need to visit the store only to sign the paperwork and pay for and pick
up their vehicle. Our survey data indicates that during fiscal 2010,
approximately 75% of customers who purchased a vehicle from us had visited our
website first.
6
Suppliers for
Used Vehicles. We acquire used vehicle inventory directly from
consumers through our in-store appraisal process and through other sources,
including local, regional and online auctions, wholesalers, franchised and
independent dealers and fleet owners, such as leasing companies and rental
companies. The supply of used vehicles is influenced by a variety of
factors, including the total number of vehicles in operation; the rate of new
vehicle sales, which in turn generate used-car trade-ins; and the number of used
vehicles sold or remarketed through retail channels, wholesale transactions and
at automotive auctions. According to industry statistics, there are
approximately 250 million light vehicles in operation in the U.S. In
recent years, generally between 10 million and 17 million new vehicles and
between 35 million and 45 million used vehicles have been retailed annually and
between 9 million and 10 million vehicles have been sold at wholesale auction
each year.
Our used
vehicle inventory acquired directly from consumers through our appraisal
process, within our stores and car-buying centers, helps provide an inventory of
makes and models that reflects the consumer preferences of each
market. We have replaced the traditional “trade-in” transaction with
a process in which a CarMax-trained buyer appraises a customer’s vehicle and
provides the owner with a written, guaranteed offer that is good for seven days.
An appraisal is
available to every customer free of charge, whether or not the customer
purchases a vehicle from us. Based on their age, mileage or
condition, fewer than half of the vehicles acquired through this in-store
appraisal process meet our high-quality retail standards. Those
vehicles that do not meet our retail standards are sold to licensed dealers
through on-site wholesale auctions.
The
inventory purchasing function is primarily performed at the store level and is
the responsibility of the buyers, who handle both on-site appraisals and
off-site auction purchases. Our buyers evaluate all used vehicles
based on internal and external auction data and market sales, as well as
estimated reconditioning costs and, for off-site purchases, transportation
costs. Our buyers, in collaboration with our home office staff,
utilize the extensive inventory and sales trend data available through the
CarMax information system to decide which inventory to purchase at off-site
auctions. Our inventory and pricing models help the buyers tailor
inventories to the buying preferences at each superstore, recommend pricing
adjustments and optimize inventory turnover to help maintain gross profit per
unit.
Based on
consumer acceptance of the in-store appraisal process, our experience and
success to date in acquiring vehicles from auctions and other sources, and the
large size of the U.S. auction market relative to our needs, we believe that
sources of used vehicles will continue to be sufficient to meet our current and
future needs.
Suppliers for New
Vehicles. Our new car operations are governed by the terms of
the sales, service and dealer agreements. Among other things, these
agreements generally impose operating requirements and restrictions, including
inventory levels, working capital, monthly financial reporting, signage and
cooperation with marketing strategies. A manufacturer may terminate a
dealer agreement under certain circumstances. In addition to selling
new vehicles using our low, no-haggle price strategy, the franchise and dealer
agreements generally allow us to perform warranty work on these vehicles and
sell related parts and services within a specified market
area. Designation of specified market areas generally does not
guarantee exclusivity within a specified territory.
Seasonality. Historically,
our business has been seasonal. Typically, our superstores experience
their strongest traffic and sales in the spring and summer
quarters. Sales are typically slowest in the fall quarter, when used
vehicles generally experience proportionately more of their annual
depreciation. We believe this is partly the result of a decline in
customer traffic, as well as discounts on model year closeouts that can pressure
pricing for late-model used vehicles. Customer traffic generally
tends to slow in the fall as the weather changes and as customers shift their
spending priorities toward holiday-related expenditures.
Products
and Services
Merchandising. We
offer customers a broad selection of makes and models of used vehicles,
including both domestic and imported vehicles, at competitive
prices. Our used car selection covers popular brands from
manufacturers such as Chrysler, Ford, General Motors, Honda, Hyundai, Kia,
Mazda, Mitsubishi, Nissan, Subaru, Toyota and Volkswagen and luxury brands such
as Acura, BMW, Infiniti, Lexus and Mercedes. Our primary focus is
vehicles that are 1 to 6 years old, have fewer than 60,000 miles and generally
range in price from $11,000 to $30,000. For the more cost-conscious
consumer, we also offer used cars that are more than 6 years old or have 60,000
miles or more and that generally range in price from $8,000 to
$21,000.
We have
implemented an everyday low-price strategy under which we set no-haggle prices
on both our used and new vehicles. We believe that our pricing is
competitive with the best-negotiated prices in the market. Prices on
all vehicles are clearly displayed on each vehicle’s information sticker; on
carmax.com, AutoTrader.com, cars.com and usedcars.com; and, where applicable, in
our newspaper advertising. We extend our no-haggle philosophy to
every component of the vehicle transaction, including vehicle appraisal offers,
financing rates, accessories, extended service plan pricing and vehicle
documentation fees.
7
Reconditioning
and Service. An
integral part of our used car consumer offer is the reconditioning
process. This process includes a comprehensive Certified Quality
Inspection of the engine and all major systems, including cooling, fuel,
drivetrain, transmission, electronics, suspension, brakes, steering, air
conditioning and other
equipment, as well as the interior and exterior of the vehicle. Based
on this quality inspection, we determine the reconditioning necessary to bring
the vehicle up to our quality standards. Our service technicians
complete vehicle inspections. We perform most routine mechanical and
minor body repairs in-house; however, for some reconditioning services, we
engage third parties specializing in those services. Some superstores
depend upon nearby, typically larger, superstores for reconditioning, which
increases efficiency and reduces overhead.
All
CarMax used car superstores provide vehicle repair service including repairs of
vehicles covered by our extended service plans. We also provide
factory-authorized service at all new car franchises. We have
developed systems and procedures that are intended to ensure that our retail
repair service is conducted in the same customer-friendly and efficient manner
as our other operations.
We
believe that the efficiency of our reconditioning and service operations is
enhanced by our modern facilities, our information systems and our technician
training and development process. The training and development
process and our compensation programs are designed to increase the productivity
of technicians, identify opportunities for cost reduction and achieve
high-quality repairs. Our information systems provide the ability to
track repair history and enable trend analysis, which serves as guidance for our
continuous improvement efforts.
Wholesale
Auctions. Vehicles purchased through our in-store appraisal
process that do not meet our retail standards are sold through on-site wholesale
auctions. As of February 28, 2010, wholesale auctions were conducted
at 50 of our 100 superstores and were generally held on a weekly or bi-weekly
basis. Auction frequency at a given superstore is determined by the
number of vehicles to be auctioned, which depends on the number of stores and
the market awareness of CarMax and our in-store appraisal offer in that
market. The typical wholesale vehicle is approximately 10 years old
and has more than 100,000 miles. Participation in our wholesale
auctions is restricted to licensed automobile dealers, the majority of whom are
independent dealers. To participate in a CarMax auction, dealers must
register with our centralized auction support group, at which time we determine
the purchase limit available to each dealer. We make conditional
announcements on each vehicle, including those for vehicles with major
mechanical issues, possible frame or flood damage, branded titles, salvage
history and unknown true mileage. Professional, licensed auctioneers
conduct our auctions. The average auction sales rate was 97% in
fiscal 2010. Dealers pay a fee to us based on the sales price of the
vehicles they purchase.
Customer Credit.
We
offer customers a wide range of financing alternatives, which we believe
enhances the CarMax consumer offer. Before the effect of 3-day
payoffs and vehicle returns, CAF financed more than 35% of our retail vehicle
unit sales in fiscal 2010. Customer credit applications are initially
reviewed by CAF and may also be reviewed by a third-party
provider. Customers who are not approved by either CAF or the initial
third-party provider may be evaluated by other financial
institutions. Having a wide array of financing sources increases
discrete approvals and expands the options for our customers. To this
end, we have tested, and will continue to test, other third-party
providers.
Customers
applying for financing provide credit information that is electronically
submitted by sales consultants through our proprietary information
system. A majority of applicants receive a response within five
minutes. The vehicle financings are retail installment contracts
secured by the vehicles financed. For the majority of the contracts
arranged by the third-party providers, we are paid a fixed, prenegotiated fee
per vehicle financed. We have no recourse liability on retail
installment contracts arranged with third-party providers. Customers
are permitted to refinance or pay off their contract within three business days
of a purchase without incurring any finance or related charges.
Extended Service
Plans and Guaranteed Asset Protection. At the time of the
sale, we offer the customer an extended service plan. We sell these
plans on behalf of unrelated third parties that are the primary
obligors. Under the third-party service plan programs, we have no
contractual liability to the customer. The extended service plans
have terms of coverage from 12 to 72 months, depending on the vehicle mileage,
make and age. We offer extended service plans at low, fixed prices,
which are based primarily on the historical repair record of the vehicle make
and model and the length of coverage selected. All extended service
plans that we sell (other than manufacturer programs) have been designed to our
specifications and are administered by the third parties through private-label
arrangements. We receive a commission from the administrator at the
time the extended service plan is sold. In fiscal 2010, more than
half of the customers purchasing a used vehicle from CarMax also purchased an
extended service plan.
8
Our
extended service plan customers have access to vehicle repair service at each
CarMax store and to the third-party administrators’ nationwide network
consisting of thousands of independent and franchised service
providers. We believe that the quality of the services provided by
this network, as well as the broad scope of our extended service plans, helps
promote customer satisfaction and loyalty, and thus increases the likelihood of
repeat and referral business.
In fiscal
2010, we introduced a guaranteed asset protection product (“GAP”) that will pay
the difference between the customer’s insurance settlement and the finance
contract payoff amount on their vehicle in the case of a total loss or
unrecovered theft. We sell this product on behalf of an unrelated third party
that is the primary obligor and we have no contractual liability to the
customer. GAP has been designed to our specifications and is
administered by the third party through private-label
arrangements. We receive a commission from the administrator at the
time of sale.
Systems
Our
stores are supported by an advanced information system that improves the
customer experience while providing tightly integrated automation of all
operating functions. Using in-store information kiosks, customers can
search our entire vehicle inventory through our website, carmax.com, and print a
detailed listing for any vehicle, which includes the vehicle’s features and
specifications and its location on the display lot. Our inventory
management system tracks every vehicle through its life from purchase through
reconditioning and test-drives to ultimate sale. Bar codes are placed
on each vehicle and on each parking space on the display lot, and all vehicle
bar codes are scanned daily as a loss prevention measure. Test-drive
information is captured on every vehicle using radio frequency identification
devices, linking the specific vehicle and the sales consultant. We
also capture data on vehicles we wholesale, which helps us track market
pricing. A computerized finance application process and
computer-assisted document preparation ensure rapid completion of the sales
transaction. Behind the scenes, our proprietary store technology
provides our management with real-time information about many aspects of store
operations, such as inventory management, pricing, vehicle transfers, wholesale
auctions and sales consultant productivity. In addition, our store
system provides a direct link to our proprietary credit processing information
system to facilitate the credit review and approval process.
Our
inventory management and pricing system allows us to buy the mix of makes,
models, age, mileage and price points tailored to customer buying preferences at
each superstore. This system also generates recommended initial
retail price points, as well as retail price markdowns for specific vehicles
based on complex algorithms that take into account factors including sales
history, consumer interest and seasonal patterns. We believe this
systematic approach to vehicle pricing allows us to optimize inventory turns,
which minimizes the depreciation risk inherent in used cars and helps us to
achieve our targeted gross profit dollars per unit.
In
addition to inventory management, our Electronic Repair Order system (“ERO”) is
used to sequence reconditioning procedures. ERO provides information
that helps increase quality and reduce costs, which further enhances our
customer service and profitability.
Through
our centralized systems, we are able to quickly integrate new stores into our
store network, allowing the new stores to rapidly achieve operating
efficiency. We continue to enhance and refine our information
systems, which we believe to be a core competitive advantage. The
design of our information systems incorporates off-site backups, redundant
processing and other measures to reduce the risk of significant data loss in the
event of an emergency or disaster.
Associates
On
February 28, 2010, we had a total of 13,439 full- and part-time associates,
including 10,196 hourly and salaried associates and 3,243 sales associates, who
worked on a commission basis. We employ additional associates during
peak selling seasons. As of February 28, 2010, our location general
managers averaged more than nine years of CarMax experience, in addition to
prior retail management experience. We open new stores with
experienced management teams drawn from existing stores.
We
believe we have created a unique corporate culture and maintain good employee
relations. No associate is subject to a collective bargaining
agreement. We focus on providing our associates with the information
and resources they need to offer exceptional customer service. We
reward associates whose behavior exemplifies our culture, and we believe that
our favorable working conditions and compensation programs allow us to attract
and retain highly qualified individuals. We have been recognized for
the success of our efforts by a number of external organizations.
9
Training. To
further support our emphasis on attracting, developing and retaining qualified
associates, we have made a commitment to providing exceptional training
programs. On average, each store associate completed at least 20
online or classroom courses, totaling more than 44 hours of training per
associate in fiscal 2010. Store associates receive structured,
self-paced training that introduces them to company policies and their specific
job responsibilities through KMX University – our proprietary intranet-based
testing and tracking system. KMX University is comprised of
customized applications hosted within a learning management system that allow us
to author, deliver and track training events and to measure associate competency
after training. Most new store associates are also assigned mentors
who provide on-the-job guidance and support.
We also
provide comprehensive, facilitator-led classroom training courses at the
associate and manager levels. All sales consultants go through a
four-week on-boarding process in which they are partnered with a mentor,
combining self-paced online training with shadowing and
role-playing. Our Professional Selling Skills training provides sales
associates the opportunity to learn and practice customer-oriented selling
techniques. This online training program contains modules on a
variety of skill sets, including building confidence, connecting with the
customer, and listening and persuasion techniques. We have also
implemented a call recording and review program to provide constructive feedback
to associates on how to improve their interactions with
customers. Buyers-in-training undergo a 6- to 18-month apprenticeship
under the supervision of experienced buyers, and they generally will assist with
the appraisal of more than 1,000 cars before making their first independent
purchase. Business office associates undergo a 3- to 6-month
on-the-job certification process in order to be fully cross-trained in all
functional areas of the business office. All business office
associates and managers also receive continuous training through facilitated
competency-based training courses. We utilize a mix of internal and
external technical training programs in an effort to provide a stable future
supply of qualified technicians. Reconditioning and mechanical
technicians attend in-house and vendor-sponsored training programs designed to
develop their skills in performing repairs on the diverse makes and models of
vehicles we sell. Technicians at our new car franchises also attend
manufacturer-sponsored training programs to stay abreast of current diagnostic,
repair and maintenance techniques for those manufacturers’
vehicles. New managers attend an intensive week-long workshop at the
home office where they meet with senior leaders and learn fundamental CarMax
management skills.
Laws
and Regulations
Vehicle Dealer
and Other Laws and Regulations. We operate in a highly
regulated industry. In every state in which we operate, we must
obtain various licenses and permits in order to conduct business, including
dealer, service, sales and finance licenses issued by state and certain local
regulatory authorities. A wide range of federal, state and local laws
and regulations govern the manner in which we conduct business, including
advertising, sales, financing and employment practices. These laws
include consumer protection laws, privacy laws and state franchise laws, as well
as other laws and regulations applicable to new and used motor vehicle
dealers. These laws also include federal and state wage-hour,
anti-discrimination and other employment practices laws. Our
financing activities with customers are subject to federal truth-in-lending,
consumer leasing and equal credit opportunity laws and regulations, as well as
state and local motor vehicle finance and collection laws, installment finance
laws and usury laws.
Claims
arising out of actual or alleged violations of law could be asserted against us
by individuals or governmental authorities and could expose us to significant
damages or other penalties, including revocation or suspension of the licenses
necessary to conduct business and fines.
Environmental Laws and
Regulations. We are subject to a
variety of federal, state and local laws and regulations that pertain to the
environment. Our business involves the use, handling and disposal of
hazardous materials and wastes, including motor oil, gasoline, solvents,
lubricants, paints and other substances. We are subject to compliance
with regulations concerning the operation of underground and aboveground
gasoline storage tanks, aboveground oil tanks and automotive paint
booths.
AVAILABILITY
OF REPORTS AND OTHER INFORMATION
Our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and proxy statements on Schedule 14A, as well as any amendments to
those reports, are available without charge through our website, carmax.com, as
soon as reasonably practicable after filing or furnishing the material to the
Securities and Exchange Commission (“SEC”). The contents of our
website are not, however, part of this report.
10
In
addition, our Corporate Governance Guidelines and Code of Business Conduct, as
well as the charters of the Audit Committee, Nominating and Governance Committee
and Compensation and Personnel Committee, are available to shareholders and the
public through the “Corporate Governance” link on our investor information home
page at investor.carmax.com. Printed copies of these documents are
available to any shareholder, without charge, upon written request to our
corporate secretary at the address set forth on the cover page of this
report. Any changes to these documents or reportable waivers of the
Code of Business Conduct are promptly disclosed on our website.
Item
1A. Risk Factors.
We are
subject to various risks, including the risks described below. Our
business, results of operations and financial condition could be materially and
adversely affected by any of these risks or additional risks not presently known
or that we currently deem immaterial.
Economic
Conditions. In the normal course
of business, we are subject to changes in general or regional U.S. economic
conditions, including, but not limited to, consumer credit availability,
consumer credit delinquency and loss rates, interest rates, gasoline prices,
inflation, personal discretionary spending levels, unemployment levels and
consumer sentiment about the economy in general. Any significant
changes in economic conditions could adversely affect consumer demand and/or
increase costs.
Capital. Changes
in the availability or cost of capital and working capital financing, including
the long-term financing to support our geographic expansion and financing of
auto loan receivables, could adversely affect growth and operating
strategies. Further, our current credit facility and certain
securitization and sale-leaseback agreements contain covenants and/or
performance triggers. Any failure to comply with these covenants
and/or performance triggers could have a material adverse effect on our
business, results of operations and financial condition.
We use
and have historically relied upon a securitization program to fund substantially
all of the auto loan receivables originated by CAF. Initially, we
sell these receivables into our warehouse facility. We periodically
refinance the receivables through term securitizations. Changes in
the condition of the asset-backed securitization market have led, and could in
the future lead, us to incur higher costs to access funds in this market or we
could be required to seek alternative means to finance our loan
originations. In the event that this market ceased to exist and there
were no immediate alternative funding sources available, we might be forced to
curtail our lending practices for some period of time. The impact of
reducing or curtailing CAF’s loan originations could have a material adverse
impact on our business, sales and results of operations.
Disruptions
in the capital and credit markets could adversely affect our ability to draw on
our revolving credit facility. If our ability to secure funds from
the facility were significantly impaired, our access to working capital would be
impacted, our ability to maintain appropriate inventory levels could be affected
and these conditions could have a material adverse effect on our business,
sales, results of operations and financial condition.
Third-Party
Financing Providers. CarMax provides financing to qualified
customers through CAF and a number of third-party financing
providers. In the event that one or more of these third-party
providers could no longer, or choose not to, provide financing to our customers,
could only provide financing to a reduced segment of our customers or could no
longer provide financing at competitive rates of interest, it could have a
material impact on our business, sales and results of
operations. Additionally, if we were unable to replace current
third-party financing providers upon the occurrence of one or more of the
foregoing events, it could also have a material impact on our business, sales
and results of operations.
Competition. Automotive retailing is
a highly competitive business. Our competition includes publicly and
privately owned new and used car dealers, as well as millions of private
individuals. Competitors sell the same or similar makes of vehicles
that we offer in the same or similar markets at competitive
prices. Further, new entrants to the market could result in increased
acquisition costs for used vehicles and lower-than-expected vehicle sales and
margins. Competition could be affected by the increasing use of the
Internet to market and potentially sell used vehicles and obtain vehicle
financing. The increasing use of the Internet in the automotive
retailing business could reduce our sales and adversely affect our results of
operations. In addition, CAF is subject to competition from various
financial institutions.
Retail
Prices. Any significant changes in retail prices for used and
new vehicles could reduce sales and profits. If any of our
competitors seek to gain or retain market share by reducing prices for used or
new vehicles, we would likely reduce our prices in order to remain competitive,
which could result in a decrease in our sales revenue and results of operations
and require a change in our operating strategies.
11
Inventory. A
reduction in the availability or access to sources of inventory could adversely
affect our business. A failure to adjust appraisal offers to stay in
line with broader market trade-in offer trends, or a failure to recognize those
trends, could negatively impact the ability to acquire
inventory. Should we develop excess inventory, the inability to
liquidate the excess inventory at prices that allow us to meet margin targets or
to recover our costs would adversely affect our results of
operations.
Regulatory and
Legislative Environment. We are subject to a wide range of
federal, state and local laws and regulations, such as licensing requirements
and laws regarding advertising, vehicle sales, financing and employment
practices. Our facilities and business operations are also subject to
laws and regulations relating to environmental protection and health and
safety. The violation of these laws or regulations could result in
administrative, civil or criminal penalties or in a cease-and-desist order
against business operations. As a result, we have incurred and will
continue to incur capital and operating expenses and other costs to comply with
these laws and regulations. Further, over the past several years,
private plaintiffs and federal, state and local regulatory and law enforcement
authorities have increased their scrutiny of advertising, sales, financing and
insurance activities in the sale and leasing of motor vehicles. If,
as a result, other automotive retailers adopt more transparent,
consumer-oriented business practices, our differentiation versus those retailers
could be reduced.
During
the past year, there were several proposed, comprehensive federal legislative
and regulatory initiatives and reforms, and depending upon the scope of the
final legislation, if any, we may experience an increase in expenses or a
decrease in revenues. Certain new laws, including legislation
regarding health care, employee relations, and finance and tax reform, could
adversely affect our business, results of operations and financial
condition.
Management and
Workforce. Our success depends upon the continued
contributions of our store, region and corporate management
teams. Consequently, the loss of the services of key employees could
have a material adverse effect on our business. In addition, we will
need to hire additional personnel as we open new stores. The market
for qualified employees in the industry and in the regions in which we operate
is highly competitive and could result in increased labor costs during periods
of low unemployment.
Information
Systems. Our business is dependent upon the efficient
operation of our information systems. In particular, we rely on our
information systems to effectively manage sales, inventory, consumer financing
and customer information. The failure of these systems to perform as
designed or the failure to maintain and continually enhance or protect the
integrity of these systems could disrupt our business operations, impact sales
and results of operations, expose us to customer or third-party claims or result
in adverse publicity.
Accounting
Policies and Matters. We have identified several accounting policies
as being “critical” to the fair presentation of our financial condition and
results of operations because they involve major aspects of our business and
require management to make judgments about matters that are inherently
uncertain. Materially different amounts could be recorded under
different conditions or using different assumptions.
Additionally,
the Financial Accounting Standards Board is currently considering various
proposed rule changes including, but not limited to, potential changes in
accounting for leases. The SEC is currently considering adopting
rules that would require U.S. issuers to prepare their financial statements
contained in SEC filings in accordance with International Financial Reporting
Standards (“IFRS”), as issued by the International Accounting Standards
Board. The implementation of these or other new accounting
requirements or changes to U.S. generally accepted accounting principles could
adversely affect our reported results of operations and financial
condition.
Confidential
Customer Information. In the normal course of
business, we collect, process and retain sensitive and confidential customer
information. Despite the security measures we have in place, our
facilities and systems, and those of third-party service providers, could be
vulnerable to security breaches, acts of vandalism, computer viruses, misplaced
or lost data, programming or human errors or other similar
events. Any security breach involving the misappropriation, loss or
other unauthorized disclosure of confidential information, whether by us or by
third-party service providers, could damage our reputation, expose us to the
risks of litigation and liability, disrupt our business or otherwise affect our
results of operations.
12
Growth. Our
inability to acquire or lease suitable real estate at favorable terms could
limit our expansion and could adversely affect our business and results of
operations. The expansion of our store base places significant
demands on our management team, our associates and our systems. If we
fail to effectively or efficiently manage our growth, it could adversely affect
our business, sales and results of operations.
Litigation. We
are subject to various litigation matters, which could adversely affect our
business. Claims arising out of actual or alleged violations of law
could be asserted against us by individuals, either individually or through
class actions, or by governmental entities in civil or criminal investigations
and proceedings. These actions could expose us to adverse publicity
and to substantial monetary damages and legal defense costs, injunctive relief
and criminal and civil fines and penalties, including suspension or revocation
of licenses to conduct business.
Automotive
Manufacturers. Adverse conditions affecting one or more
automotive manufacturers could impact our results of
operations. Manufacturer recalls could also have an adverse effect on
used vehicle sales or valuations.
Weather. The
occurrence of severe weather events, such as rain, snow, wind, storms,
hurricanes or other natural disasters, could cause store closures, adversely
affecting consumer traffic, and could adversely affect our results of
operations.
Seasonal
Fluctuations. Our business is subject to seasonal
fluctuations. We generally realize a higher proportion of revenue and
operating profit during the first and second fiscal quarters. If
conditions arise that impair vehicle sales during the first or second fiscal
quarters, these conditions could have a disproportionately large adverse effect
on our annual results of operations.
Geographic
Concentration. Our performance is subject
to local economic, competitive and other conditions prevailing in geographic
areas where we operate. Since a large number of our superstores are
located in the Southeastern U.S. and in the Chicago, Los Angeles and Washington,
D.C./Baltimore markets, our results of operations depend substantially on
general economic conditions and consumer spending habits in these
markets. In the event that any of these geographic areas experienced
a downturn in economic conditions, it could adversely affect our business and
results of operations.
Other Material
Events. The occurrence of certain material events including
acts of terrorism, the outbreak of war or other significant national or
international events could adversely affect our business, results of operations
or financial condition.
13
Item
1B. Unresolved Staff Comments.
None.
Item
2. Properties.
We
conduct our used vehicle operations in two basic retail formats – production and
non-production superstores. Production superstores are those
locations at which vehicle reconditioning is performed, while non-production
superstores do not perform vehicle reconditioning. In determining
whether to construct a production or a non-production superstore on a given
site, we take several factors into account, including the anticipated long-term
reconditioning needs and the available acreage of this and other sites in that
market. As a result, some superstores that are constructed to
accommodate reconditioning activities may initially be operated as
non-production superstores until we expand our presence in that
market. As of February 28, 2010, we operated 59 production
superstores and 41 non-production superstores. At that date, we also
operated one new car store, which was located adjacent to our used car
superstore in Laurel, Maryland. Our remaining five new car franchises
are operated as part of our used car superstores.
Production
superstores are generally 40,000 to 60,000 square feet on 10 to 25 acres, but a
few range from approximately 70,000 to 95,000 square feet on 20 to 35
acres. Non-production superstores are generally 10,000 to 25,000
square feet on 4 to 12 acres.
Used
Car Superstores as of February 28, 2010
Total
|
||||
Alabama
|
2 | |||
Arizona
|
3 | |||
California
|
13 | |||
Colorado
|
1 | |||
Connecticut
|
2 | |||
Florida
|
10 | |||
Georgia
|
5 | |||
Illinois
|
6 | |||
Indiana
|
2 | |||
Kansas
|
2 | |||
Kentucky
|
1 | |||
Maryland
|
4 | |||
Mississippi
|
1 | |||
Missouri
|
1 | |||
Nebraska
|
1 | |||
Nevada
|
2 | |||
New
Mexico
|
1 | |||
North
Carolina
|
8 | |||
Ohio
|
2 | |||
Oklahoma
|
2 | |||
South
Carolina
|
3 | |||
Tennessee
|
4 | |||
Texas
|
12 | |||
Utah
|
1 | |||
Virginia
|
8 | |||
Wisconsin
|
3 | |||
Total
|
100 |
We have
financed the majority of our stores through sale-leaseback
transactions. As of February 28, 2010, we leased 59 of our 100 used
car superstores as well as our CAF office building in Atlanta,
Georgia. We owned the remaining 41 stores currently in operation and
the 3 superstores that were constructed in fiscal 2009 and which we now plan to
open in fiscal 2011. We also owned our home office building in
Richmond, Virginia, and land associated with planned future store
openings.
14
Expansion
Prior to
fiscal 2010, we had opened used car superstores at an annual rate of
approximately 15% of our used car superstore base for several consecutive
years. As a result of the weak economic and sales environment, in
December 2008, we temporarily suspended store growth. Based on the
improvements in our sales and profitability in fiscal 2010, as well as the
increasing stability in the credit markets, we plan to resume store growth in
fiscal 2011. We plan to take a measured approach by opening three
superstores in fiscal 2011, between three and five superstores in fiscal 2012,
and between five and ten superstores in fiscal 2013. The three
superstores that we plan to open in fiscal 2011 were constructed in fiscal 2009,
but we chose not to open them until market conditions improved.
We
continue to believe that we are well positioned to succeed in the highly
competitive automotive retail industry. We have built a strong
foundation for future growth based upon our unique knowledge of the used car
market, established presence in key locations and ability to execute our
business plan in a market subject to continuous change. We continue
to refine our operating strategies and have grown to be the nation’s largest
retailer of used cars.
For
additional details on fiscal 2010, see “Operations Outlook,” included in Part
II, Item 7, of this Form 10-K.
Item 3. Legal
Proceedings.
On April
2, 2008, Mr. John Fowler filed a putative class action lawsuit against CarMax
Auto Superstores California, LLC and CarMax Auto Superstores West Coast, Inc. in
the Superior Court of California, County of Los
Angeles. Subsequently, two other lawsuits, Leena Areso et al.
v. CarMax Auto Superstores California, LLC and Justin Weaver v.
CarMax Auto Superstores California, LLC, were consolidated as part of the Fowler
case. The allegations in the consolidated case involved: (1) failure
to provide meal and rest breaks or compensation in lieu thereof; (2) failure to
pay wages of terminated or resigned employees related to meal and rest breaks
and overtime; (3) failure to pay overtime; (4) failure to comply with itemized
employee wage statement provisions; and (5) unfair competition. The
putative class consisted of sales consultants, sales managers, and other hourly
employees who worked for the company in California from April 2, 2004, to the
present. On May 12, 2009, the court dismissed all of the class claims
with respect to the sales manager putative class. On June 16, 2009,
the court dismissed all claims related to the failure to comply with the
itemized employee wage statement provisions. The court also granted
CarMax's motion for summary adjudication with regard to CarMax's alleged failure
to pay overtime to the sales consultant putative class. The
plaintiffs have appealed the court's ruling regarding the sales consultant
overtime claim. In addition to the plaintiffs' appeal of the overtime
claim, the claims currently remaining in the lawsuit regarding the sales
consultant putative class are: (1) failure to provide meal and rest breaks or
compensation in lieu thereof; (2) failure to pay wages of terminated or resigned
employees related to meal and rest breaks; and (3) unfair
competition. On June 16, 2009, the court entered a stay of these
claims pending the outcome of a California Supreme Court case involving related
legal issues. The lawsuit seeks compensatory and special damages,
wages, interest, civil and statutory penalties, restitution, injunctive relief
and the recovery of attorneys’ fees. We are unable to make a
reasonable estimate of the amount or range of loss that could result from an
unfavorable outcome in these matters.
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 or results of operations.
15
PART
II
Item
5. Market for the Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.
Our
common stock is listed and traded on the New York Stock Exchange under the
ticker symbol KMX. We are authorized to issue up to 350,000,000
shares of common stock and up to 20,000,000 shares of preferred
stock. As
of February 28, 2010, there were 223,065,542 shares of CarMax common stock
outstanding and there were approximately 7,500 shareholders of
record. As of that date, there were no preferred shares
outstanding.
The
following table presents the quarterly high and low sales prices per share for
our common stock for each quarter during the last two fiscal years, as reported
on the New York Stock Exchange composite tape.
1st
|
2nd
|
3rd
|
4th
|
|||||||||||||
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||
Fiscal
2010
|
||||||||||||||||
High
|
$ | 14.00 | $ | 17.60 | $ | 23.07 | $ | 24.75 | ||||||||
Low
|
$ | 8.40 | $ | 11.31 | $ | 16.64 | $ | 19.60 | ||||||||
Fiscal
2009
|
||||||||||||||||
High
|
$ | 21.99 | $ | 19.95 | $ | 20.70 | $ | 10.38 | ||||||||
Low
|
$ | 17.30 | $ | 10.53 | $ | 5.76 | $ | 6.59 |
To date,
we have not paid a cash dividend on CarMax common stock. We believe
it is prudent to retain our net earnings for use in operations and for
geographic expansion, as well as to maintain maximum financial flexibility and
liquidity for our business. Therefore, we do not anticipate paying
any cash dividends in the foreseeable future.
During
the fourth quarter of fiscal 2010, we sold no CarMax equity securities that were
not registered under the Securities Act of 1933, as amended. In
addition, we did not repurchase any CarMax equity securities during this
period.
Performance
Graph
The
following graph compares the cumulative total shareholder return (stock price
appreciation plus dividends, as applicable) on our common stock for the last
five fiscal years with the cumulative total return of the S&P 500 Index and
the S&P 500 Retailing Index. The graph assumes an original
investment of $100 in CarMax common stock and in each index on February 28,
2005, and the reinvestment of all dividends, as applicable.
16
As
of February 28 or 29
|
||||||||||||||||||||||||
2005
|
2006
|
2007
|
2008
|
2009
|
2010
|
|||||||||||||||||||
CarMax
|
$ | 100.00 | $ | 95.21 | $ | 159.70 | $ | 111.27 | $ | 57.15 | $ | 122.36 | ||||||||||||
S&P
500 Index
|
$ | 100.00 | $ | 108.40 | $ | 121.38 | $ | 117.01 | $ | 66.32 | $ | 101.88 | ||||||||||||
S&P
500 Retailing Index
|
$ | 100.00 | $ | 111.97 | $ | 124.14 | $ | 98.88 | $ | 66.82 | $ | 114.87 |
17
Item
6. Selected Financial Data.
FY10
|
FY09
|
FY08
|
FY07
|
FY06
|
FY05
|
|||||||||||||||||||
Income
statement information (In millions)
|
||||||||||||||||||||||||
Used
vehicle sales
|
$ | 6,192.3 | $ | 5,690.7 | $ | 6,589.3 | $ | 5,872.8 | $ | 4,771.3 | $ | 3,997.2 | ||||||||||||
New
vehicle sales
|
186.5 | 261.9 | 370.6 | 445.1 | 502.8 | 492.1 | ||||||||||||||||||
Wholesale
vehicle sales
|
844.9 | 779.8 | 985.0 | 918.4 | 778.3 | 589.7 | ||||||||||||||||||
Other
sales and revenues
|
246.6 | 241.6 | 254.6 | 229.3 | 207.6 | 181.3 | ||||||||||||||||||
Net
sales and operating revenues
|
7,470.2 | 6,974.0 | 8,199.6 | 7,465.7 | 6,260.0 | 5,260.3 | ||||||||||||||||||
Gross
profit
|
1,098.9 | 968.2 | 1,072.4 | 971.1 | 790.7 | 650.2 | ||||||||||||||||||
CarMax
Auto Finance income
|
175.2 | 15.3 | 85.9 | 132.6 | 104.3 | 82.7 | ||||||||||||||||||
SG&A
|
818.7 | 882.4 | 858.4 | 776.2 | 674.4 | 565.3 | ||||||||||||||||||
Earnings
before income taxes
|
452.5 | 96.8 | 297.1 | 323.3 | 217.6 | 165.8 | ||||||||||||||||||
Income
tax provision
|
170.8 | 37.6 | 115.0 | 124.8 | 83.4 | 64.5 | ||||||||||||||||||
Net
earnings
|
281.7 | 59.2 | 182.0 | 198.6 | 134.2 | 101.3 | ||||||||||||||||||
Share
and per share information (Shares in
millions)
|
||||||||||||||||||||||||
Weighted
average shares outstanding:
|
||||||||||||||||||||||||
Basic
|
219.5 | 217.5 | 216.0 | 212.5 | 209.3 | 208.1 | ||||||||||||||||||
Diluted
|
222.2 | 219.4 | 220.0 | 216.6 | 212.8 | 211.3 | ||||||||||||||||||
Net
earnings per share:
|
||||||||||||||||||||||||
Basic
|
$ | 1.27 | $ | 0.27 | $ | 0.84 | $ | 0.93 | $ | 0.64 | $ | 0.49 | ||||||||||||
Diluted
|
$ | 1.26 | $ | 0.27 | $ | 0.82 | $ | 0.91 | $ | 0.63 | $ | 0.48 | ||||||||||||
Balance sheet information
(In
millions)
|
||||||||||||||||||||||||
Total
current assets
|
$ | 1,556.4 | $ | 1,287.8 | $ | 1,356.9 | $ | 1,150.5 | $ | 941.7 | $ | 853.0 | ||||||||||||
Total
assets
|
2,556.2 | 2,379.2 | 2,333.2 | 1,885.6 | 1,509.6 | 1,306.3 | ||||||||||||||||||
Total
current liabilities
|
477.4 | 490.8 | 490.0 | 512.0 | 344.9 | 317.8 | ||||||||||||||||||
Short-term
debt
|
0.9 | 0.9 | 21.0 | 3.3 | 0.5 | 65.2 | ||||||||||||||||||
Current
portion of long-term debt
|
122.3 | 158.1 | 79.7 | 148.4 | 59.8 | 0.3 | ||||||||||||||||||
Long-term
debt, excluding current portion
|
27.4 | 178.1 | 227.2 | 33.7 | 134.8 | 128.4 | ||||||||||||||||||
Total
shareholders’ equity
|
1,933.6 | 1,593.1 | 1,488.9 | 1,247.4 | 980.1 | 814.2 | ||||||||||||||||||
Unit
sales information
|
||||||||||||||||||||||||
Used
vehicle units sold
|
357,129 | 345,465 | 377,244 | 337,021 | 289,888 | 253,168 | ||||||||||||||||||
New
vehicle units sold
|
7,851 | 11,084 | 15,485 | 18,563 | 20,901 | 20,636 | ||||||||||||||||||
Wholesale
vehicle units sold
|
197,382 | 194,081 | 222,406 | 208,959 | 179,548 | 155,393 | ||||||||||||||||||
Percent
changes in
|
||||||||||||||||||||||||
Comparable
store used vehicle unit sales
|
1 | (16 | ) | 3 | 9 | 4 | 1 | |||||||||||||||||
Total
used vehicle unit sales
|
3 | (8 | ) | 12 | 16 | 15 | 13 | |||||||||||||||||
Total
net sales and operating revenues
|
7 | (15 | ) | 10 | 19 | 19 | 14 | |||||||||||||||||
Net
earnings
|
376 | (67 | ) | (8 | ) | 48 | 32 | (8 | ) | |||||||||||||||
Diluted
net earnings per share
|
367 | (67 | ) | (10 | ) | 46 | 31 | (8 | ) | |||||||||||||||
Other
year-end information
|
||||||||||||||||||||||||
Used
car superstores
|
100 | 100 | 89 | 77 | 67 | 58 | ||||||||||||||||||
Associates
|
13,439 | 13,035 | 15,637 | 13,736 | 11,712 | 10,815 |
18
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”) is provided as a supplement to, and should be
read in conjunction with, our consolidated financial statements and the
accompanying notes presented in Item 8, Consolidated Financial Statements and
Supplementary Data. Note references are to the notes to consolidated
financial statements included in Item 8. All references to net
earnings per share are to diluted net earnings per share. Amounts and
percentages in tables may not total due to rounding. Certain prior
year amounts have been reclassified to conform to the current year’s
presentation. All share and per share amounts for prior periods have
been adjusted to reflect our 2-for-1 common stock split in March
2007.
As of
March 1, 2009, we adopted new accounting rules related to the treatment of
participating securities in the calculation of net earnings per
share. As a result, certain prior year amounts have been restated to
reflect the adoption. See Note 12 for additional
information.
BUSINESS
OVERVIEW
General
CarMax is
the nation’s largest retailer of used vehicles. We pioneered the used
car superstore concept, opening our first store in 1993. Our strategy
is to revolutionize the auto retailing market by addressing the major sources of
customer dissatisfaction with traditional auto retailers and to maximize
operating efficiencies through the use of standardized operating procedures and
store formats enhanced by sophisticated, proprietary management information
systems. As of February 28, 2010, we operated 100 used car
superstores in 46 markets, comprised of 34 mid-sized markets, 11 large markets
and 1 small market. We define mid-sized markets as those with
television viewing populations generally between 600,000 and 2.5 million
people. We also operated six new car franchises. In fiscal
2010, we sold 357,129 used cars, representing 98% of the total 364,980 vehicles
we sold at retail.
We
believe the CarMax consumer offer is distinctive within the auto retailing
marketplace. Our offer provides customers the opportunity to shop for
vehicles the same way they shop for items at other big box
retailers. Our consumer offer is structured around our four customer
benefits: low, no-haggle prices; a broad selection; high quality vehicles; and a
customer-friendly sales process. Our website, carmax.com, is a
valuable tool for communicating the CarMax consumer offer, a sophisticated
search engine and an efficient channel for customers who prefer to conduct their
shopping online. We generate revenues, income and cash flows
primarily by retailing used vehicles and associated items including vehicle
financing, extended service plans (“ESPs”) and vehicle repair
service.
We also
generate revenues, income and cash flows from the sale of vehicles purchased
through our appraisal process that do not meet our retail
standards. These vehicles are sold through on-site wholesale
auctions. Wholesale auctions are generally held on a weekly or
bi-weekly basis, and as of February 28, 2010, we conducted auctions at 50 used
car superstores. During fiscal 2010, we sold 197,382 wholesale
vehicles. On average, the vehicles we wholesale are approximately 10
years old and have more than 100,000 miles. Participation in our
wholesale auctions is restricted to licensed automobile dealers, the majority of
whom are independent dealers and licensed wholesalers.
CarMax
provides financing to qualified retail customers through CarMax Auto Finance
(“CAF”), our finance operation, and a number of third-party financing
providers. As of February 28, 2010, these third parties included Bank
of America Dealer Financial Services, Capital One Auto Finance, CitiFinancial
Auto, Santander Consumer USA and Wachovia Dealer Services (which changed its
name to Wells Fargo Dealer Services in March 2010). The third-party
provider who purchases subprime financings purchases these loans at a discount,
and we collect fixed, prenegotiated fees from the majority of the other
providers. We periodically test additional
providers. CarMax has no recourse liability for the financing
provided by these third parties.
We sell
ESPs on behalf of unrelated third parties who are the primary
obligors. As of February 28, 2010, the used vehicle third-party ESP
providers were CNA National Warranty Corporation and The Warranty
Group. We have no contractual liability to the customer under these
third-party service plans. ESP revenue represents commissions from
the unrelated third parties.
In fiscal
2010, we introduced a guaranteed asset protection product (“GAP”) that will pay
the difference between the customer’s insurance settlement and the finance
contract payoff amount on their vehicle in the case of a total loss or
unrecovered theft. We sell GAP on behalf of an unrelated third party
who is the primary obligor. As of February 28, 2010, the
third-party GAP provider was Safe-Guard Products International,
LLC. We have no contractual liability to the customer for this
product. GAP revenue represents commissions from the unrelated third
party.
19
Over the
long term, we believe the primary drivers for earnings growth will be vehicle
unit sales growth, both from new stores and from stores included in our
comparable store base, as well as improvements in margins resulting from
operational efficiencies. We target a dollar range of gross profit
per used unit sold. The gross profit dollar target for an individual
vehicle is based on a variety of factors, including its anticipated probability
of sale and its mileage relative to its age; however, it is not primarily based
on the vehicle’s selling price.
Prior to
fiscal 2010, we opened used car superstores at an annual rate of approximately
15% of our used car superstore base for several consecutive years. As
a result of the weak economic and sales environment, in December 2008, we
temporarily suspended store growth. This suspension reduced our
capital needs and growth-related costs. Based on the improvements in
our sales and profitability in fiscal 2010, as well as the increasing stability
in the credit markets, we plan to resume store growth in fiscal
2011. We plan to take a measured approach by opening three stores in
fiscal 2011, between three and five stores in fiscal 2012, and between five and
ten stores in fiscal 2013. We are still at a relatively early stage
in the national rollout of our retail concept, and as of
February 28, 2010, we had used car superstores located in markets that
comprised approximately 45% of the U.S. population.
In the
near term, our principal challenges are related to the weak economic conditions
and the resulting high unemployment rate and relatively low levels of consumer
confidence, all of which have caused a dramatic decline in industry-wide auto
sales when compared with pre-recessionary levels. Longer term, we
believe the principal challenges we face will include our ability to build our
management bench strength to support our store growth and our ability to procure
suitable real estate. We staff each newly opened store with an
experienced management team. Therefore, we must recruit, train and
develop managers and associates to fill the pipeline necessary to support future
store openings.
Fiscal
2010 Highlights
·
|
Net
sales and operating revenues increased 7% to $7.47 billion from $6.97
billion in fiscal 2009, while net earnings increased to $281.7 million, or
$1.26 per share, from $59.2 million, or $0.27 per
share.
|
·
|
Total
used vehicle revenues increased 9% to $6.19 billion versus $5.69 billion
in fiscal 2009. The average used vehicle selling price climbed
5%, primarily reflecting increases in our acquisition costs, which have
been affected by a significant year-over-year increase in used vehicle
wholesale values. Total used vehicle unit sales rose 3%,
reflecting the combination of a 1% increase in comparable store used unit
sales and sales from newer stores not yet included in the comparable store
base.
|
·
|
Total
wholesale vehicle revenues increased 8% to $844.9 million versus $779.8
million in fiscal 2009, reflecting the combination of a 6% rise in the
average wholesale vehicle selling price and a 2% increase in wholesale
unit sales.
|
·
|
Total
gross profit increased 13% to $1.10 billion compared with $968.2 million
in fiscal 2009, primarily because of a significant improvement in total
gross profit per unit, which climbed $296 to $3,011 per unit from $2,715
per unit in fiscal 2009. Several factors contributed to the
strength of our gross profit per unit, including our ongoing initiative to
reduce waste in the vehicle reconditioning process; the support provided
by the appreciation in used vehicle wholesale values; and continued
refinements in our proprietary inventory management systems and processes,
which allowed us to increase inventory
turns.
|
·
|
CAF
income climbed to $175.2 million compared with $15.3 million in fiscal
2009. In both periods, CAF results were affected by adjustments
related to loans originated in previous fiscal years. In fiscal
2010, the adjustments increased CAF income by $26.7 million, or $0.07 per
share, while in fiscal 2009, the adjustments reduced CAF income by $81.8
million, or $0.23 per share. The fiscal 2010 adjustments
included $64.0 million of favorable mark-to-market adjustments primarily
on retained subordinated bonds and $18.9 million of net favorable
valuation adjustments primarily related to decreases in prepayment rate
and discount rate assumptions, partially offset by $56.2 million of
increased funding costs. CAF’s gain on loans originated and
sold increased to $83.0 million compared with $46.5 million in fiscal
2009. The increase primarily reflected an increase in CAF’s
gain percentage, which improved to 4.5% versus 2.4% in fiscal
2009.
|
·
|
Selling,
general and administrative (“SG&A”) expenses were reduced 7% to $818.7
million from $882.4 million in fiscal 2009, despite the increase in unit
sales. The SG&A reduction reflected decreases in
advertising expenses and growth-related costs, as well as benefits from a
variety of waste-reduction initiatives. In addition, fiscal
2010 SG&A expenses included the benefit of a favorable litigation
settlement, which increased earnings by $0.02 per share, while fiscal 2009
SG&A expenses included various non-recurring items, which in the
aggregate reduced earnings by $0.04 per share. SG&A
expenses as a percent of net sales and operating revenues (the “SG&A
ratio”), fell to 11.0% from 12.7% in fiscal 2009 due to both the reduction
in SG&A expenses and the leverage associated with the increases in
unit sales and average selling
prices.
|
·
|
Net
cash provided by operating activities fell to $50.3 million compared with
$264.6 million in fiscal 2009. The reduction occurred despite
the significant improvement in net income in fiscal 2010, and it reflected
the use of cash for increases in the retained interest in securitized
receivables and inventory in fiscal 2010, and the generation of cash from
a significant reduction in inventory in fiscal 2009. The fiscal
2010 increase in the retained interest in securitized receivables
primarily reflected the effects of retaining subordinated bonds in the
April 2009 term securitization and the $64.0 million of favorable
mark-to-market adjustments.
|
20
CRITICAL
ACCOUNTING POLICIES
Our
results of operations and financial condition as reflected in the consolidated
financial statements have been prepared in accordance with U.S. generally
accepted accounting principles. Preparation of financial statements
requires management to make estimates and assumptions affecting the reported
amounts of assets, liabilities, revenues, expenses and the disclosures of
contingent assets and liabilities. We use our historical experience
and other relevant factors when developing our estimates and
assumptions. We continually evaluate these estimates and
assumptions. Note 2 includes a discussion of significant accounting
policies. The accounting policies discussed below are the ones we
consider critical to an understanding of our consolidated financial statements
because their application places the most significant demands on our
judgment. Our financial results might have been different if
different assumptions had been used or other conditions had
prevailed.
Securitization
Transactions
We
maintain a revolving securitization program (“warehouse facility”) to fund
substantially all of the auto loan receivables originated by CAF until they can
be funded through a term securitization or alternative funding
arrangement. The securitization transactions are accounted for as
sales. A gain, recorded at the time of securitization, results from
recording a receivable approximately equal to the present value of the expected
residual cash flows generated by the securitized receivables. We
retain an interest in the auto loan receivables that we
securitize. The retained interest includes the present value of the
expected residual cash flows generated by the securitized receivables, various
reserve accounts, required excess receivables and retained subordinated
bonds.
The
present value of the residual cash flows we expect to receive over the life of
the securitized receivables is determined by estimating the future cash flows
using our assumptions of key factors, such as finance charge income, loss rates,
prepayment rates, funding costs and discount rates appropriate for the type of
asset and risk. These assumptions are derived from historical
experience and projected economic trends. Adjustments to one or more
of these assumptions could have a material impact on the fair value of the
retained interest. The fair value of the retained interest could also
be affected by external factors, such as changes in the behavior patterns of
customers, changes in the strength of the economy and developments in the
interest rate and credit markets. Note 2(C) includes a discussion of
accounting policies related to securitizations. Note 4 includes a
discussion of securitizations and provides a sensitivity analysis showing the
hypothetical effect on the retained interest if there were variations from the
assumptions used. Note 6 includes a discussion on fair value
measurements. In addition, see the “CarMax Auto Finance Income”
section of this MD&A for a discussion of the effect of changes in our
assumptions.
As
discussed in Note 17 and in the “Fiscal 2011 Expectations – CAF Income” section
of this MD&A, we will adopt Accounting Standards Updates (“ASUs”) 2009-16
and 2009-17 (formerly Statement of Financial Accounting Standards Nos. 166 and
167, respectively) effective March 1, 2010. Pursuant to these
pronouncements, we will recognize existing and future transfers of auto loan
receivables into term securitizations as secured borrowings, which will result
in recording the auto loan receivables and the related notes payable to the
investors on our consolidated balance sheets. We will also account
for future transfers of receivables into our warehouse facility as secured
borrowings. As of March 1, 2010, we amended our warehouse facility
agreement. As a result, the receivables that were funded in the
warehouse facility at that date will be consolidated, along with the related
notes payable, at their fair value. In future periods, CAF income
included in the consolidated statements of earnings will no longer include a
gain on the sale of loans originated and sold, but instead will reflect the net
interest margin generated by the auto loan receivables less direct CAF
expenses.
Revenue
Recognition
We
recognize revenue when the earnings process is complete, generally either at the
time of sale to a customer or upon delivery to a customer. We
recognize used vehicle revenue when a sales contract has been executed and the
vehicle has been delivered, net of a reserve for returns under our 5-day,
money-back guarantee. A reserve for vehicle returns is recorded based
on historical experience and trends, and results could be affected if future
vehicle returns differ from historical averages.
21
We also
sell ESPs and GAP on behalf of unrelated third parties to customers who purchase
a vehicle. Because we are not the primary obligor under these
products, we recognize commission revenue at the time of sale, net of a reserve
for returns. The reserve for cancellations is recorded based on
historical experience and trends, and results could be affected if future
cancellations differ from historical averages.
Income
Taxes
Estimates
and judgments are used in the calculation of certain tax liabilities and in the
determination of the recoverability of certain deferred tax
assets. In the ordinary course of business, transactions occur for
which the ultimate tax outcome is uncertain at the time of the
transactions. We adjust our income tax provision in the period in
which we determine that it is probable that our actual results will differ from
our estimates. Tax law and rate changes are reflected in the income
tax provision in the period in which such changes are enacted. Note 8
includes information regarding income taxes.
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 carrybacks,
future reversals of existing temporary differences and future taxable
income. Except for a valuation allowance recorded for capital loss
carryforwards that may not be utilized before their expiration, we believe that
our recorded deferred tax assets as of February 28, 2010, will more likely than
not be realized. However, if a change in circumstances results in a
change in our ability to realize our deferred tax assets, our tax provision
would increase in the period when the change in circumstances
occurs.
In
addition, the calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. We
recognize potential liabilities for anticipated tax audit issues in the U.S. and
other tax jurisdictions based on our estimate of whether, and the extent to
which, additional taxes will be due. If payments of these amounts
ultimately prove to be unnecessary, the reversal of the liabilities would result
in tax benefits being recognized in the period when we determine the liabilities
are no longer necessary. If our estimate of tax liabilities proves to
be less than the ultimate assessment, a further charge to expense would result
in the period of determination.
RESULTS
OF OPERATIONS
Net
Sales and Operating Revenues
Years
Ended February 28 or 29
|
||||||||||||||||||||||||
(In
millions)
|
2010
|
%
|
2009
|
%
|
2008
|
%
|
||||||||||||||||||
Used
vehicle sales
|
$ | 6,192.3 | 82.9 | $ | 5,690.7 | 81.6 | $ | 6,589.3 | 80.4 | |||||||||||||||
New
vehicle sales
|
186.5 | 2.5 | 261.9 | 3.8 | 370.6 | 4.5 | ||||||||||||||||||
Wholesale
vehicle sales
|
844.9 | 11.3 | 779.8 | 11.2 | 985.0 | 12.0 | ||||||||||||||||||
Other
sales and revenues:
|
||||||||||||||||||||||||
Extended
service plan revenues
|
144.5 | 1.9 | 125.2 | 1.8 | 132.4 | 1.6 | ||||||||||||||||||
Service
department sales
|
101.1 | 1.4 | 101.2 | 1.5 | 96.0 | 1.2 | ||||||||||||||||||
Third-party
finance fees, net
|
0.9 | ― | 15.3 | 0.2 | 26.1 | 0.3 | ||||||||||||||||||
Total
other sales and revenues
|
246.6 | 3.3 | 241.6 | 3.5 | 254.6 | 3.1 | ||||||||||||||||||
Total
net sales and operating revenues
|
$ | 7,470.2 | 100.0 | $ | 6,974.0 | 100.0 | $ | 8,199.6 | 100.0 |
22
Retail
Vehicle Sales Changes
Years
Ended February 28 or 29
|
||||||||||||
2010
|
2009
|
2008
|
||||||||||
Vehicle
units:
|
||||||||||||
Used
vehicles
|
3 | % | (8 | )% | 12 | % | ||||||
New
vehicles
|
(29 | )% | (28 | )% | (17 | )% | ||||||
Total
|
2 | % | (9 | )% | 10 | % | ||||||
Vehicle
dollars:
|
||||||||||||
Used
vehicles
|
9 | % | (14 | )% | 12 | % | ||||||
New
vehicles
|
(29 | )% | (29 | )% | (17 | )% | ||||||
Total
|
7 | % | (14 | )% | 10 | % |
Comparable
store used unit sales growth is one of the key drivers of our
profitability. A store is included in comparable store retail sales
in the store’s fourteenth full month of operation.
Comparable
Store Retail Vehicle Sales Changes
Years
Ended February 28 or 29
|
||||||||||||
2010
|
2009
|
2008
|
||||||||||
Vehicle
units:
|
||||||||||||
Used
vehicles
|
1 | % | (16 | )% | 3 | % | ||||||
New
vehicles
|
(29 | )% | (25 | )% | (11 | )% | ||||||
Total
|
0 | % | (17 | )% | 2 | % | ||||||
Vehicle
dollars:
|
||||||||||||
Used
vehicles
|
6 | % | (21 | )% | 3 | % | ||||||
New
vehicles
|
(29 | )% | (26 | )% | (11 | )% | ||||||
Total
|
5 | % | (21 | )% | 2 | % |
Change
in Used Car Superstore Base
Years
Ended February 28 or 29
|
||||||||||||
2010
|
2009
|
2008
|
||||||||||
Used
car superstores, beginning of year
|
100 | 89 | 77 | |||||||||
Superstore
openings
|
― | 11 | 12 | |||||||||
Used
car superstores, end of year
|
100 | 100 | 89 | |||||||||
Openings
as a percent of the beginning-of-year store base
|
― | % | 12 | % | 16 | % |
Used
Vehicle Sales
Fiscal 2010
Versus Fiscal 2009. Our 9% increase in used vehicle revenues
in fiscal 2010 resulted from a 5% increase in average retail selling price and a
3% increase in unit sales. The increase in the average retail selling
price primarily reflected increases in our vehicle acquisition costs resulting
from appreciation in wholesale industry used vehicle values. After
falling sharply in fiscal 2009, wholesale vehicle values climbed during much of
fiscal 2010, which we believe in part reflected tight supply conditions that
occurred as vehicle trade-in activity slowed in tandem with the decline in new
car industry sales.
The 3%
unit sales growth reflected a 1% increase in comparable store used unit sales
and sales from newer superstores not yet included in the comparable store
base. We experienced a significant improvement in sales execution in
fiscal 2010; however, the resulting increase in sales conversion rate was almost
fully offset by a decline in customer traffic. The improvement in
sales conversion occurred despite the tightening of lending standards by our
third-party finance providers and CAF in fiscal 2010, which we estimate
adversely affected our comparable store used unit sales growth by several
percentage points. Continuing weak economic conditions caused our
customer traffic to remain below the prior year level, despite the fact that the
government’s Consumer Assistance to Recycle and Save Act (“CARS” or “cash for
clunkers”) new car incentive program generated a spike in traffic in late July
and August 2009. Similar to our experience with previous successful,
broad-based new car incentive programs, we believe this program had a beneficial
effect on our used car customer traffic and sales.
23
Our data
indicated that we increased our share of the late-model used vehicle market by
more than 10% in fiscal 2010, while the overall market contracted. We
believe our ability to grow market share year after year is a testament to the
strength of our consumer offer and the preference for our brand.
Fiscal 2009
Versus Fiscal 2008. Our 14% decrease in used vehicle revenues
in fiscal 2009 resulted from the combination of an 8% decline in unit sales and
a 6% decrease in average retail selling price. The decline in unit
sales reflected a 16% decrease in comparable store used units, partially offset
by sales from newer superstores not yet in the comparable store
base. The decrease in the average retail selling price was primarily
caused by a significant industry-wide drop in wholesale used car prices during
the first three quarters of the year, which reduced our inventory acquisition
costs. Early in fiscal 2009, the steep increase in the cost of
gasoline caused a temporary shift in consumer demand away from SUVs and trucks,
toward more fuel-efficient vehicles. However, in the latter half of
fiscal 2009, the combination of the decline in gasoline prices and the lower,
more affordable prices for these less fuel-efficient vehicles caused our sales
mix to return to the prior year levels.
We began
to see the initial effects of the slowdown in the automotive retail market in
the latter part of fiscal 2008. However, the weakness in the economy
and the stresses on consumer spending accelerated in fiscal 2009, causing
customer traffic to decline sharply starting in late May 2008. These
stresses included rising unemployment rates, decreases in home equity values and
personal wealth, and record low levels of consumer confidence. For
the year, the decline in customer traffic was slightly greater than the decrease
in comparable store unit sales. Despite the more difficult
environment, the solid execution by our store teams allowed us to modestly
improve our conversion rate compared with fiscal 2008. While both CAF
and our third-party providers tightened lending criteria for some higher-risk
customer segments, lack of credit availability was not a major contributor to
the reduction in sales in fiscal 2009. Our data indicated that we
modestly gained market share in the late-model used vehicle market in fiscal
2009.
New
Vehicle Sales
Fiscal 2010
Versus Fiscal 2009. New vehicle revenues declined 29% in
fiscal 2010. The decrease was entirely the result of a corresponding
decline in unit sales, which primarily reflected the extremely soft new car
industry sales trends for the brands we represent. A reduction in
sales volumes at our Chevrolet franchise, which is one of many franchises being
terminated by General Motors, also contributed to the decline in new vehicle
unit sales. For the fiscal year ended February 28, 2010, new car
manufacturers reported a 15% decline in U.S. new car unit sales.
Fiscal 2009
Versus Fiscal 2008. New vehicle revenues declined 29% in
fiscal 2009. The decline was the result of a 28% decrease in unit
sales and a 1% decrease in average selling price. New vehicle unit
sales primarily reflected the extremely soft new car industry sales trends, as
well as the sale of our Orlando Chrysler-Jeep-Dodge franchise in the second
quarter of fiscal 2008. For the fiscal year ended February 28, 2009,
new car manufacturers reported a 23% decline in U.S. new car unit
sales.
Wholesale
Vehicle Sales
Our
operating strategy is to build customer satisfaction by offering high-quality
vehicles. Fewer than half of the vehicles acquired from consumers
through the appraisal purchase process meet our standards for reconditioning and
subsequent retail sale. Those vehicles that do not meet our standards
are sold through on-site wholesale auctions. Our wholesale auction
prices usually reflect the trends in the general wholesale market for the types
of vehicles we sell, although they could also be affected by changes in vehicle
mix or the average age, mileage or condition of the vehicles
wholesaled.
Fiscal 2010
Versus Fiscal 2009. The 8% increase in wholesale vehicle
revenues in fiscal 2010 resulted from a 6% increase in average wholesale vehicle
selling price combined with a 2% increase in wholesale unit
sales. The increase in wholesale unit sales was mainly the result of
a significant increase in our appraisal buy rate. We believe the
strong industry-wide wholesale vehicle pricing environment and the resulting
increases in our appraisal offers had a favorable effect on the buy
rate. The benefit of the improvement in appraisal buy rate was
largely offset, however, by a double-digit decline in appraisal traffic,
particularly in the first half of the year. Appraisal traffic was
adversely affected by both the slowdown in our customer traffic and by the
reduction in new car industry sales and the related used vehicle trade-in
activity.
Fiscal 2009
Versus Fiscal 2008. The 21% decrease in wholesale vehicle
revenues in fiscal 2009 resulted from a 13% decrease in wholesale unit sales
combined with a 10% decrease in average wholesale vehicle selling
price. The decline in unit sales primarily reflected a decrease in
our appraisal traffic and, to a lesser extent, a decline in our appraisal buy
rate. Appraisal traffic was affected by the overall slowdown in
customer traffic. Industry wholesale prices for SUVs, trucks and
other less fuel efficient vehicles fell sharply in the first two quarters of
fiscal 2009, and prices for virtually all vehicle classes declined at an
unprecedented rate during the third quarter, reflecting the weak demand
environment. We believe the significant drop in wholesale market
values, which resulted in corresponding decreases in our appraisal offers,
contributed to the reduction in our buy rate.
24
Other
Sales and Revenues
Other
sales and revenues include commissions on the sale of ESPs and GAP (reported in
ESP revenues), service department sales and net third-party finance
fees. The fixed fees paid by third-party finance providers vary by
provider, reflecting their differing levels of credit risk
exposure. The third-party provider who purchases subprime financings
purchases these loans at a discount, which is reflected as an offset to finance
fee revenues received from the other third-party providers.
Fiscal 2010
Versus Fiscal 2009. Other sales and revenues increased 2% in
fiscal 2010. The increase was comprised of a 15% increase in ESP
revenues, largely offset by a 94% decline in third-party finance
fees. ESP revenues benefited from the 3% increase in used unit sales
and the successful introduction of GAP in fiscal 2010. In addition,
fiscal 2010 ESP revenues benefited from modifications in pricing made during the
second half of fiscal 2009. The decline in third-party finance fees
primarily reflected a mix shift among providers, which increased the percentage
of vehicle sales financed by the subprime provider. The subprime
provider financed approximately 6% of our retail unit sales in fiscal 2010
compared with approximately 3% in fiscal 2009. In addition, during
the third quarter of fiscal 2010, we curtailed our temporary strategy of routing
a larger percentage of credit applications directly to the third-party finance
providers. We had originally implemented this practice in the third
quarter of fiscal 2009 in order to slow the use of capacity in our warehouse
facility during a period when the asset-backed securitization markets were
severely disrupted. The warehouse facility is used to provide initial
funding for substantially all of the auto loan receivables originated by
CAF.
Fiscal 2009
Versus Fiscal 2008. Other sales and revenues decreased 5% in
fiscal 2009. ESP revenues declined 5%. Compared with the
8% decrease in total used vehicle unit sales in fiscal 2009, ESP revenues
benefited from a slow down in the rate of ESP cancellations, which we believe
was the result of the decline in auto industry sales and
trade-ins. Third-party finance fees decreased 42% due to a
combination of factors including the reduction in retail vehicle unit sales, a
shift in mix among providers and a change in discount arrangements with certain
of the providers during fiscal 2009. Collectively, the third-party
providers financed a larger percentage of our retail unit sales in the second
half of fiscal 2009, as we chose to route more credit applications to these
providers in order to slow the use of capacity in our warehouse
facility.
Supplemental
Sales Information
Unit
Sales
Years
Ended February 28 or 29
|
||||||||||||
2010
|
2009
|
2008
|
||||||||||
Used
vehicles
|
357,129 | 345,465 | 377,244 | |||||||||
New
vehicles
|
7,851 | 11,084 | 15,485 | |||||||||
Wholesale
vehicles
|
197,382 | 194,081 | 222,406 |
Average Selling Prices
Years
Ended February 28 or 29
|
||||||||||||
2010
|
2009
|
2008
|
||||||||||
Used
vehicles
|
$ | 17,152 | $ | 16,291 | $ | 17,298 | ||||||
New
vehicles
|
$ | 23,617 | $ | 23,490 | $ | 23,795 | ||||||
Wholesale
vehicles
|
$ | 4,155 | $ | 3,902 | $ | 4,319 |
25
Retail
Vehicle Sales Mix
Years
Ended February 28 or 29
|
||||||||||||
2010
|
2009
|
2008
|
||||||||||
Vehicle
units:
|
||||||||||||
Used
vehicles
|
98 | % | 97 | % | 96 | % | ||||||
New
vehicles
|
2 | 3 | 4 | |||||||||
Total
|
100 | % | 100 | % | 100 | % | ||||||
Vehicle
dollars:
|
||||||||||||
Used
vehicles
|
97 | % | 96 | % | 95 | % | ||||||
New
vehicles
|
3 | 4 | 5 | |||||||||
Total
|
100 | % | 100 | % | 100 | % |
As of February 28, 2010, we had a total of six new car franchises representing the Chevrolet, Chrysler, Nissan and Toyota brands. In June 2009, we were notified by General Motors that our Chevrolet franchise in Kenosha, Wisconsin, will be terminated no later than October 2010. By this date, we expect to stop selling new General Motors vehicles at this site, where we also have a used car superstore and a Toyota franchise. We do not expect this franchise termination to have a material effect on sales or earnings.
Between
fiscal 2007 and fiscal 2009, we opened five car-buying centers. These
are test sites at which we conduct appraisals and purchase, but do not sell,
vehicles. We will continue to evaluate the performance of these five
centers before deciding whether to open additional ones in future
years. These test sites are part of our long-term program to increase
both appraisal traffic and retail vehicle sourcing self-sufficiency (equal to
the percentage of vehicles sold at retail that were purchased directly from
consumers).
Gross
Profit
Years
Ended February 28 or 29
|
||||||||||||
(In
millions)
|
2010
|
2009
|
2008
|
|||||||||
Used
vehicle gross profit
|
$ | 739.9 | $ | 644.4 | $ | 708.6 | ||||||
New
vehicle gross profit
|
6.7 | 9.0 | 15.4 | |||||||||
Wholesale
vehicle gross profit
|
171.5 | 162.5 | 176.7 | |||||||||
Other
gross profit
|
180.8 | 152.2 | 171.8 | |||||||||
Total
|
$ | 1,098.9 | $ | 968.2 | $ | 1,072.4 |
Gross Profit per Unit
Years
Ended February 28 or 29
|
||||||||||||||||||||||||
2010
|
2009
|
2008
|
||||||||||||||||||||||
$
per unit (1)
|
% | (2) |
$
per unit (1)
|
% | (2) |
$
per unit (1)
|
% | (2) | ||||||||||||||||
Used
vehicle gross profit
|
$ | 2,072 | 11.9 | $ | 1,865 | 11.3 | $ | 1,878 | 10.8 | |||||||||||||||
New
vehicle gross profit
|
$ | 858 | 3.6 | $ | 814 | 3.4 | $ | 994 | 4.2 | |||||||||||||||
Wholesale
vehicle gross profit
|
$ | 869 | 20.3 | $ | 837 | 20.8 | $ | 794 | 17.9 | |||||||||||||||
Other
gross profit
|
$ | 495 | 73.3 | $ | 427 | 63.0 | $ | 437 | 67.5 | |||||||||||||||
Total
gross profit
|
$ | 3,011 | 14.7 | $ | 2,715 | 13.9 | $ | 2,731 | 13.1 |
(1)
|
Calculated
as category gross profit divided by its respective units sold, except the
other and total categories, which are divided by total retail units
sold.
|
(2)
|
Calculated
as a percentage of its respective sales or
revenue.
|
Used
Vehicle Gross Profit
We target
a dollar range of gross profit per used unit sold. The gross profit
dollar target for an individual vehicle is based on a variety of factors,
including its anticipated probability of sale and its mileage relative to its
age; however, it is not primarily based on the vehicle’s selling
price. Our ability to quickly adjust appraisal offers to be
consistent with the broader market trade-in trends and our rapid inventory turns
reduce our exposure to the inherent continual fluctuation in used vehicle values
and contribute to our ability to manage gross profit dollars per
unit. We employ a volume-based strategy, and we systematically mark
down individual vehicle prices based on proprietary pricing algorithms in order
to appropriately balance sales trends, inventory turns and gross profit
achievement. When customer traffic and sales are consistently strong,
we generally take fewer pricing markdowns, which in turn benefits gross profit
dollars per unit. When the sales pace slows, we may initially take
more pricing markdowns, which could pressure gross profit dollars per
unit. However, as we are successful in reducing inventories to align
them with a slower sales pace, this may allow us to return to target levels of
gross profit per unit. Over the past several years, we have continued
to refine our car-buying strategies, which we believe has benefited used vehicle
gross profit per unit.
26
Fiscal 2010
Versus Fiscal 2009. Our used vehicle gross profit increased by
$95.4 million, or 15%, to $739.9 million from $644.4 million in fiscal 2009,
reflecting the combination of an 11% improvement in used vehicle gross profit
dollars per unit and the 3% increase in used unit sales. Used vehicle
gross profit per unit increased $207 to $2,072 per unit compared with $1,865 per
unit in fiscal 2009. The improvement in gross profit per unit
resulted from a combination of factors, including our ongoing initiative to
reduce waste in the vehicle reconditioning process. We estimate that
we achieved a sustainable reduction in average reconditioning costs of
approximately $200 per vehicle by the end of fiscal 2010. This
reduction was primarily accomplished through our emphasis on the consistent
application of our reconditioning standards across our entire store
base. The benefit of the year-over-year appreciation in used vehicle
wholesale values also contributed to our used vehicle gross
profit. In addition, we believe continuing refinements to our
proprietary inventory management systems and processes were contributing
factors, as we were able to increase inventory turns in fiscal 2010, despite our
aggressive reductions in inventory in the previous year. The
improvement also reflected the below-average profitability reported early in
fiscal 2009 when the initial slowdown in customer traffic and a rapid decline in
underlying values of SUVs and trucks put pressure on our used vehicle
margins.
Fiscal 2009
Versus Fiscal 2008. Our used vehicle gross profit decreased by
$64.2 million, or 9%, to $644.4 million from $708.6 million in fiscal 2008,
primarily as a result of the 8% decline in total used unit
sales. Despite the difficult sales environment in fiscal 2009, gross
profit per unit decreased only $13 to $1,865 per unit. Several
factors adversely affected our fiscal 2009 used vehicle gross profit per unit,
including a reduction in the percent of vehicles purchased directly from
customers and the sharp decrease in wholesale industry prices. These
were largely offset, however, by our success in managing our
inventories.
During
fiscal 2009, we experienced a decline in both appraisal traffic and our buy
rate, which required us to source a larger percentage of our used vehicles at
auction. Vehicles purchased at auction typically generate less gross
profit per unit compared with vehicles purchased directly from
consumers. Additionally, wholesale industry prices for mid-sized and
large SUVs and trucks declined sharply in the spring and early summer of 2008,
and this rapid decline in valuation resulted in margin pressure on this segment
of inventory in the first half of fiscal 2009.
We
believe that our ability to maintain a generally consistent level of gross
profit per unit during fiscal 2009, despite the challenging sales environment
and the unprecedented decline in wholesale market prices, was due in large part
to the effectiveness of our proprietary inventory management systems and
processes. In response to the sharp decline in traffic and sales that
began in late May 2008, we rapidly reduced our used car inventories, which
brought them back in line with the current sales rates and minimized required
pricing markdowns in the second half of the fiscal year. Compared
with inventory levels at stores open as of February 29, 2008, we had
approximately 16,500 fewer total used vehicle units in inventory as of February
28, 2009, representing a 28% reduction. Due to the severe decline in
customer traffic during fiscal 2009, we generally chose not to reduce our gross
profit targets, as we believed doing so in the current economic environment
would not have spurred a sufficient increase in sales to offset the reduction in
per-unit profitability.
New
Vehicle Gross Profit
Fiscal 2010
Versus Fiscal 2009. Our new vehicle gross profit decreased 25%
to $6.7 million from $9.0 million in fiscal 2009. The reduction
primarily reflected the 29% decline in new vehicle unit sales, partially offset
by a 5% increase in new vehicle gross profit dollars per unit, which improved to
$858 per unit from $814 per unit in fiscal 2009. The industry-wide
reductions in new vehicle inventories and incentives related to the cash for
clunkers program benefited the new vehicle gross profit dollars per unit in the
second and third quarters of fiscal 2010.
Fiscal 2009
Versus Fiscal 2008. Our new vehicle gross
profit decreased 42% to $9.0 million in fiscal 2009 from $15.4 million in fiscal
2008, reflecting the 28% reduction in total new unit sales and a $180 decline in
gross profit per unit. These reductions resulted from the sharp
decline in new car industry sales and the resulting increase in competitiveness
in the new car market.
27
Wholesale
Vehicle Gross Profit
Our
wholesale vehicle gross profit per unit has steadily increased over the last
several years, in part, reflecting the benefits realized from improvements and
refinements in our car-buying strategies, appraisal delivery processes and
in-store auction processes. We have made continuous improvements in
these processes, which we believe has allowed us to become more
efficient. Our in-store auctions have benefited from initiatives to
increase our dealer-to-car ratio, which we believe has allowed us to achieve
higher prices. In addition, the frequency of our auctions, which are
generally held weekly or bi-weekly, minimizes the depreciation risk on these
vehicles.
Fiscal 2010
Versus Fiscal 2009. Our wholesale vehicle gross profit
increased by $8.9 million, or 5%, to $171.5 million from $162.5 million in
fiscal 2009, reflecting the combination of a 4% improvement in wholesale vehicle
gross profit per unit and the 2% increase in wholesale unit
sales. Wholesale gross profit per unit increased $32 to $869 per unit
compared with $837 per unit in fiscal 2009. The improvement in the
wholesale vehicle gross profit per unit primarily reflected the higher
year-over-year wholesale pricing environment. We also achieved a new
record dealer-to-car ratio at our auctions in fiscal 2010, with the resulting
price competition among bidders contributing to the strong wholesale gross
profit per unit.
Fiscal 2009
Versus Fiscal 2008. Our wholesale vehicle gross profit
decreased by $14.2 million, or 8%, to $162.5 million from $176.7 million in
fiscal 2008. The reduction was driven by the 13% decline in wholesale
vehicle unit sales, partially offset by an increase in wholesale gross profit
per unit of $43, or 5%, to $837 per unit from $794 per unit in fiscal
2008. We experienced an improvement in our dealer-to-car ratio at our
auctions in fiscal 2009, with the resulting price competition among bidders
contributing to the strong wholesale gross profit per unit. Our
wholesale vehicles are predominantly comprised of older, higher mileage
vehicles, and we believe the demand for these types of vehicles remained strong
from dealers who specialize in selling to credit-challenged
customers.
Other
Gross Profit
Other
gross profit includes profits related to ESP and GAP revenues, net third-party
finance fees and service department sales. We have no cost of sales
related to ESP and GAP revenues or net third-party finance fees, as these
represent commissions paid to us by the third-party
providers. Accordingly, changes in the relative mix of the other
gross profit components can affect the composition of other gross
profit.
Fiscal 2010
Versus Fiscal 2009. Other gross profit increased by $28.6
million, or 19%, to $180.8 million from $152.2 million in fiscal
2009. Other gross profit per unit increased $68, or 16%, to $495 per
unit from $427 per unit in fiscal 2009. ESP gross profit increased
$19.3 million, or 15%, benefiting from the introduction of GAP, the
modifications in pricing made during the second half of fiscal 2009 and the 3%
increase in used unit sales. Service department gross profit grew
$23.6 million, primarily because our retail vehicle sale growth outpaced fixed
service overhead costs. The increases in ESP and service department
gross profit were partially offset by a $14.3 million reduction in net
third-party finance fees, which were adversely affected by the mix shift among
providers and the termination of our temporary practice of reducing CAF
originations by routing more credit applications to our third-party
providers.
Fiscal 2009
Versus Fiscal 2008. Other gross profit
decreased by $19.6 million, or 11%, to $152.2 million from $171.8 million in
fiscal 2008. This decrease primarily reflected the reductions in used
and new retail unit sales and the related impact on ESP revenues and third-party
finance fees and a $10 decline in other gross profit per unit in fiscal
2009. The decline in other gross profit per unit was primarily
associated with the increase in mix of other revenues represented by service
department sales.
Impact
of Inflation
Historically,
inflation has not been a significant contributor to
results. Profitability is primarily affected by our ability to
achieve targeted unit sales and gross profit dollars per vehicle rather than on
average retail prices. However, increases in average vehicle selling
prices benefit the SG&A ratio and CAF income, to the extent the average
amount financed also increases.
During
fiscal 2010, we experienced a period of strong appreciation in used vehicle
wholesale pricing. We believe the appreciation resulted, in part,
from a reduced supply of used vehicles in the market that was caused by the
dramatic decline in new car industry sales and the associated slow down in used
vehicle trade-in activity. The appreciation also reflected a rebound
in pricing compared with the severe depreciation experienced in the previous
year. The higher wholesale values increased both our vehicle
acquisition costs and our average selling prices for used and wholesale
vehicles.
28
During
fiscal 2009, the weakness in the economy and the stresses on consumer spending
contributed to the industry-wide slowdown in the sale of new and used vehicles
and to the unprecedented decline in wholesale market prices for most vehicle
classes during the first three quarters of the year. These lower
wholesale values reduced our vehicle acquisition costs and contributed to the
decline in our used and wholesale vehicle average selling price.
CarMax
Auto Finance Income
CAF
provides financing for a portion of our used and new car retail
sales. Because the purchase of a vehicle is often reliant on the
consumer’s ability to obtain on-the-spot financing, it is important to our
business that financing be available to creditworthy customers. While
financing can also be obtained from third-party sources, we believe that total
reliance on third parties can create unacceptable volatility and business
risk. Furthermore, we believe that our processes and systems, the
transparency of our pricing and our vehicle quality provide a unique and ideal
environment in which to procure high quality auto loans, both for CAF and for
the third-party financing providers. Generally, CAF has provided us
the opportunity to capture additional profits and cash flows from auto loan
receivables while managing our reliance on third-party financing
sources.
Components
of CAF Income
Years
Ended February 28 or 29
|
||||||||||||||||||||||||
(In
millions)
|
2010
|
%
|
2009
|
%
|
2008
|
%
|
||||||||||||||||||
Gain
on sales of loans originated and sold (1)(2)
|
$ | 83.0 | 4.5 | $ | 46.5 | 2.4 | $ | 58.1 | 2.4 | |||||||||||||||
Other
gains (losses) (1)
|
26.7 | (81.8 | ) | (9.6 | ) | |||||||||||||||||||
Total
gain (loss)
|
109.7 | (35.3 | ) | 48.5 | ||||||||||||||||||||
Other
CAF income: (3)
|
||||||||||||||||||||||||
Servicing
fee income
|
41.9 | 1.0 | 41.3 | 1.0 | 37.4 | 1.0 | ||||||||||||||||||
Interest
income
|
68.5 | 1.7 | 48.3 | 1.2 | 33.3 | 0.9 | ||||||||||||||||||
Total
other CAF income
|
110.4 | 2.7 | 89.6 | 2.2 | 70.7 | 2.0 | ||||||||||||||||||
Direct
CAF expenses: (3)
|
||||||||||||||||||||||||
CAF
payroll and fringe benefit expense
|
20.2 | 0.5 | 19.2 | 0.5 | 15.9 | 0.4 | ||||||||||||||||||
Other
direct CAF expenses
|
24.7 | 0.6 | 19.9 | 0.5 | 17.4 | 0.5 | ||||||||||||||||||
Total
direct CAF expenses
|
44.9 | 1.1 | 39.1 | 1.0 | 33.3 | 0.9 | ||||||||||||||||||
CarMax
Auto Finance income (4)
|
$ | 175.2 | 2.3 | $ | 15.3 | 0.2 | $ | 85.9 | 1.0 | |||||||||||||||
Total
loans originated and sold
|
$ | 1,855.3 | $ | 1,930.2 | $ | 2,430.8 | ||||||||||||||||||
Average
managed receivables
|
$ | 4,080.0 | $ | 4,021.0 | $ | 3,608.4 | ||||||||||||||||||
Ending
managed receivables
|
$ | 4,112.7 | $ | 3,986.7 | $ | 3,838.5 | ||||||||||||||||||
Total
net sales and operating revenues
|
$ | 7,470.2 | $ | 6,974.0 | $ | 8,199.6 |
(1)
|
To
the extent we recognize valuation or other adjustments related to loans
originated and sold during previous quarters of the same fiscal year, the
sum of amounts reported for the individual quarters may not equal the
amounts reported for the corresponding full fiscal
year.
|
Percent
columns indicate:
(2)
Percent of loans originated and sold (“gain
percentage”).
(3)
Percent of average managed receivables.
(4)
Percent of total net sales and operating revenues.
CAF
income does not include any allocation of indirect costs or
income. We present this information on a direct basis to avoid making
arbitrary decisions regarding the indirect benefits or costs that could be
attributed to CAF. Examples of indirect costs not included are retail
store expenses and corporate expenses such as human resources, administrative
services, marketing, information systems, accounting, legal, treasury and
executive payroll.
CAF
provides financing for qualified customers at competitive market rates of
interest. The majority of CAF income has typically been generated by
the spread between the interest rates charged to customers and the related cost
of funds. Substantially all of the loans originated by CAF are sold
in securitization transactions. A gain, recorded at the time of
securitization, results from recording a receivable approximately equal to the
present value of the expected residual cash flows generated by the securitized
receivables. Historically, the gain on loans originated and sold as a
percent of loans originated and sold (the “gain percentage”) has generally been
in the range of 3.5% to 4.5%. However, the gain percentage was
substantially below the low end of this range in fiscal 2009 and fiscal 2008,
primarily as a result of the more challenging economic environment and the
disruption in the global credit markets. These factors caused us to
increase the loss and discount rate assumptions that affect the gain recognized
on the sale of loans, and they increased our funding costs.
29
The gain
on sales of loans originated and sold includes both the gain income recorded at
the time of securitization and the effect of any subsequent changes in valuation
assumptions or funding costs that are incurred in the same fiscal period that
the loans were originated. Other losses or gains include the effects
of changes in valuation assumptions or funding costs related to loans originated
and sold during previous fiscal periods. In addition, other losses or
gains could include the effects of new term securitizations, changes in the
valuation of retained subordinated bonds and the repurchase and resale of
receivables in existing term securitizations, as applicable.
Between
January 2008 and April 2009, we retained some or all of the subordinated bonds
associated with our term securitizations. We retained these
subordinated bonds because, at the applicable issue date, the economics of doing
so were more favorable than selling them. During fiscal 2010, we
retained subordinated bonds in connection with the April 2009 securitization of
$1.0 billion of auto loans. These subordinated bonds were issued at a
discount and had a fair value of $123.0 million as of February 28,
2010. Retained subordinated bonds are included in retained interest
in securitized receivables on our consolidated balance sheets, and their total
fair value was $248.8 million as of February 28, 2010, $87.4 million as of
February 28, 2009, and $43.1 million as of February 29, 2008. Changes
in the fair value of the retained subordinated bonds are reflected in CAF
income.
Fiscal 2010
Versus Fiscal 2009. CAF income increased to $175.2 million
from $15.3 million in fiscal 2009. In both periods, CAF results were
affected by adjustments related to loans originated in previous fiscal
years. In fiscal 2010, the adjustments increased CAF income by $26.7
million, or $0.07 per share, while in fiscal 2009, the adjustments reduced CAF
income by $81.8 million, or $0.23 per share. The fiscal 2010
adjustments included:
·
|
$64.0
million of favorable mark-to-market adjustments primarily on retained
subordinated bonds resulting from improvements in credit market conditions
and an increase in demand for these
securities.
|
·
|
$14.8
million of net favorable valuation adjustments primarily related to
decreases in prepayment rate
assumptions.
|
·
|
$4.1
million of favorable valuation adjustments related to reducing the
discount rate assumption on select pools of
loans.
|
·
|
Partly
offset by a $56.2 million increase in funding costs largely related to the
$1.22 billion of auto loan receivables that were funded in the warehouse
facility at the end of fiscal 2009. The majority of this
increase in funding costs was associated with the term securitization
completed in April 2009.
|
Excluding
the adjustments from both periods, CAF income increased to $148.6 million from
$97.0 million in fiscal 2009. CAF’s gain on loans originated and sold
climbed to $83.0 million from $46.5 million in fiscal 2009. The
increase primarily reflected a significant improvement in the gain percentage,
partially offset by a reduction in the volume of loans originated and
sold. The gain percentage increased to 4.5% in fiscal 2010 from 2.4%
in fiscal 2009. Several factors contributed to this
improvement. The spread between the rates charged customers and CAF’s
funding costs increased, largely due to lower benchmark rates. In
addition, CAF’s tightening of lending standards had a favorable effect on the
expected net loss and discount rate assumptions used to value the related gain
income and on the required credit enhancements. The volume of
CAF loans originated and sold declined 4% to $1.86 billion from $1.93 billion in
fiscal 2009, mainly reflecting a decline in the percentage of sales financed by
CAF. Net of 3-day payoffs, the number of units financed by CAF as a
percentage of total retail unit sales (the “penetration rate”) fell to slightly
below 30% from 32% in fiscal 2009, primarily reflecting CAF’s tightening of
lending standards.
The
increases in servicing fee income and direct CAF expenses in fiscal 2010 were
proportionate to the growth in average managed receivables. The
interest income component of other CAF income, which increased to 1.7% of
average managed receivables from 1.2% in fiscal 2009, includes the interest
earned on the retained subordinated bonds. This growth in interest
income primarily resulted from our increased holdings of retained subordinated
bonds and higher yields on the subordinated bonds retained in connection with
the April 2009 securitization.
30
Fiscal 2009
Versus Fiscal 2008. CAF income declined to $15.3 million from
$85.9 million in fiscal 2008. In both periods, CAF income was reduced
by adjustments related to loans originated in previous fiscal
years. In fiscal 2009, these adjustments totaled $81.8 million, or
$0.23 per share, and they included:
·
|
$32.0
million of mark-to-market write-downs on the retained subordinated
bonds. The size of the write-downs reflected the illiquidity in
the credit markets in fiscal 2009, particularly for subordinated
bonds.
|
·
|
$31.8
million for increases in cumulative net loss rate
assumptions. The upper end of our cumulative net loss rate
assumption range was 4.0% as of the end of fiscal 2009 versus 3.0% as of
the end of fiscal 2008.
|
·
|
$18.0
million for increases in funding costs related to loans originated in
prior fiscal years. The majority of this increase related to
loans that were securitized in the warehouse facility at the end of fiscal
2008 and which were subsequently resold in term securitizations during
fiscal 2009.
|
·
|
$3.8
million for increasing the discount rate assumption to 19% from
17%.
|
·
|
Partly
offset by $3.8 million of net favorable adjustments primarily related to
reducing our prepayment rate
assumptions.
|
In fiscal
2008, the adjustments related to loans originated and sold in previous fiscal
years totaled $9.6 million, or $0.03 per share. In fiscal 2009, CAF’s
gain on sales of loans originated and sold declined to $46.5 million compared
with $58.1 million in fiscal 2008. This decrease was primarily the
result of the reduction in CAF loan originations, which were adversely affected
by the decreases in our used unit sales and average retail selling
price. In addition, it reflected a decrease in the percentage of
sales financed by CAF resulting from our election to slow the use of capacity in
our warehouse facility during the second half of fiscal 2009. The
gain percentage was 2.4% in both fiscal 2009 and fiscal
2008. Compared with the prior year, the effects of using higher loss
and discount rate assumptions and higher credit enhancement levels for fiscal
2009 originations were offset by the benefit of a significant drop in our
funding cost benchmark rate.
The
increases in servicing fee income and direct CAF expenses in fiscal 2009 were
proportionate to the growth in average managed receivables. The
interest income component of other CAF income increased to 1.2% of average
managed receivables from 0.9% in fiscal 2008, primarily due to the increase in
the discount rate assumption used to value the retained interest. The
use of a higher discount rate reduces the gain recognized at the time the loans
are sold, but increases the interest income recognized in subsequent
periods. Additionally, the growth in interest income reflected our
increased holdings of retained subordinated bonds.
Our term
securitizations typically contain an option to repurchase the securitized
receivables when the outstanding balance in the pool of auto loan receivables
falls below 10% of the original pool balance. This option was
exercised two times in each of fiscal 2010, fiscal 2009 and fiscal
2008. In each case, the remaining eligible receivables were
subsequently resold into the warehouse facility. These transactions
did not have a material effect on CAF income in any of the three fiscal
years. In future periods, the effects of refinancing, repurchase or
resale activity could be favorable or unfavorable, depending on the
securitization structure and the market conditions at the transaction
date.
Past
Due Account Information
As
of February 28 or 29
|
||||||||||||
(In
millions)
|
2010
|
2009
|
2008
|
|||||||||
Loans
securitized
|
$ | 3,946.6 | $ | 3,831.9 | $ | 3,764.5 | ||||||
Loans
held for sale or investment
|
166.1 | 154.8 | 74.0 | |||||||||
Total
managed receivables
|
$ | 4,112.7 | $ | 3,986.7 | $ | 3,838.5 | ||||||
Accounts
31+ days past due
|
$ | 133.2 | $ | 118.1 | $ | 86.1 | ||||||
Past
due accounts as a percentage of total managed receivables
|
3.24 | % | 2.96 | % | 2.24 | % |
Credit
Loss Information
Years
Ended February 28 or 29
|
||||||||||||
(In
millions)
|
2010
|
2009
|
2008
|
|||||||||
Net
credit losses on managed receivables
|
$ | 70.1 | $ | 69.8 | $ | 38.3 | ||||||
Average
managed receivables
|
$ | 4,080.0 | $ | 4,021.0 | $ | 3,608.4 | ||||||
Net
credit losses as a percentage of average managed
receivables
|
1.72 | % | 1.74 | % | 1.06 | % | ||||||
Average
recovery rate
|
49.8 | % | 44.0 | % | 50.2 | % |
31
We are at
risk for the performance of the managed securitized receivables to the extent of
our retained interest in the receivables. If the managed receivables
do not perform in accordance with the assumptions used in determining the fair
value of the retained interest, earnings could be affected. Our
retained interest was $552.4 million as of February 28, 2010, compared with
$348.3 million as of February 28, 2009.
During
fiscal 2010 and fiscal 2009, CAF’s net loss and delinquency performance was
weaker than historical averages. We believe this was primarily the
result of the weak economic environment, which has adversely affected
unemployment and industry trends for losses and delinquencies. In
response, we tightened CAF’s lending criteria in February and June
2009. In November 2009, one of our third-party finance providers
began purchasing a large portion of the loans that CAF would have originated
prior to the tightening of lending standards, offsetting the majority of the
adverse sales effect of the tightening.
The
average recovery rate represents the average percentage of the outstanding
principal balance we receive when a vehicle is repossessed and liquidated at
wholesale auction. Historically, the annual recovery rate has ranged
from a low of 42% to a high of 51%, and it is primarily affected by changes in
the wholesale market pricing environment.
Selling,
General and Administrative Expenses
SG&A
expenses primarily include rent and occupancy costs; payroll expenses, other
than payroll related to reconditioning and vehicle repair service, which is
included in cost of sales; fringe benefits; advertising; and other general
expenses.
Fiscal 2010
Versus Fiscal 2009. SG&A expenses were reduced 7% to
$818.7 million from $882.4 million in fiscal 2009, despite the increase in unit
sales in fiscal 2010. Given the weak environment experienced in the
last two years, we felt it was prudent to take a particularly cautious approach
to SG&A spending during fiscal 2010. Accordingly, we made
significant curtailments in advertising, implemented a wage freeze for all
salaried and hourly associates and a hiring freeze at our home office, reduced
our management bench strength and deferred developmental and discretionary
project spending. The SG&A expense reduction also reflected
decreases in growth-related costs, including pre-opening and relocation costs,
resulting from the suspension of store growth, as well as benefits from a
variety of waste-reduction initiatives. The SG&A ratio fell to
11.0% from 12.7% in fiscal 2009 primarily due to the reduction in SG&A
expenses and the leverage associated with the increases in average selling
prices and unit sales.
The
fiscal 2010 SG&A expenses included the benefit of a favorable litigation
settlement, which increased net earnings by $0.02 per share, while the fiscal
2009 SG&A expenses included various non-recurring items, which in the
aggregate reduced net earnings by a total of $0.04 per share.
Fiscal 2009
Versus Fiscal 2008. SG&A expenses
increased 3% to $882.4 million from $858.4 million in fiscal 2008, although we
increased our store base by 12% in fiscal 2009. In response to the
decline in sales, we focused on reducing store and corporate overhead costs,
including payroll and advertising. Our total number of associates
declined to 13,035 as of the end of fiscal 2009 from a peak of approximately
16,400 in May 2008. The fiscal 2009 SG&A expenses also reflected
reductions in growth-related costs resulting from the suspension of store
growth. The SG&A ratio increased to 12.7% from 10.5% in fiscal
2009 primarily due to the significant declines in comparable store used unit
sales and average selling price.
The
fiscal 2009 SG&A expenses included a number of non-recurring items, which in
the aggregate reduced net earnings by $0.04 per share. These
non-recurring items included severance costs associated with a reduction in our
service operations workforce in October 2008, costs for the termination of store
site acquisitions resulting from our decision to temporarily suspend store
growth, and litigation costs, partially offset by a benefit related to our
decision to freeze our pension plan benefits as of
December 31, 2008.
Income
Taxes
The
effective income tax rate was 37.8% in fiscal 2010, 38.8% in fiscal 2009 and
38.7% in fiscal 2008. The fiscal 2010 effective tax rate was slightly
reduced by the favorable settlement of prior year tax audits.
OPERATIONS
OUTLOOK
Based
upon improvements in our sales and profitability in fiscal 2010 and the
increasing stability in the credit markets, we have decided to resume store
growth in fiscal 2011. We plan to take a measured approach by opening
three superstores in fiscal 2011, between three and five superstores in fiscal
2012, and between five and ten superstores in fiscal 2013. This
approach allows us to maintain momentum on recent initiatives to reduce waste
and increase efficiency while still offering superior quality to
customers. It also allows us to rebuild our store management bench
strength and to restart our real estate acquisition activity.
32
The three
superstores we plan to open in fiscal 2011 were constructed in fiscal 2009, but
we chose not to open them until market conditions improved.
Fiscal
2011 Planned Superstore Openings
Television
|
Market
|
Planned
|
Production
|
Non-Production
|
|
Location
|
Market
|
Status
|
Opening
Date
|
Superstores
|
Superstores
|
Augusta,
Georgia
|
Augusta
|
New
market
|
May
2010
|
―
|
1
|
Dayton,
Ohio
|
Dayton
|
New
market
|
June
2010
|
―
|
1
|
Cincinnati,
Ohio
|
Cincinnati
|
New
market
|
June
2010
|
1
|
―
|
Total
openings
|
1
|
2
|
We currently estimate capital expenditures will total approximately $90 million in fiscal 2011. Compared with the $22.4 million of capital spending in fiscal 2010, the increase in planned fiscal 2011 expenditures reflects real estate acquisitions and construction costs associated with the resumption of store growth, as well as information technology and reconditioning equipment upgrades.
By the
end of fiscal 2010, we had achieved a sustainable reduction in average
reconditioning costs of approximately $200 per vehicle. These
savings, together with additional reductions that we believe are achievable,
will be available to continue to optimize future sales and
profitability.
Although
we intend to maintain momentum on our initiatives to reduce waste and increase
efficiencies, to the extent the economy and our sales improve, we would expect
SG&A spending to increase from the level in fiscal 2010, reflecting the
resulting increases in store and overhead spending, including payroll,
advertising and other costs. We also expect the resumption of store
growth will result in an increase in growth-related expenses, including
preopening costs, advertising for new stores and rebuilding our store management
bench strength. In addition, assuming no economic deterioration, we
plan to invest in some key initiatives to continue to enhance the CarMax
model. These include continued improvements to carmax.com and other
information technology projects and additional training for
associates.
Fiscal
2011 Expectations – CAF Income
As of
March 1, 2010, we will adopt ASUs 2009-16 and 2009-17. Pursuant to
these pronouncements, we will recognize existing and future transfers of auto
loan receivables into term securitizations as secured borrowings, which will
result in recording the auto loan receivables and the related notes payable to
the investors on our consolidated balance sheets. Term
securitizations will be consolidated based on the unpaid principal balances,
less an appropriate reserve for credit losses. We will also account
for future transfers of receivables into our warehouse facility as secured
borrowings.
As of
March 1, 2010, we amended our warehouse facility agreement. As a
result, existing transfers of auto loan receivables no longer qualify for sale
treatment. The receivables that were funded in the warehouse facility
at that date will be consolidated, along with the related notes payable, at
their fair value.
As of
March 1, 2010, we expect the cumulative effect of these changes to result in a
$3.7 billion increase in total assets (net of a reserve for credit losses of
approximately $58 million) and a $3.8 billion increase in total
liabilities.
The
following unaudited pro forma consolidated balance sheet gives affect to the
adoption of ASUs 2009-16 and 2009-17 and the amendment to our warehouse facility
agreement.
33
(Unaudited)
|
||||||||||||||||
Actual
|
Proforma
Adjustments
|
Pro
forma
|
||||||||||||||
February
28,
|
Accounting
|
Amended
|
March
1,
|
|||||||||||||
(In
thousands)
|
2010
|
Change
|
Agreement
|
2010
|
||||||||||||
CURRENT
ASSETS:
|
||||||||||||||||
Cash
and cash equivalents
|
$ | 18,278 | $ | ― | $ | ― | $ | 18,278 | ||||||||
Restricted
cash
|
― | 162,608 | ― | 162,608 | ||||||||||||
Accounts
receivable, net
|
99,434 | (20,375 | ) | ― | 79,059 | |||||||||||
Auto
loan receivables held for sale
|
30,578 | (30,578 | ) | ― | ― | |||||||||||
Retained
interest in securitized receivables
|
552,377 | (508,631 | ) | ― | 43,746 | |||||||||||
Inventory
|
843,133 | ― | ― | 843,133 | ||||||||||||
Deferred
tax asset
|
5,595 | ― | ― | 5,595 | ||||||||||||
Prepaid
expenses and other current assets
|
7,017 | ― | ― | 7,017 | ||||||||||||
TOTAL CURRENT
ASSETS
|
1,556,412 | (396,976 | ) | ― | 1,159,436 | |||||||||||
Auto
loan receivables, net(1)
|
― | 3,712,595 | 331,000 | 4,043,595 | ||||||||||||
Property
and equipment, net
|
893,453 | ― | ― | 893,453 | ||||||||||||
Deferred
income taxes
|
57,234 | 54,850 | ― | 112,084 | ||||||||||||
Other
assets
|
49,092 | 43,835 | ― | 92,927 | ||||||||||||
TOTAL
ASSETS
|
$ | 2,556,191 | $ | 3,414,304 | $ | 331,000 | $ | 6,301,495 | ||||||||
CURRENT
LIABILITIES:
|
||||||||||||||||
Accounts
payable
|
$ | 253,267 | $ | 6,544 | $ | ― | $ | 259,811 | ||||||||
Accrued
expenses and other current liabilities
|
94,557 | 5,584 | ― | 100,141 | ||||||||||||
Accrued
income taxes
|
6,327 | ― | ― | 6,327 | ||||||||||||
Short-term
debt
|
883 | ― | ― | 883 | ||||||||||||
Current
portion of long-term debt
|
122,317 | ― | ― | 122,317 | ||||||||||||
Current
portion of non-recourse notes payable(1)
|
― | 134,798 | ― | 134,798 | ||||||||||||
TOTAL CURRENT
LIABILITIES
|
477,351 | 146,926 | ― | 624,277 | ||||||||||||
Long-term
debt, excluding current portion
|
27,371 | ― | ― | 27,371 | ||||||||||||
Non-recourse
notes payable(1)
|
― | 3,360,612 | 331,000 | 3,691,612 | ||||||||||||
Deferred
revenue and other liabilities
|
117,887 | ― | ― | 117,887 | ||||||||||||
TOTAL
LIABILITIES
|
622,609 | 3,507,538 | 331,000 | 4,461,147 | ||||||||||||
TOTAL SHAREHOLDERS’
EQUITY
|
1,933,582 | (93,234 | ) | ― | 1,840,348 | |||||||||||
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY
|
$ | 2,556,191 | $ | 3,414,304 | $ | 331,000 | $ | 6,301,495 |
(1)
|
When
presented in our consolidated financial statements beginning in the first
quarter of fiscal 2011, the assets and liabilities of the securitization
trusts will be separately presented on the face of the consolidated
balance sheet, as required by ASU 2009-17, to reflect the fact that trust
assets can be used only to settle trust obligations and that the trusts’
creditors (or beneficial interest holders) do not have recourse to the
general credit of CarMax.
|
The pro
forma consolidated balance sheet as of March 1, 2010, shown above, includes the
following adjustments:
·
|
Consolidation
of the auto loan receivables and the related non-recourse notes payable
funded in existing term
securitizations.
|
·
|
Consolidation
of the auto loan receivables and the related non-recourse notes payable
funded in the warehouse facility as of March 1,
2010.
|
·
|
Recognition
of a reserve for credit losses on the consolidated auto loan
receivables.
|
·
|
Consolidation
of customer loan payments received but not yet distributed by the
securitization trusts. These payments are included in
restricted cash.
|
·
|
Reclassification
of auto loan receivables held for sale to auto loans
receivable.
|
·
|
Reclassification
of certain balances previously included in retained interest in
securitized receivables that relate to existing term
securitizations.
|
·
|
Write-off
of the remaining interest-only strip receivables related to term
securitizations, previously recorded in retained interest in securitized
receivables, and the related deferred tax liability. These write-offs are
charged against retained earnings.
|
·
|
Recording
of a net deferred tax asset, primarily related to the establishment of the
reserve for credit losses.
|
34
In future
periods, CAF income included in the consolidated statements of earnings will no
longer include a gain on the sale of loans originated and sold, but instead will
reflect the net interest margin generated by the auto loan receivables less
direct CAF expenses. The net interest margin will include the
interest and certain other income associated with the auto loan receivables less
a provision for estimated credit losses and the interest expense associated with
the non-recourse debt issued to fund these receivables.
Including
the effects of these changes, we currently estimate that CAF income will be in
the range of $145 million to $185 million in fiscal 2011. Many
factors could affect the actual amount of CAF income recognized, including among
others, changes in consumer rates and/or funding costs related to new loan
originations, changes in loan loss experience, changes in the volume of CAF loan
originations, changes in the value of derivative instruments and potential
regulatory changes.
In future
periods, because our securitization transactions will be accounted for as
secured borrowings rather than asset sales, the cash flows from these
transactions will be presented as cash flows from financing activities rather
than as cash flows from operating or investing
activities. Notwithstanding this accounting treatment, our
securitizations are structured to legally isolate the receivables, and we would
not expect to be able to access the assets of our securitization trusts, even in
insolvency, receivership or conservatorship proceedings. We would,
however, continue to have the rights associated with our retained interests in
these trusts.
RECENT
ACCOUNTING PRONOUNCEMENTS
For a
discussion of recent accounting pronouncements applicable to CarMax, see Note
17.
FINANCIAL
CONDITION
Liquidity
and Capital Resources
Operating
Activities. We generated net
cash from operating activities of $50.3 million in fiscal 2010, $264.6 million
in fiscal 2009 and $79.5 million in fiscal 2008. Compared with the
prior year, the $214.3 million decline in cash from operating activities in
fiscal 2010 occurred despite the significant increase in net
income. It primarily reflected the use of cash for increases in the
retained interest in securitized receivables and inventory in fiscal 2010, while
the prior year benefited from the generation of cash from a significant
reduction in inventory.
Select
Operating Assets
As
of February 28 or 29
|
||||||||||||
(In
millions)
|
2010
|
2009
|
2008
|
|||||||||
Reserve
accounts, required excess receivables and
|
||||||||||||
interest-only
strip receivables
|
$ | 303.6 | $ | 260.9 | $ | 227.7 | ||||||
Retained
subordinated bonds, at fair value
|
248.8 | 87.4 | 43.1 | |||||||||
Retained
interest in securitized receivables
|
$ | 552.4 | $ | 348.3 | $ | 270.8 | ||||||
Inventory
|
$ | 843.1 | $ | 703.2 | $ | 975.8 |
Between January 2008 and April 2009, we retained some or all of the subordinated bonds associated with our term securitizations. During this period, market demand for asset-backed securities fell sharply, and we retained the subordinated bonds because the economics of doing so were more favorable than selling them. We believe the government’s Term Asset-Backed Securities Loan Facility (“TALF”) program, launched in March 2009, contributed to the subsequent increase in demand for auto asset-backed securities, and we were able to sell all of the subordinated bonds in our term securitizations completed after April 2009.
The
$204.1 million increase in the retained interest in securitized receivables
during fiscal 2010 primarily reflected the effects of retaining subordinated
bonds in the April 2009 term securitization and the $64.0 million of favorable
mark-to-market adjustments primarily on retained subordinated bonds recognized
during the year. The $77.5 million increase in the retained interest
during fiscal 2009 primarily reflected increases in the required excess
receivables and the effects of retaining subordinated bonds in the May and July
2008 term securitizations, partially offset by a decrease in interest-only strip
receivables and the $32.0 million of mark-to-market write-downs on retained
subordinated bonds recognized during fiscal 2009.
35
The
$140.0 million increase in inventory during fiscal 2010 reflected the increase
in our vehicle acquisition costs caused by appreciation in wholesale vehicle
values, combined with a 10% increase in used vehicle units in
inventory. The increase in units reflected the additional vehicles
required to support recent sales trends. The $272.6 million reduction
in inventory during fiscal 2009 primarily resulted from a 23% reduction in used
vehicle units in inventory, as well as a decline in vehicle acquisition costs
for several vehicle categories, including SUVs and trucks. The
reduction in used vehicle inventory units occurred despite the 12% increase in
our store base in fiscal 2009. We dramatically reduced total used
vehicle inventory units in response to falling customer demand and sales levels
during fiscal 2009.
The
aggregate principal amount of outstanding auto loan receivables funded through
securitizations, which are discussed in Notes 3 and 4, totaled $3.95 billion as
of February 28, 2010; $3.83 billion as of February 28, 2009; and $3.76 billion
as of February 29, 2008. During fiscal 2010, we completed four term
securitizations, funding a total of $2.57 billion of auto loan
receivables. We retained subordinated bonds in conjunction with one
of these term securitizations. These bonds were issued at a discount
and they had a fair value of $123.0 million as of
February 28, 2010. During fiscal 2009, we completed two
term securitizations, funding a total of $1.28 billion of auto loan
receivables. We retained subordinated bonds in conjunction with both
of these transactions. These bonds had a fair value of $78.0 million
as of February 28, 2010.
As of
February 28, 2010, the warehouse facility limit was $1.2 billion. At
that date, $331.0 million of auto loan receivables were funded in the warehouse
facility and unused warehouse capacity totaled $869.0 million. In
August 2009, we renewed the warehouse facility, which has a 364-day
term. The size of the warehouse facility was reduced from the
previous $1.4 billion, as our then-current warehouse needs were lower than they
were previously, when economic conditions and our sales were
stronger. Over the long term, we anticipate that we will be able to
enter into new, or renew or expand existing funding arrangements to meet CAF’s
future funding needs. However, based on conditions in the credit
markets, the cost for these arrangements could be significantly higher than
historical levels and the timing and capacity of these transactions could be
dictated by market availability rather than our requirements. The
securitization agreement related to the warehouse facility includes various
financial covenants. As of February 28, 2010, we were in
compliance with the financial covenants. Note 4 includes additional
discussion of the warehouse facility.
Investing
Activities. Net cash used in investing activities was $21.3
million in fiscal 2010, $155.3 million in fiscal 2009 and $257.0 million in
fiscal 2008. Capital expenditures totaled $22.4 million in fiscal
2010, $185.7 million in fiscal 2009 and $253.1 million in fiscal
2008. The declines in capital spending in fiscal 2010 and fiscal 2009
reflected our decision in December 2008 to temporarily suspend store
growth. In fiscal 2010, our capital spending primarily represented
maintenance capital, which is fairly modest because of the relatively young
average age of our store base. During fiscal 2009, we opened 11 used
car superstores and we completed construction of 3 additional stores that are
now planned to be opened in fiscal 2011. During fiscal 2008, we
opened 12 used car superstores. In addition to store construction
costs, capital expenditures for fiscal 2009 and fiscal 2008 included the cost of
land acquired for future year store openings.
Historically,
capital expenditures have been funded with internally generated funds, long-term
debt and sale-leaseback transactions. Net proceeds from the sales of
assets totaled $0.7 million in fiscal 2010, $34.3 million in fiscal 2009 and
$1.1 million in fiscal 2008. During fiscal 2009, we completed
sale-leaseback transactions for our two used car superstores in Austin, Texas,
valued at $31.3 million.
As of
February 28, 2010, we owned 41 used car superstores currently in operation, 3
superstores that were constructed in fiscal 2009 prior to our suspension of
store growth and that we plan to open in the first half of fiscal 2011 and our
home office in Richmond, Virginia. In addition, five superstores were
accounted for as capital leases.
Financing
Activities. During fiscal 2010, net cash used in financing
activities totaled $151.3 million, including a reduction in total debt of $186.5
million. During fiscal 2009 and fiscal 2008, net cash provided by
financing activities totaled $18.4 million and $171.0 million, respectively,
including increases in total debt of $7.8 million and $148.9 million,
respectively. The increase in total debt for fiscal 2009 was net of a
$1.4 million non-cash increase in long-term debt related to capital leases. The
increase in total debt for fiscal 2008 was net of a $6.6 million non-cash
decrease in long-term debt related to capital leases.
36
Total
Debt and Cash and Cash Equivalents
As
of February 28 or 29
|
||||||||||||
(In
millions)
|
2010
|
2009
|
2008
|
|||||||||
Revolving
credit agreement
|
$ | 122.5 | $ | 308.5 | $ | 300.2 | ||||||
Obligations
under capital leases
|
28.1 | 28.6 | 27.6 | |||||||||
Total
debt
|
$ | 150.6 | $ | 337.0 | $ | 327.8 | ||||||
Cash
and cash equivalents
|
$ | 18.3 | $ | 140.6 | $ | 13.0 |
Starting
in the second half of fiscal 2009, we believed that it was prudent to maintain a
cash balance in excess of our normal operating requirements due to the
unprecedented conditions in the credit markets. Given the subsequent
stabilization in the financial sector, we elected to resume maintaining a more
normalized cash level in the latter half of fiscal 2010.
In fiscal
2010, the reduction in total debt reflected the use of the excess cash to pay
down debt, as well as our increase in net earnings and the reduction in capital
spending resulting from our temporary suspension of store growth. In
fiscal 2009, total debt increased only modestly, as our significant reductions
in inventory substantially offset the effects of the decline in net earnings and
our increase in cash. In fiscal 2008, we increased total debt
primarily to fund increases in inventory and capital expenditures.
We have a
$700 million revolving credit facility, which expires in December
2011. The credit facility is secured by vehicle inventory and
contains customary representations and warranties, conditions and
covenants. As of February 28, 2010, we were in compliance
with the financial covenants. Borrowings under this credit facility
are limited to 80% of qualifying inventory, and they are available for working
capital and general corporate purposes. As of February 28, 2010,
based on then-current inventory levels, we had additional borrowing capacity of
$505.4 million under the credit facility. The outstanding balance
included $0.9 million classified as short-term debt and $121.6 million
classified as current portion of long-term debt. We classified $121.6
million as current portion of long-term debt based on our expectation that this
balance will not remain outstanding for more than one year.
Cash
received on equity issuances, which primarily related to employee stock option
exercises, was $31.3 million in fiscal 2010, $10.2 million in fiscal 2009 and
$14.7 million in fiscal 2008. The fiscal 2010 receipts included
exercises prompted by the increase in our stock price during the fiscal
year.
We expect
that cash generated by operations and proceeds from securitization transactions
or other funding arrangements, sale-leaseback transactions and borrowings under
existing or expanded credit facilities will be sufficient to fund capital
expenditures and working capital for the foreseeable future.
Fair Value
Measurements. As described in Note 6, we reported money market
securities, retained interest in securitized receivables and financial
derivatives at fair value.
The
retained interest in securitized receivables was valued at $552.4 million as of
February 28, 2010, and $348.3 million as of February 28,
2009. Included in the retained interest were interest-only strip
receivables, various reserve accounts and required excess receivables totaling
$303.6 million and $260.9 million, respectively, as of these
dates. In addition, the retained interest included retained
subordinated bonds with a total fair value of $248.8 million as of
February 28, 2010, and $87.4 million as of
February 28, 2009.
As
described in Note 4, we use discounted cash flow models to measure the fair
value of the retained interest, excluding the retained subordinated
bonds. In addition to funding costs and prepayment rates, the
estimates of future cash flows are based on certain key assumptions, such as
finance charge income, loss rates and discount rates appropriate for the type of
asset and risk, both of which are significant unobservable
inputs. Changes in these inputs could have a material impact on our
financial condition or results of operations.
In
measuring the fair value of the retained subordinated bonds, we use a widely
accepted third-party bond pricing model. Our key assumption is
determined based on current market spread quotes from third-party investment
banks and is currently a significant unobservable input. Changes in
this input could have a material impact on our financial condition or results of
operations.
37
During
fiscal 2010 and fiscal 2009, changes were made to certain key assumptions used
in measuring the fair value of the retained interest. See the CarMax
Auto Finance Income section of MD&A for a discussion of the effects of these
changes.
As the
key assumptions used in measuring the fair value of the retained interest
(including the retained subordinated bonds) are significant unobservable inputs,
the retained interest is classified as a Level 3 asset. As of
February 28, 2010, the retained interest represented 94.4% of the
total assets measured at fair value, as disclosed in Note 6.
Contractual
Obligations
As
of February 28, 2010
|
||||||||||||||||||||||||
Less
Than
|
1
to 3
|
3
to 5
|
More
Than
|
|||||||||||||||||||||
(In
millions)
|
Total
|
1
Year
|
Years
|
Years
|
5
Years
|
Other
|
||||||||||||||||||
Revolving
credit agreement (1)
|
$ | 122.5 | $ | ― | $ | 122.5 | $ | ― | $ | ― | $ | ― | ||||||||||||
Capital
leases (2)
|
55.4 | 3.6 | 7.2 | 7.5 | 37.1 | ― | ||||||||||||||||||
Operating
leases (2)
|
971.8 | 82.8 | 165.5 | 166.0 | 557.5 | ― | ||||||||||||||||||
Purchase
obligations (3)
|
26.8 | 5.7 | 11.6 | 9.5 | ― | ― | ||||||||||||||||||
Asset
retirement obligations (4)
|
1.2 | ― | 0.1 | ― | 1.1 | ― | ||||||||||||||||||
Defined
benefit retirement plans (5)
|
38.8 | 0.4 | ― | ― | ― | 38.4 | ||||||||||||||||||
Unrecognized
tax benefits (6)
|
20.2 | 0.3 | ― | ― | ― | 19.9 | ||||||||||||||||||
Total
|
$ | 1,236.7 | $ | 92.8 | $ | 306.9 | $ | 183.0 | $ | 595.7 | $ | 58.3 |
(1)
|
Due
to the uncertainty of forecasting expected variable interest rate
payments, those amounts are not included in the table.
See Note 10.
|
(2)
|
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. See Note 14.
|
(3)
|
Includes
certain enforceable and legally binding obligations related to third-party
outsourcing services.
|
(4)
|
Represents
the liability to retire signage, fixtures and other assets at certain
leased locations.
|
(5)
|
Represents
the recognized funded status of our retirement plan, of which $38.4
million has no contractual payment schedule and we expect payments to
occur beyond 12 months from February 28, 2010. See Note
9.
|
(6)
|
Represents
the net unrecognized tax benefits related to uncertain tax
positions. The timing of payments associated with $19.9 million
of these tax benefits could not be estimated as of February 28,
2010. See Note 8.
|
Off-Balance
Sheet Arrangements
CAF provides financing for a portion of
our used and new car retail sales. We use the warehouse facility to
fund substantially all of the auto loan receivables originated by CAF
until they can be funded through
a term securitization or alternative funding arrangement. We sell the
auto loan receivables to a wholly owned, bankruptcy-remote, special purpose
entity that transfers an undivided interest in the receivables to entities
formed by third-party investors.
Historically,
we have used term securitizations to refinance the receivables previously
securitized through the warehouse facility. The purpose of term
securitizations is to provide permanent funding for these
receivables. In these transactions, a pool of auto loan receivables
is sold to a bankruptcy-remote, special purpose entity that in turn transfers
the receivables to a special purpose securitization trust.
Additional
information regarding the nature, business purposes and importance of our
off-balance sheet arrangement to our liquidity and capital resources can be
found in the CarMax Auto Finance Income, Operations Outlook, Financial Condition
and Market Risk sections of MD&A, as well as in Notes 3 and 4. As
described in the Operations Outlook section, these off-balance sheet
arrangements will be reflected on our consolidated balance sheets effective
March 1, 2010.
38
Auto
Loan Receivables
As of
February 28, 2010 and 2009, all loans in our portfolio of auto loan receivables
were fixed-rate installment loans. Financing for these auto loan
receivables was achieved through asset securitization programs that, in turn,
issued both fixed- and floating-rate securities. We manage the
interest rate exposure relating to floating-rate securitizations through the use
of interest rate swaps. Disruptions in the credit markets could
impact the effectiveness of our hedging strategies. Receivables held
for investment or sale are financed with working capital. Generally,
changes in interest rates associated with underlying swaps will not have a
material impact on earnings; however, they could have a material impact on cash
and cash flows.
Credit
risk is the exposure to nonperformance of another party to an
agreement. We mitigate credit risk by dealing with highly rated bank
counterparties. The market and credit risks associated with financial
derivatives are similar to those relating to other types of financial
instruments. Notes 5 and 6 provide additional information on
financial derivatives.
Composition
of Auto loan receivables
As
of February 28
|
||||||||
(In
millions)
|
2010
|
2009
|
||||||
Principal
amount of:
|
||||||||
Fixed-rate
securitizations
|
$ | 3,432.9 | $ | 2,246.7 | ||||
Floating-rate
securitizations synthetically altered to fixed (1)
|
512.9 | 1,584.6 | ||||||
Floating-rate
securitizations
|
0.8 | 0.6 | ||||||
Loans
held for investment (2)
|
135.5 | 145.1 | ||||||
Loans
held for sale (3)
|
30.6 | 9.7 | ||||||
Total
|
$ | 4,112.7 | $ | 3,986.7 |
(1)
|
Includes
variable-rate securities totaling $182.7 million as of February 28, 2010,
and $370.2 million as of February 28, 2009, issued in connection with
certain term securitizations that were synthetically altered to fixed at
the bankruptcy-remote special purpose
entity.
|
(2)
|
The
majority is held by a bankruptcy-remote special purpose
entity.
|
(3)
|
Held
by a bankruptcy-remote special purpose
entity.
|
Interest
Rate Exposure
We also
have interest rate risk from changing interest rates related to our outstanding
debt. Substantially all of our debt is floating-rate debt based on
LIBOR. A 100-basis point increase in market interest rates would have
decreased our fiscal 2010 net earnings per share by $0.01.
39
Item
8. Consolidated Financial Statements and Supplementary
Data.
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL
OVER
FINANCIAL REPORTING
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting for the company. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Accordingly, even effective internal control over
financial reporting can provide only reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with U.S. generally accepted accounting
principles.
Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework and criteria established in Internal Control—Integrated
Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, our management has
concluded that our internal control over financial reporting was effective as of
February 28, 2010.
KPMG LLP,
the company's independent registered public accounting firm, has issued a report
on our internal control over financial reporting. Their report is
included herein.
/s/ Thomas J.
Folliard
THOMAS
J. FOLLIARD
PRESIDENT
AND CHIEF EXECUTIVE OFFICER
/s/ Keith D.
Browning
KEITH
D. BROWNING
EXECUTIVE
VICE PRESIDENT AND
CHIEF
FINANCIAL OFFICER
40
REPORT
OF INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
The Board
of Directors and Shareholders
CarMax,
Inc.:
We have
audited the accompanying consolidated balance sheets of CarMax, Inc. and
subsidiaries (the Company) as of February 28, 2010 and 2009, and the
related consolidated statements of earnings, shareholders’ equity, and cash
flows for each of the fiscal years in the three-year period ended
February 28, 2010. In connection with our audits of the consolidated
financial statements, we also have audited financial statement schedule II –
valuation and qualifying accounts and reserves as of and for each of the fiscal
years in the three-year period ended February 28, 2010. We also have
audited the Company’s internal control over financial reporting as of
February 28, 2010, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible for these
consolidated financial statements and financial statement schedule for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Annual Report on
Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule and an opinion on the Company’s internal control over
financial reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
41
In our
opinion, the consolidated financial statements and financial statement schedule
referred to above present fairly, in all material respects, the financial
position of CarMax, Inc. and subsidiaries as of February 28, 2010 and 2009,
and the results of their operations and their cash flows for each of the fiscal
years in the three-year period ended February 28, 2010, in conformity with
U.S. generally accepted accounting principles. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of February 28, 2010, based on criteria established in Internal Control — Integrated
Framework issued by COSO.
As
discussed in note 12 to the consolidated financial statements, the Company
adopted the provisions of FASB Accounting Standards Codification Topic 260,
Earnings Per Share,
effective March 1, 2009.
/s/ KPMG LLP
Richmond,
Virginia
April 26, 2010
42
CONSOLIDATED
STATEMENTS OF EARNINGS
Years
Ended February 28 or 29
|
||||||||||||||||||||||||
(In
thousands except per share data)
|
2010
|
% | (1) | 2009 | % | (1) | 2008 | % | (1) | |||||||||||||||
SALES AND OPERATING
REVENUES:
|
||||||||||||||||||||||||
Used
vehicle sales
|
$ | 6,192,278 | 82.9 | $ | 5,690,658 | 81.6 | $ | 6,589,342 | 80.4 | |||||||||||||||
New
vehicle sales
|
186,481 | 2.5 | 261,940 | 3.8 | 370,603 | 4.5 | ||||||||||||||||||
Wholesale
vehicle sales
|
844,868 | 11.3 | 779,785 | 11.2 | 985,048 | 12.0 | ||||||||||||||||||
Other
sales and revenues
|
246,566 | 3.3 | 241,583 | 3.5 | 254,578 | 3.1 | ||||||||||||||||||
NET
SALES AND OPERATING REVENUES
|
7,470,193 | 100.0 | 6,973,966 | 100.0 | 8,199,571 | 100.0 | ||||||||||||||||||
Cost
of sales
|
6,371,323 | 85.3 | 6,005,796 | 86.1 | 7,127,146 | 86.9 | ||||||||||||||||||
GROSS
PROFIT
|
1,098,870 | 14.7 | 968,170 | 13.9 | 1,072,425 | 13.1 | ||||||||||||||||||
CARMAX AUTO FINANCE
INCOME
|
175,217 | 2.3 | 15,286 | 0.2 | 85,865 | 1.0 | ||||||||||||||||||
Selling,
general and administrative expenses
|
818,691 | 11.0 | 882,358 | 12.7 | 858,372 | 10.5 | ||||||||||||||||||
Gain
on franchise disposition
|
― | ― | ― | ― | 740 | ― | ||||||||||||||||||
Interest
expense
|
3,460 | ― | 6,086 | 0.1 | 4,955 | 0.1 | ||||||||||||||||||
Interest
income
|
560 | ― | 1,786 | ― | 1,366 | ― | ||||||||||||||||||
Earnings
before income taxes
|
452,496 | 6.1 | 96,798 | 1.4 | 297,069 | 3.6 | ||||||||||||||||||
Income
tax provision
|
170,828 | 2.3 | 37,585 | 0.5 | 115,044 | 1.4 | ||||||||||||||||||
NET
EARNINGS
|
$ | 281,668 | 3.8 | $ | 59,213 | 0.8 | $ | 182,025 | 2.2 | |||||||||||||||
Weighted
average common shares:(2)
|
||||||||||||||||||||||||
Basic
|
219,527 | 217,537 | 216,045 | |||||||||||||||||||||
Diluted
|
222,234 | 219,357 | 219,963 | |||||||||||||||||||||
NET
EARNINGS PER SHARE:(2)
|
||||||||||||||||||||||||
Basic
|
$ | 1.27 | $ | 0.27 | $ | 0.84 | ||||||||||||||||||
Diluted
|
$ | 1.26 | $ | 0.27 | $ | 0.82 |
|
(1)Percents
are calculated as a percentage of net sales and operating revenues and may
not equal totals due to rounding.
|
|
(2)Reflects
the implementation of the accounting pronouncement related to
participating securities. See Note 12 for additional
information.
|
See
accompanying notes to consolidated financial statements.
43
CONSOLIDATED
BALANCE SHEETS
As
of February 28
|
||||||||
(In
thousands except share data)
|
2010
|
2009
|
||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$ | 18,278 | $ | 140,597 | ||||
Accounts
receivable, net
|
99,434 | 75,876 | ||||||
Auto
loan receivables held for sale
|
30,578 | 9,748 | ||||||
Retained
interest in securitized receivables
|
552,377 | 348,262 | ||||||
Inventory
|
843,133 | 703,157 | ||||||
Deferred
tax asset
|
5,595 | ― | ||||||
Prepaid
expenses and other current assets
|
7,017 | 10,112 | ||||||
TOTAL CURRENT
ASSETS
|
1,556,412 | 1,287,752 | ||||||
Property
and equipment, net
|
893,453 | 938,259 | ||||||
Deferred
income taxes
|
57,234 | 103,163 | ||||||
Other
assets
|
49,092 | 50,013 | ||||||
TOTAL
ASSETS
|
$ | 2,556,191 | $ | 2,379,187 | ||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 253,267 | $ | 237,312 | ||||
Accrued
expenses and other current liabilities
|
94,557 | 55,793 | ||||||
Accrued
income taxes
|
6,327 | 26,551 | ||||||
Deferred
income taxes
|
― | 12,129 | ||||||
Short-term
debt
|
883 | 878 | ||||||
Current
portion of long-term debt
|
122,317 | 158,107 | ||||||
TOTAL CURRENT
LIABILITIES
|
477,351 | 490,770 | ||||||
Long-term
debt, excluding current portion
|
27,371 | 178,062 | ||||||
Deferred
revenue and other liabilities
|
117,887 | 117,288 | ||||||
TOTAL
LIABILITIES
|
622,609 | 786,120 | ||||||
Commitments
and contingent liabilities
|
||||||||
SHAREHOLDERS’
EQUITY:
|
||||||||
Common
stock, $0.50 par value; 350,000,000 shares authorized; 223,065,542
and 220,392,014 shares issued and outstanding as of
|
||||||||
February
28, 2010 and 2009, respectively
|
111,533 | 110,196 | ||||||
Capital
in excess of par value
|
746,134 | 685,938 | ||||||
Accumulated
other comprehensive loss
|
(19,546 | ) | (16,860 | ) | ||||
Retained
earnings
|
1,095,461 | 813,793 | ||||||
TOTAL SHAREHOLDERS’
EQUITY
|
1,933,582 | 1,593,067 | ||||||
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY
|
$ | 2,556,191 | $ | 2,379,187 |
See
accompanying notes to consolidated financial statements.
44
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended February 28 or 29
|
||||||||||||
(In
thousands)
|
2010
|
2009
|
2008
|
|||||||||
OPERATING
ACTIVITIES:
|
||||||||||||
Net
earnings
|
$ | 281,668 | $ | 59,213 | $ | 182,025 | ||||||
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
||||||||||||
Depreciation
and amortization
|
58,328 | 54,741 | 46,615 | |||||||||
Share-based
compensation expense
|
37,858 | 35,436 | 33,467 | |||||||||
Loss
on disposition of assets
|
372 | 10,728 | 1,404 | |||||||||
Deferred
income tax expense (benefit)
|
29,761 | (41,502 | ) | (24,405 | ) | |||||||
Impairment
of long-lived assets
|
2,055 | ― | ― | |||||||||
Net
(increase) decrease in:
|
||||||||||||
Accounts
receivable, net
|
(23,558 | ) | (2,648 | ) | (1,815 | ) | ||||||
Auto
loan receivables held for sale, net
|
(20,830 | ) | (4,764 | ) | 1,178 | |||||||
Retained
interest in securitized receivables
|
(204,115 | ) | (77,501 | ) | (68,459 | ) | ||||||
Inventory
|
(139,976 | ) | 272,620 | (139,661 | ) | |||||||
Prepaid
expenses and other current assets
|
3,095 | 9,090 | (4,148 | ) | ||||||||
Other
assets
|
917 | 647 | 1,360 | |||||||||
Net
increase (decrease) in:
|
||||||||||||
Accounts
payable, accrued expenses and other current liabilities and accrued
income taxes
|
33,818 | (40,276 | ) | 14,561 | ||||||||
Deferred
revenue and other liabilities
|
(9,103 | ) | (11,193 | ) | 37,398 | |||||||
NET CASH PROVIDED BY OPERATING
ACTIVITIES
|
50,290 | 264,591 | 79,520 | |||||||||
INVESTING
ACTIVITIES:
|
||||||||||||
Capital
expenditures
|
(22,434 | ) | (185,700 | ) | (253,106 | ) | ||||||
Proceeds
from sales of assets
|
662 | 34,341 | 1,089 | |||||||||
Insurance
proceeds related to damaged property
|
447 | ― | ― | |||||||||
Purchases
of money market securities, net
|
(2,196 | ) | (3,987 | ) | (19,565 | ) | ||||||
Sales
of investments available-for-sale
|
2,200 | ― | 21,665 | |||||||||
Purchases
of investments available-for-sale
|
― | ― | (7,100 | ) | ||||||||
NET CASH USED IN INVESTING
ACTIVITIES
|
(21,321 | ) | (155,346 | ) | (257,017 | ) | ||||||
FINANCING
ACTIVITIES:
|
||||||||||||
Increase
(decrease) in short-term debt, net
|
5 | (20,139 | ) | 17,727 | ||||||||
Issuances
of long-term debt
|
606,500 | 789,800 | 972,300 | |||||||||
Payments
on long-term debt
|
(792,981 | ) | (761,827 | ) | (841,119 | ) | ||||||
Equity
issuances, net
|
31,307 | 10,162 | 14,730 | |||||||||
Excess
tax benefits from share-based payment arrangements
|
3,881 | 391 | 7,369 | |||||||||
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES
|
(151,288 | ) | 18,387 | 171,007 | ||||||||
(Decrease)
increase in cash and cash equivalents
|
(122,319 | ) | 127,632 | (6,490 | ) | |||||||
Cash
and cash equivalents at beginning of year
|
140,597 | 12,965 | 19,455 | |||||||||
CASH
AND CASH EQUIVALENTS AT END OF YEAR
|
$ | 18,278 | $ | 140,597 | $ | 12,965 | ||||||
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
||||||||||||
Cash
paid during the year for:
|
||||||||||||
Interest
|
$ | 4,796 | $ | 10,171 | $ | 9,768 | ||||||
Income
taxes
|
$ | 163,324 | $ | 64,023 | $ | 124,868 | ||||||
Non-cash
investing and financing activities:
|
||||||||||||
Increase
(decrease) in accrued capital expenditures
|
$ | (5,823 | ) | $ | (12,861 | ) | $ | 9,909 | ||||
Increase
(decrease) in long-term debt obligations from capitalization of
leases
|
||||||||||||
capitalization
of leases
|
$ | ― | $ | 1,382 | $ | (6,554 | ) | |||||
Adjustment
to initially apply FIN 48
|
$ | ― | $ | ― | $ | 408 |
See
accompanying notes to consolidated financial statements.
45
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
Accumulated
|
||||||||||||||||||||||||
Common
|
Capital
in
|
Other
|
||||||||||||||||||||||
Shares
|
Common
|
Excess
of
|
Retained
|
Comprehensive
|
||||||||||||||||||||
(In thousands)
|
Outstanding
|
Stock
|
Par
Value
|
Earnings
|
Loss
|
Total
|
||||||||||||||||||
BALANCE
AS OF FEBRUARY 28, 2007
|
216,028 | $ | 108,014 | $ | 587,546 | $ | 572,147 | $ | (20,332 | ) | $ | 1,247,375 | ||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||
Net
earnings
|
― | ― | ― | 182,025 | ― | 182,025 | ||||||||||||||||||
Retirement
benefit plans,
|
||||||||||||||||||||||||
net
of taxes of $2,091
|
― | ― | ― | ― | 3,604 | 3,604 | ||||||||||||||||||
Total
comprehensive income
|
185,629 | |||||||||||||||||||||||
Adjustment
to initially apply FIN 48
|
― | ― | ― | 408 | ― | 408 | ||||||||||||||||||
Share-based
compensation expense
|
― | ― | 33,146 | ― | ― | 33,146 | ||||||||||||||||||
Exercise
of common stock options
|
1,774 | 887 | 13,854 | ― | ― | 14,741 | ||||||||||||||||||
Shares
issued under stock
|
||||||||||||||||||||||||
incentive
plans
|
927 | 463 | (148 | ) | ― | ― | 315 | |||||||||||||||||
Shares
cancelled upon reacquisition
|
(113 | ) | (56 | ) | 45 | ― | ― | (11 | ) | |||||||||||||||
Tax
benefit from the exercise of
|
||||||||||||||||||||||||
common
stock options
|
― | ― | 7,323 | ― | ― | 7,323 | ||||||||||||||||||
BALANCE
AS OF FEBRUARY 29, 2008
|
218,616 | 109,308 | 641,766 | 754,580 | (16,728 | ) | 1,488,926 | |||||||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||
Net
earnings
|
― | ― | ― | 59,213 | ― | 59,213 | ||||||||||||||||||
Retirement
benefit plans,
|
||||||||||||||||||||||||
net
of taxes of $176
|
― | ― | ― | ― | (132 | ) | (132 | ) | ||||||||||||||||
Total
comprehensive income
|
59,081 | |||||||||||||||||||||||
Share-based
compensation expense
|
― | ― | 34,854 | ― | ― | 34,854 | ||||||||||||||||||
Exercise
of common stock options
|
817 | 408 | 9,778 | ― | ― | 10,186 | ||||||||||||||||||
Shares
issued under stock
|
||||||||||||||||||||||||
incentive
plans
|
1,119 | 560 | 40 | ― | ― | 600 | ||||||||||||||||||
Shares
cancelled upon reacquisition
|
(160 | ) | (80 | ) | 40 | ― | ― | (40 | ) | |||||||||||||||
Tax
effect from the exercise of
|
||||||||||||||||||||||||
common
stock options
|
― | ― | (540 | ) | ― | ― | (540 | ) | ||||||||||||||||
BALANCE
AS OF FEBRUARY 28, 2009
|
220,392 | 110,196 | 685,938 | 813,793 | (16,860 | ) | 1,593,067 | |||||||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||
Net
earnings
|
― | ― | ― | 281,668 | ― | 281,668 | ||||||||||||||||||
Retirement
benefit plans,
|
||||||||||||||||||||||||
net
of taxes of $1,556
|
― | ― | ― | ― | (2,686 | ) | (2,686 | ) | ||||||||||||||||
Total
comprehensive income
|
278,982 | |||||||||||||||||||||||
Share-based
compensation expense
|
― | ― | 31,589 | ― | ― | 31,589 | ||||||||||||||||||
Exercise
of common stock options
|
3,086 | 1,543 | 33,680 | ― | ― | 35,223 | ||||||||||||||||||
Shares
issued under stock
|
||||||||||||||||||||||||
incentive
plans
|
45 | 23 | 542 | ― | ― | 565 | ||||||||||||||||||
Shares
cancelled upon reacquisition
|
(457 | ) | (229 | ) | (3,687 | ) | ― | ― | (3,916 | ) | ||||||||||||||
Tax
effect from the exercise of
|
||||||||||||||||||||||||
common
stock options
|
― | ― | (1,928 | ) | ― | ― | (1,928 | ) | ||||||||||||||||
BALANCE
AS OF FEBRUARY 28, 2010
|
223,066 | $ | 111,533 | $ | 746,134 | $ | 1,095,461 | $ | (19,546 | ) | $ | 1,933,582 |
See
accompanying notes to consolidated financial statements.
46
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
BUSINESS
AND BACKGROUND
|
CarMax,
Inc. (“we”, “our”, “us”, “CarMax” and “the company”), including its wholly owned
subsidiaries, is the largest retailer of used vehicles in the United
States. We were the first used vehicle retailer to offer a large
selection of high quality used vehicles at competitively low, no-haggle prices
using a customer-friendly sales process in an attractive, modern sales
facility. At select locations we also sell new vehicles under various
franchise agreements. We provide customers with a full range of
related products and services, including the financing of vehicle purchases
through our own finance operation, CarMax Auto Finance (“CAF”), and third-party
lenders; the sale of extended service plans and accessories; the appraisal and
purchase of vehicles directly from consumers; and vehicle repair
service. Vehicles purchased through the appraisal process that do not
meet our retail standards are sold to licensed dealers through on-site wholesale
auctions.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
(A)
Basis of Presentation and Use of Estimates
The consolidated financial
statements include the accounts of CarMax and our wholly owned
subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation. The preparation of
financial statements in conformity with U.S. generally accepted accounting
principles (“GAAP”) requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses and
the disclosure of contingent assets and liabilities. Actual results
could differ from those estimates. Amounts and percentages may not
total due to rounding.
(B)
Cash and Cash Equivalents
Cash
equivalents of $0.5 million as of February 28, 2010, and $128.3 million as of
February 28, 2009, consisted of highly liquid investments with original
maturities of three months or less.
(C)
Securitizations
The
transfers of receivables associated with our auto loan securitization program
are accounted for as sales. We retain an interest in the auto loan
receivables that we securitize. The retained interest includes the
present value of the expected residual cash flows generated by the securitized
receivables, various reserve accounts, required excess receivables and retained
subordinated bonds. The retained interest is carried at fair value
and changes in fair value are included in earnings. See Notes 3 and 4
for additional discussion of securitizations.
As
described in Note 17, pursuant to Financial Accounting Standards Board (“FASB”)
Accounting Standards Updates (“ASUs”) 2009-16 and 2009-17, effective March 1,
2010, we will recognize existing and future transfers of auto loan receivables
into term securitizations as secured borrowings, which will result in recording
the auto loan receivables and the related notes payable to the investors on our
consolidated balance sheets. We will also account for future
transfers of receivables into our warehouse facility as secured borrowings
effective March 1, 2010.
(D)
Fair Value of Financial Instruments
Due to
the short-term nature and/or variable rates associated with these financial
instruments, the carrying value of our cash and cash equivalents, receivables
including auto loan receivables held for sale, restricted investments, accounts
payable, short-term debt and long-term debt approximates fair
value. Our retained interest in securitized receivables and financial
derivatives are recorded at fair value. See Note 6 for additional
discussion of fair value measurements.
(E)
Accounts Receivable
Accounts
receivable, net of an allowance for doubtful accounts, include certain amounts
due from third-party finance companies and customers, from new car manufacturers
for incentives, from third parties for warranty reimbursements and for other
miscellaneous receivables. The allowance for doubtful accounts is
estimated based on historical experience and trends.
(F)
Inventory
Inventory
is primarily comprised of vehicles held for sale or currently undergoing
reconditioning and is stated at the lower of cost or market. Vehicle
inventory cost is determined by specific identification. Parts and
labor used to recondition vehicles, as well as transportation and other
incremental expenses associated with acquiring and reconditioning vehicles, are
included in inventory. Certain manufacturer incentives and rebates
for new car inventory, including holdbacks, are recognized as a reduction to new
car inventory when we purchase the vehicles. We recognize
volume-based incentives as a reduction to cost of sales when we determine the
achievement of qualifying sales volumes is probable.
47
(G)
Property and Equipment
Property
and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are calculated using the
straight-line method over the shorter of the asset's estimated useful life or
the lease term, if applicable. Property held under capital lease is
stated at the lesser of the present value of the future minimum lease payments
at the inception of the lease or fair value. Amortization of capital
lease assets is computed on a straight-line basis over the shorter of the
initial lease term or the estimated useful life of the asset and is included in
depreciation expense. Costs incurred during new store construction
are capitalized as construction-in-progress and reclassified to the appropriate
fixed asset categories when the store is completed.
Estimated
Useful Lives
Life
|
||
Buildings
|
25
– 40 years
|
|
Capital
leases
|
15
– 20 years
|
|
Leasehold
improvements
|
8 –
15 years
|
|
Furniture,
fixtures and equipment
|
3 –
15 years
|
We review
long-lived assets for impairment when 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. In fiscal
2010, we recognized an impairment of $2.1 million related to an asset within
land held for sale. No impairment of long-lived assets resulted from
our impairment tests in fiscal 2009 or 2008.
(H)
Other Assets
Computer
Software Costs
We
capitalize external direct costs of materials and services used in, and payroll
and related costs for employees directly involved in the development of,
internal-use software. We amortize amounts capitalized on a
straight-line basis over five years.
Goodwill
and Intangible Assets
We review
goodwill and intangible assets for impairment annually or when circumstances
indicate the carrying amount may not be recoverable. See Note 15(A)
for additional information.
Restricted
Investments
Restricted
investments primarily consist of money market and other debt securities
associated with certain insurance programs. Due to the short-term
nature and/or variable rates associated with these financial instruments, the
carrying value approximates fair value. See Note 15(B) for additional
information.
(I)
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 deferred
revenue and 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 by independent actuaries using a number of assumptions provided by
CarMax. Key assumptions used in measuring the plan obligations
include the discount rate, rate of return on plan assets and mortality
rate.
(J)
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.
(K)
Revenue Recognition
We
recognize revenue when the earnings process is complete, generally either at the
time of sale to a customer or upon delivery to a customer. As part of
our customer service strategy, we guarantee the retail vehicles we sell with a
5-day, money-back guarantee. If a customer returns the vehicle
purchased within the parameters of the guarantee, we will refund the customer's
money. We record a reserve for returns based on historical experience
and trends.
48
We sell
extended service plans and guaranteed asset protection (“GAP”) on behalf of
unrelated third parties. The service plans have terms of coverage
ranging from 12 to 72 months, while GAP covers the customer for the entire term
of their finance contract. Because we are not the primary obligor
under these products, we recognize commission revenue at the time of sale, net
of a reserve for estimated customer returns. The reserve for returns
is based on historical experience and trends.
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.
(L)
Cost of Sales
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 and
repair costs associated with reconditioning and vehicle repair
services.
(M)
Selling, General and Administrative Expenses
Selling,
general and administrative (“SG&A”) expenses primarily include rent and
occupancy costs; payroll expenses, other than payroll related to reconditioning
and vehicle repair services; fringe benefits; advertising; and other general
expenses.
(N)
Advertising Expenses
Advertising
costs are expensed as incurred. Advertising expenses are included in
SG&A expenses. See Note 15(D) for additional
information.
(O)
Store Opening Expenses
Costs
related to store openings, including preopening costs, are expensed as incurred
and are included in SG&A expenses.
(P)
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. Prior to fiscal 2009, we
used the Black-Scholes valuation model for the directors’ plan. Key
assumptions used in estimating the fair value of options are dividend yield,
expected volatility, risk-free interest rate and expected term. The
fair value of restricted stock is based on the weighted average market value on
the date of the grant. The fair value of stock-settled restricted
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 market price of CarMax
common stock at 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 capital in excess of par value (if the tax deduction
exceeds the deferred tax asset) or in the consolidated statements of earnings
(if the deferred tax asset exceeds the tax deduction and no capital in excess of
par value exists from previous awards).
(Q)
Financial Derivatives
In
connection with certain securitization activities, we enter into derivative
agreements to manage our exposure to interest rates, to more closely match
funding costs to the use of funding and to limit the risk for investors in our
warehouse facility. We recognize the derivatives at fair value as
either current assets or current liabilities. 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 pursuant to a valid master netting
agreement. Changes in fair value of derivatives are included in
earnings as a component of CAF income.
49
(R)
Income Taxes
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
recognize tax liabilities when, despite our belief that our tax return positions
are supportable, we believe that certain 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 tax liabilities is
included in accrued income taxes and any noncurrent portion of tax liabilities
is included in deferred revenue and 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.
(S)
Net Earnings Per Share
Basic net
earnings per share is computed by dividing net earnings, less earnings allocated
to participating securities, by the weighted average number of shares of common
stock outstanding. Diluted net earnings per share is computed by
dividing net earnings, less earnings allocated to participating securities, by
the sum of the weighted average number of shares of common stock outstanding and
dilutive potential common stock. See Note 12 for additional
information.
(T)
Risks and Uncertainties
We sell
used and new vehicles. The diversity of our customers and suppliers
and the highly fragmented nature of the U.S. automotive retail market reduce the
risk that near term changes in our customer base, sources of supply or
competition will have a severe impact on our business. However,
unanticipated events could have an adverse effect on our business, results of
operations and financial condition.
(U)
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current year’s
presentation with no effect on net earnings.
50
3.
|
CARMAX
AUTO FINANCE INCOME
|
Years
Ended February 28 or 29
|
||||||||||||||||||||||||
(In
millions)
|
2010
|
%
|
2009
|
%
|
2008
|
%
|
||||||||||||||||||
Gain
on sales of loans originated and sold (1)(2)
|
$ | 83.0 | 4.5 | $ | 46.5 | 2.4 | $ | 58.1 | 2.4 | |||||||||||||||
Other
gains (losses) (1)
|
26.7 | (81.8 | ) | (9.6 | ) | |||||||||||||||||||
Total
gain (loss)
|
109.7 | (35.3 | ) | 48.5 | ||||||||||||||||||||
Other
CAF income: (3)
|
||||||||||||||||||||||||
Servicing
fee income
|
41.9 | 1.0 | 41.3 | 1.0 | 37.4 | 1.0 | ||||||||||||||||||
Interest
income
|
68.5 | 1.7 | 48.3 | 1.2 | 33.3 | 0.9 | ||||||||||||||||||
Total
other CAF income
|
110.4 | 2.7 | 89.6 | 2.2 | 70.7 | 2.0 | ||||||||||||||||||
Direct
CAF expenses: (3)
|
||||||||||||||||||||||||
CAF
payroll and fringe benefit expense
|
20.2 | 0.5 | 19.2 | 0.5 | 15.9 | 0.4 | ||||||||||||||||||
Other
direct CAF expenses
|
24.7 | 0.6 | 19.9 | 0.5 | 17.4 | 0.5 | ||||||||||||||||||
Total
direct CAF expenses
|
44.9 | 1.1 | 39.1 | 1.0 | 33.3 | 0.9 | ||||||||||||||||||
CarMax
Auto Finance income (4)
|
$ | 175.2 | 2.3 | $ | 15.3 | 0.2 | $ | 85.9 | 1.0 | |||||||||||||||
Total
loans originated and sold
|
$ | 1,855.3 | $ | 1,930.2 | $ | 2,430.8 | ||||||||||||||||||
Average
managed receivables
|
$ | 4,080.0 | $ | 4,021.0 | $ | 3,608.4 | ||||||||||||||||||
Ending
managed receivables
|
$ | 4,112.7 | $ | 3,986.7 | $ | 3,838.5 | ||||||||||||||||||
Total
net sales and operating revenues
|
$ | 7,470.2 | $ | 6,974.0 | $ | 8,199.6 |
(1)
|
To
the extent we recognize valuation or other adjustments related to loans
originated and sold during previous quarters of the same fiscal year, the
sum of amounts reported for the individual quarters may not equal the
amounts reported for the corresponding full fiscal
year.
|
Percent
columns indicate:
(2)
Percent of loans originated and sold (“gain
percentage”).
(3)
Percent of average managed receivables.
(4)
Percent of total net sales and operating revenues.
CAF
provides financing for qualified customers at competitive market rates of
interest. Throughout each month, we sell substantially all of the
loans originated by CAF in securitization transactions as discussed in Note
4. The majority of CAF income has typically been generated by the
spread between the interest rates charged to customers and the related cost of
funds. A gain, recorded at the time of securitization, results from
recording a receivable approximately equal to the present value of the expected
residual cash flows generated by the securitized receivables. The
cash flows are calculated taking into account expected prepayments, losses and
funding costs.
The gain
on sales of loans originated and sold includes both the gain income recorded at
the time of securitization and the effect of any subsequent changes in valuation
assumptions or funding costs that are incurred in the same fiscal period that
the loans were originated. Other gains or losses include the effects
of changes in valuation assumptions or funding costs related to loans originated
and sold during previous fiscal periods. In addition, other gains or
losses could include the effects of new term securitizations, changes in the
valuation of retained subordinated bonds and the repurchase and resale of
receivables in existing term securitizations, as applicable.
CAF
income does not include any allocation of indirect costs or
income. We present this information on a direct basis to avoid making
arbitrary decisions regarding the indirect benefits or costs that could be
attributed to CAF. Examples of indirect costs not included are retail
store expenses and corporate expenses such as human resources,
administrative services, marketing, information systems, accounting, legal,
treasury and executive payroll.
51
4.
|
SECURITIZATIONS
|
We
maintain a revolving securitization program (“warehouse facility”) that
currently provides financing of up to $1.2 billion to fund substantially all of
the auto loan receivables originated by CAF until they can be funded through a
term securitization or alternative funding arrangement. We sell the
auto loan receivables to a wholly owned, bankruptcy-remote, special purpose
entity that transfers an undivided interest in the receivables to entities
formed by third-party investors (“bank conduits”). The bank conduits
issue asset-backed commercial paper supported by the transferred receivables,
and the proceeds from the sale of the commercial paper are used to pay for the
securitized receivables. The return requirements of investors in the
bank conduits could fluctuate significantly depending on market
conditions. The warehouse facility has a 364-day term ending in
August 2010. At renewal, the cost, structure and capacity of the
facility could change. These changes could have a significant impact
on our funding costs.
The bank
conduits may be considered variable interest entities, but are not consolidated
because we are not the primary beneficiary and our interest does not constitute
a variable interest in the entities. We hold a variable interest in
specified assets transferred to the entities rather than interests in the
entities themselves.
Historically,
we have used term securitizations to refinance the receivables previously
securitized through the warehouse facility. The purpose of term
securitizations is to provide permanent funding for these
receivables. In these transactions, a pool of auto loan receivables
is sold to a bankruptcy-remote, special purpose entity that in turn transfers
the receivables to a special purpose securitization trust. The
securitization trust issues asset-backed securities, secured or otherwise
supported by the transferred receivables, and the proceeds from the sale of the
securities are used to pay for the securitized
receivables. Refinancing receivables in a term securitization could
have a significant impact on our results of operations depending on the
transaction structure and market conditions.
The
warehouse facility and each term securitization are governed by various legal
documents that limit and specify the activities of the special purpose entities
and securitization trusts (collectively, “securitization vehicles”) used to
facilitate the securitizations. The securitization vehicles are
generally allowed to acquire the receivables being sold to them, issue
asset-backed securities to investors to fund the acquisition of the receivables
and enter into derivatives or other yield maintenance contracts to hedge or
mitigate certain risks related to the pool of receivables or asset-backed
securities. Additionally, the securitization vehicles are required to
service the receivables they hold and the securities they have
issued. These servicing functions are performed by CarMax as
appointed within the underlying legal documents. Servicing functions
include, but are not limited to, collecting payments from borrowers, monitoring
delinquencies, liquidating assets, investing funds until distribution, remitting
payments to the trustee who in turn remits payments to the investors, and
accounting for and reporting information to investors.
Ending
Managed Receivables
As
of February 28 or 29
|
||||||||||||
(In
millions)
|
2010
|
2009
|
2008
|
|||||||||
Warehouse
facility
|
$ | 331.0 | $ | 1,215.0 | $ | 854.5 | ||||||
Term
securitizations
|
3,615.6 | 2,616.9 | 2,910.0 | |||||||||
Loans
held for investment
|
135.5 | 145.1 | 69.0 | |||||||||
Loans
held for sale
|
30.6 | 9.7 | 5.0 | |||||||||
Total
ending managed receivables
|
$ | 4,112.7 | $ | 3,986.7 | $ | 3,838.5 |
The special purpose entities and investors have no recourse to our assets. Our risk under these arrangements is limited to the retained interest. We have not provided financial or other support to the special purpose entities or investors that was not previously contractually required. There are no additional arrangements, guarantees or other commitments that could require us to provide financial support or that would affect the fair value of our retained interest. All transfers of receivables are accounted for as sales. When the receivables are securitized, we recognize a gain or loss on the sale of the receivables as described in Note 3. However, as described in Note 17, pursuant to ASUs 2009-16 and 2009-17, the transferred auto loan receivables, and the related non-recourse notes payable to the investors, will be accounted for as secured borrowings effective March 1, 2010, and will be reported on our consolidated balance sheets.
Retained
Interest
We retain
an interest in the auto loan receivables that we securitize. The
retained interest includes the present value of the expected residual cash flows
generated by the securitized receivables, or “interest-only strip receivables,”
various reserve accounts, required excess receivables and retained subordinated
bonds, as described below. As of February 28, 2010, on a combined
basis, the reserve accounts and required excess receivables were 4.3% of managed
receivables. The interest-only strip receivables, reserve accounts
and required excess receivables serve as a credit enhancement for the benefit of
the investors in the securitized receivables.
52
The fair
value of the retained interest was $552.4 million as of
February 28, 2010, and $348.3 million as of February 28,
2009. Additional information on fair value measurements is included
in Note 6. The receivables underlying the retained interest had a
weighted average life of 1.5 years as of both February 28, 2010 and
2009. The weighted average life in periods (for example, months or
years) of prepayable assets is calculated by multiplying the principal
collections expected in each future period by the number of periods until that
future period, summing those products and dividing the sum by the initial
principal balance.
Interest-Only
Strip Receivables. Interest-only strip receivables represent
the present value of residual cash flows we expect to receive over the life of
the securitized receivables. The value of these receivables is
determined by estimating the future cash flows using our assumptions of key
factors, such as finance charge income, loss rates, prepayment rates, funding
costs and discount rates appropriate for the type of asset and
risk. The value of interest-only strip receivables could be affected
by external factors, such as changes in the behavior patterns of customers,
changes in the strength of the economy and developments in the interest rate and
credit markets; therefore, actual performance could differ from these
assumptions. We evaluate the performance of the receivables relative
to these assumptions on a regular basis. Any financial impact
resulting from a change in performance is recognized in earnings in the period
in which it occurs.
Reserve
Accounts. We are required to fund various reserve accounts
established for the benefit of the securitization investors. In the
event that the cash generated by the securitized 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. In general, each of our term securitizations requires that
an amount equal to a specified percentage of the original balance of the
securitized receivables be deposited in a reserve account on the closing
date. An amount equal to a specified percentage of funded receivables
is also required in our warehouse facility. Any excess cash generated
by the receivables must be used to fund the reserve account to the extent
necessary to maintain the required amount. If the amount on deposit
in the reserve account exceeds the required amount, the excess is released
through the special purpose entity to us. In the term
securitizations, the amount required to be on deposit in the reserve account
must equal or exceed a specified floor amount. The reserve account
remains funded until the investors are paid in full, at which time the remaining
balance is released through the special purpose entity to us. The
amount on deposit in reserve accounts was $47.4 million as of
February 28, 2010, and $41.4 million as of
February 28, 2009.
Required Excess
Receivables. The total value of the securitized receivables
must exceed the principal amount owed to the investors by a specified
amount. The required excess receivables balance represents this
specified amount. Any cash flows generated by the required excess
receivables are used, if needed, to make payments to the
investors. Any remaining cash flows from the required excess
receivables are released through the special purpose entity to
us. The unpaid principal balance related to the required excess
receivables was $129.5 million as of February 28, 2010, and $139.1
million as of February 28, 2009.
Retained
Subordinated Bonds. Between January 2008
and April 2009, we retained some or all of the subordinated bonds associated
with our term securitizations. We receive periodic interest payments
on certain bonds. The bonds are carried at fair value and changes in
fair value are included in earnings as a component of CAF income. We
base our valuation on observable market prices of the same or similar
instruments when available; however, observable market prices are not
consistently available for these assets. Our current valuations are
primarily based on an average of three non-binding, current market spread quotes
from third-party investment banks. By applying these average spreads
to current bond benchmarks, as determined through the use of a widely accepted
third-party bond pricing model, we have measured a current fair
value. The fair value of retained subordinated bonds was $248.8
million as of February 28, 2010, and $87.4 million as of
February 28, 2009.
Key
Assumptions Used in Measuring the Fair Value of the Retained Interest and
Sensitivity Analysis
The
following table shows the key economic assumptions used in measuring the fair
value of the retained interest as of February 28, 2010, and a sensitivity
analysis showing the hypothetical effect on the retained interest if there were
unfavorable variations from the assumptions used. These sensitivity
analyses are hypothetical and should be used with caution. In this
table, the effect of a variation in a particular assumption on the fair value of
the retained interest is calculated without changing any other assumption; in
actual circumstances, changes in one factor could result in changes in another,
which might magnify or counteract the sensitivities.
53
Key
Assumptions
Impact
on
|
Impact
on
|
|||||||||||
Fair
Value of
|
Fair
Value of
|
|||||||||||
Assumptions
|
10%
Adverse
|
20%
Adverse
|
||||||||||
(In
millions)
|
Used
|
Change
|
Change
|
|||||||||
Prepayment
rate
|
1.20% - 1.40 | % | $ | 9.7 | $ | 19.5 | ||||||
Cumulative
net loss rate
|
2.00% - 4.00 | % | $ | 8.9 | $ | 17.8 | ||||||
Annual
discount rate
|
15.00% - 19.00 | % | $ | 6.1 | $ | 12.0 | ||||||
Warehouse
facility costs
(1)
|
2.68 | % | $ | 1.5 | $ | 3.0 |
(1)
|
Expressed
as a spread above appropriate benchmark rates. Applies only to
retained interest in receivables securitized through the warehouse
facility. As of February 28, 2010, $331.0 million of auto loan
receivables were funded in the warehouse
facility.
|
Prepayment
Rate. We use the Absolute Prepayment Model or “ABS” to
estimate prepayments. This model assumes a rate of prepayment each
month relative to the original number of receivables in a pool of
receivables. ABS further assumes that all the receivables are the
same size and amortize at the same rate and that each receivable in each month
of its life will either be paid as scheduled or prepaid in full. For
example, in a pool of receivables originally containing 10,000 receivables, a 1%
ABS rate means that 100 receivables prepay each month.
Cumulative Net
Loss Rate. The cumulative net loss rate, or “static pool” net
losses, is calculated by dividing the total projected credit losses of a pool of
receivables, net of recoveries, by the original pool
balance. Projected net credit losses are estimated using the losses
experienced to date, the credit quality of the receivables, economic factors and
the performance history of similar receivables.
Annual Discount
Rate. The annual discount rate is the interest rate used for
computing the present value of future cash flows and is determined based on the
perceived market risk of the underlying auto loan receivables, current market
conditions and input from third-party investment banks.
Warehouse
Facility Costs. While receivables are securitized in the
warehouse facility, our retained interest is exposed to changes in credit
spreads and other variable funding costs. The warehouse facility
costs are expressed as a spread above applicable benchmark rates.
Continuing
Involvement with Securitized Receivables
We
continue to manage the auto loan receivables that we securitize. We
receive servicing fees of approximately 1% of the outstanding principal balance
of the securitized receivables. We believe that the servicing fees
specified in the securitization agreements adequately compensate us for
servicing the securitized receivables. No servicing asset or
liability has been recorded. We are at risk for the retained interest
in the securitized receivables and, if the securitized receivables do not
perform as originally projected, the value of the retained interest would be
impacted.
Past
Due Account Information
As
of February 28 or 29
|
||||||||||||
(In
millions)
|
2010
|
2009
|
2008
|
|||||||||
Accounts
31+ days past due
|
$ | 133.2 | $ | 118.1 | $ | 86.1 | ||||||
Ending
managed receivables
|
$ | 4,112.7 | $ | 3,986.7 | $ | 3,838.5 | ||||||
Past
due accounts as a percentage of ending managed
|
||||||||||||
receivables
|
3.24 | % | 2.96 | % | 2.24 | % |
Credit
Loss Information
Years
Ended February 28 or 29
|
||||||||||||
(In
millions)
|
2010
|
2009
|
2008
|
|||||||||
Net
credit losses on managed receivables
|
$ | 70.1 | $ | 69.8 | $ | 38.3 | ||||||
Average
managed receivables
|
$ | 4,080.0 | $ | 4,021.0 | $ | 3,608.4 | ||||||
Net
credit losses as a percentage of average managed
|
||||||||||||
receivables
|
1.72 | % | 1.74 | % | 1.06 | % | ||||||
Average
recovery rate
|
49.8 | % | 44.0 | % | 50.2 | % |
54
Selected
Cash Flows from Securitized Receivables
Years
Ended February 28 or 29
|
||||||||||||
(In
millions)
|
2010
|
2009
|
2008
|
|||||||||
Proceeds
from new securitizations
|
$ | 1,647.0 | $ | 1,622.8 | $ | 2,040.2 | ||||||
Proceeds
from collections
|
$ | 779.2 | $ | 840.6 | $ | 1,095.0 | ||||||
Servicing
fees received
|
$ | 41.8 | $ | 41.3 | $ | 37.0 | ||||||
Other
cash flows received from the retained interest:
|
||||||||||||
Interest-only
strip and excess receivables
|
$ | 131.0 | $ | 96.7 | $ | 98.6 | ||||||
Reserve
account releases
|
$ | 16.6 | $ | 6.4 | $ | 9.4 | ||||||
Interest
on retained subordinated bonds
|
$ | 9.5 | $ | 7.5 | $ | 0.2 |
Proceeds
from New Securitizations. Proceeds from new
securitizations include proceeds from receivables that are newly securitized in
or refinanced through the warehouse facility during the indicated
period. Balances previously outstanding in term securitizations that
were refinanced through the warehouse facility totaled $76.0 million in fiscal
2010, $101.0 million in fiscal 2009 and $103.6 million in fiscal
2008. Proceeds received when we refinance receivables from the
warehouse facility are excluded from this table as they are not considered new
securitizations.
Proceeds from
Collections. Proceeds from collections represent principal
amounts collected on receivables securitized through the warehouse facility that
are used to fund new originations.
Servicing Fees
Received. Servicing fees received represent cash fees paid to
us to service the securitized receivables.
Other Cash Flows
Received from the Retained Interest. Other cash flows received
from the retained interest represents cash that we receive from the securitized
receivables other than servicing fees. It includes cash collected on
interest-only strip and excess receivables, amounts released to us from reserve
accounts and interest on retained subordinated bonds.
The
information in the following table represents selected performance data for
CAF’s securitized receivables. It includes information for both
receivables securitized through term securitizations and receivables securitized
through the warehouse facility.
Selected
Performance Information for Securitized Receivables
Years
Ended February 28 or 29
|
||||||||||||||||||||||||
(In
millions)
|
2010 | % | (1) | 2009 | % | (1) | 2008 | % | (1) | |||||||||||||||
Finance
and fee income
|
$ | 433.2 | 10.7 | $ | 419.5 | 10.5 | $ | 369.0 | 10.3 | |||||||||||||||
Interest
expense
|
(168.5 | ) | (4.1 | ) | (188.1 | ) | (4.7 | ) | (178.8 | ) | (5.0 | ) | ||||||||||||
Net
charge-offs
|
(73.9 | ) | (1.8 | ) | (72.3 | ) | (1.8 | ) | (40.5 | ) | (1.1 | ) | ||||||||||||
Net
interest margin
|
$ | 190.8 | 4.7 | $ | 159.1 | 4.0 | $ | 149.7 | 4.2 | |||||||||||||||
Average
securitized receivables (2)
|
$ | 4,060.8 | $ | 4,002.4 | $ | 3,590.5 |
(1)
|
Percent
of average securitized receivables.
|
(2)
|
Excludes
auto loan receivables held for sale and auto loan receivables not eligible
for securitization through the warehouse facility or term
securitizations.
|
Finance and Fee
Income. Finance and fee income includes interest
and fees charged to customers on the auto loan receivables, including late fees
and insufficient funds fees.
Interest
Expense. Interest expense includes interest paid to
securitization investors and lending institutions and other expenses
associated with securitization activities, net of interest income earned on
restricted cash and reserve deposits.
Net
Charge-Offs. Net charge-offs includes the write-off of
outstanding principal balances on uncollectible accounts, offset by subsequent
recoveries of previously charged-off accounts.
55
Financial
Covenants and Performance Triggers
The
securitization agreement related to the warehouse facility includes various
financial covenants and performance triggers. The financial covenants
include a maximum total liabilities to tangible net worth ratio and a minimum
fixed charge coverage ratio. Performance triggers require that the
pool of securitized receivables in the warehouse facility achieve specified
thresholds related to portfolio yield, loss rate and delinquency
rate. If these financial covenants and/or thresholds are not met, we
could be unable to continue to securitize receivables through the warehouse
facility. In addition, the warehouse facility investors would charge
us a higher rate of interest and could have us replaced as
servicer. Further, we could be required to deposit collections on the
securitized receivables with the warehouse agent on a daily basis and deliver
executed lockbox agreements to the warehouse facility agent. As of
February 28, 2010, we were in compliance with the financial covenants
and the securitized receivables were in compliance with the performance
triggers.
5.
|
FINANCIAL
DERIVATIVES
|
We
utilize derivatives relating to our auto loan receivable securitizations and our
investment in certain retained subordinated bonds. Interest rate
swaps are used to better match funding costs to the interest on the fixed-rate
receivables being securitized and the retained subordinated bonds, and to
minimize the funding costs related to certain of our securitization
trusts. Swaps related to receivables funded in the warehouse facility
are unwound when those receivables are refinanced in a term
securitization. During fiscal 2010, we entered into 80 interest rate
swaps with initial notional amounts totaling $1.86 billion and terms ranging
from 15 to 41 months. The notional amount of outstanding swaps
totaled $473.6 million as of February 28, 2010, and $1.36 billion as of February
28, 2009. Interest rate caps are used to limit risk for investors in
our warehouse facility. During fiscal 2010, we entered into six
interest rate caps, with terms ranging from 48 to 53 months. As of
February 28, 2010, we were party to six interest rate caps, three of which were
assets and three were liabilities, and as a result the net effect on the
consolidated balance sheet was not material.
Fair
Value of Derivative Instruments (1)
As
of February 28
|
|||||||||
(In
thousands)
|
Consolidated
Balance Sheets
|
2010
|
2009
|
||||||
Asset
derivatives:
|
|||||||||
Interest
rate swaps
|
Retained
interest in securitized receivables
|
$ | ― | $ | 33 | ||||
Interest
rate swaps
|
Prepaid
expenses and other current assets
|
1,279 | ― | ||||||
Interest
rate swaps
|
Accounts
payable
|
― | 52 | ||||||
Interest
rate caps
|
Prepaid
expenses and other current assets
|
1,999 | ― | ||||||
Liability
derivatives:
|
|||||||||
Interest
rate swaps
|
Accounts
payable
|
(7,171 | ) | (30,590 | ) | ||||
Interest
rate caps
|
Prepaid
expenses and other current assets
|
(1,982 | ) | ― | |||||
Total
|
$ | (5,875 | ) | $ | (30,505 | ) |
Changes in
Fair Value of Derivative Instruments (1)
Years
Ended February 28 or 29
|
|||||||||||||
(In
thousands)
|
Consolidated
Statements of Earnings
|
2010
|
2009
|
2008
|
|||||||||
Loss
on derivatives
|
CarMax
Auto Finance income
|
$ | (8,547 | ) | $ | (15,214 | ) | $ | (14,107 | ) |
(1)
|
Additional
information on fair value measurements is included in Note
6.
|
The
market and credit risks associated with interest rate swaps and caps are similar
to those relating to other types of financial instruments. Market
risk is the exposure created by potential fluctuations in interest
rates. We do not anticipate significant market risk from swaps as
they are predominantly used to match funding costs to the use of the
funding. However, disruptions in the credit markets could impact the
effectiveness of our hedging strategies. Credit risk is the exposure
to nonperformance of another party to an agreement. We mitigate
credit risk by dealing with highly rated bank counterparties.
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.
56
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 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 either cash and cash equivalents or
other assets, and consist of highly liquid investments with original maturities
of three months or less. We use quoted market prices for identical
assets to measure fair value. Therefore, all money market securities
are classified as Level 1.
Retained Interest
in Securitized Receivables. We retain an interest in the auto
loan receivables that we securitize, including interest-only strip receivables,
various reserve accounts, required excess receivables and retained subordinated
bonds. Excluding the retained subordinated bonds, we estimate the
fair value of the retained interest using internal valuation
models. These models include a combination of market inputs and our
own assumptions as described in Note 4. As the valuation models
include significant unobservable inputs, we classified the retained interest as
Level 3.
For the
retained subordinated bonds, we base our valuation on observable market prices
for similar assets when available. Otherwise, our valuations are
based on input from independent third parties and internal valuation models, as
described in Note 4. As the key assumption used in the valuation is
currently based on unobservable inputs, we classified the retained subordinated
bonds as Level 3.
Financial
Derivatives. Financial derivatives are included in either
prepaid expenses and other current assets or accounts payable. As
part of our risk management strategy, we utilize derivatives relating to our
auto loan receivable securitizations and our investment in certain retained
subordinated bonds. Interest rate swaps are used to better match
funding costs to the interest on the fixed-rate receivables being securitized
and the retained subordinated bonds and to minimize the funding costs related to
certain of our securitization trusts. Interest rate caps are used to
limit risk for investors in our warehouse facility. 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. We validate
these quotes using our own internal model. Both our internal model
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. Because model inputs can typically be observed in the
liquid market and the models do not require significant judgment, these
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.
57
Items
Measured at Fair Value on a Recurring Basis
As
of February 28, 2010
|
||||||||||||||||
(In
millions)
|
Level
1
|
Level
2
|
Level
3
|
Total
|
||||||||||||
ASSETS
|
||||||||||||||||
Money
market securities
|
$ | 31.2 | $ | ― | $ | ― | $ | 31.2 | ||||||||
Retained
interest in securitized receivables
|
― | ― | 552.4 | 552.4 | ||||||||||||
Financial
derivatives
|
― | 1.3 | ― | 1.3 | ||||||||||||
Total
assets at fair value
|
$ | 31.2 | $ | 1.3 | $ | 552.4 | $ | 584.9 | ||||||||
Percent
of total assets at fair value
|
5.3 | % | 0.3 | % | 94.4 | % | 100.0 | % | ||||||||
Percent
of total assets
|
1.2 | % | 0.1 | % | 21.6 | % | 22.9 | % | ||||||||
LIABILITIES
|
||||||||||||||||
Financial
derivatives
|
$ | ― | $ | 7.2 | $ | ― | $ | 7.2 | ||||||||
Total
liabilities at fair value
|
$ | ― | $ | 7.2 | $ | ― | $ | 7.2 | ||||||||
Percent
of total liabilities
|
― | % | 1.2 | % | ― | % | 1.2 | % |
Changes
in Level 3 Assets Measured at Fair Value on a Recurring Basis
(In
millions)
|
Retained
interest in securitized receivables
|
|||
Balance
as of March 1, 2009
|
$ | 348.3 | ||
Total
realized/unrealized gains (1)
|
80.1 | |||
Purchases,
sales, issuances and settlements, net
|
124.0 | |||
Balance
as of February 28, 2010
|
$ | 552.4 | ||
Change
in unrealized gains on assets still held (1)
|
$ | 71.9 |
(1)
Reported in CarMax Auto Finance income in the consolidated statements of
earnings.
7.
|
PROPERTY
AND EQUIPMENT
|
As
of February 28
|
||||||||
(In
thousands)
|
2010
|
2009
|
||||||
Land
|
$ | 211,132 | $ | 198,809 | ||||
Land
held for sale
|
11,945 | 1,432 | ||||||
Land
held for development
|
38,464 | 38,200 | ||||||
Buildings
|
519,907 | 509,682 | ||||||
Capital
leases
|
30,640 | 30,640 | ||||||
Leasehold
improvements
|
85,955 | 83,823 | ||||||
Furniture,
fixtures and equipment
|
236,194 | 230,552 | ||||||
Construction
in progress
|
37,137 | 71,289 | ||||||
Total
property and equipment
|
1,171,374 | 1,164,427 | ||||||
Less
accumulated depreciation and amortization
|
277,921 | 226,168 | ||||||
Property
and equipment, net
|
$ | 893,453 | $ | 938,259 |
Land held
for development represents land owned for potential expansion. Leased
property meeting capital lease criteria is capitalized and the present value of
the related lease payments is recorded as long-term debt. Accumulated
amortization on capital lease assets was $9.6 million as of
February 28, 2010, and $7.9 million as of
February 28, 2009.
58
8.
|
INCOME
TAXES
|
Income
Tax Provision
Years
Ended February 28 or 29
|
||||||||||||
(In
thousands)
|
2010
|
2009
|
2008
|
|||||||||
Current:
|
||||||||||||
Federal
|
$ | 123,215 | $ | 69,095 | $ | 121,274 | ||||||
State
|
17,852 | 9,992 | 18,175 | |||||||||
Total
|
141,067 | 79,087 | 139,449 | |||||||||
Deferred:
|
||||||||||||
Federal
|
27,805 | (37,835 | ) | (21,222 | ) | |||||||
State
|
1,956 | (3,667 | ) | (3,183 | ) | |||||||
Total
|
29,761 | (41,502 | ) | (24,405 | ) | |||||||
Income
tax provision
|
$ | 170,828 | $ | 37,585 | $ | 115,044 |
Effective
Income Tax Rate Reconciliation
Years
Ended February 28 or 29
|
||||||||||||
2010
|
2009
|
2008
|
||||||||||
Federal
statutory income tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State
and local income taxes, net of federal benefit
|
3.0 | 2.7 | 3.1 | |||||||||
Nondeductible
and other items
|
(0.2 | ) | 0.3 | 0.1 | ||||||||
Valuation
allowance
|
― | 0.8 | 0.5 | |||||||||
Effective
income tax rate
|
37.8 | % | 38.8 | % | 38.7 | % |
Temporary
Differences Resulting in Deferred Tax Assets and Liabilities
As
of February 28
|
||||||||
(In
thousands)
|
2010
|
2009
|
||||||
Deferred
tax assets:
|
||||||||
Accrued
expenses
|
$ | 33,795 | $ | 27,914 | ||||
Partnership
basis
|
15,286 | 44,376 | ||||||
Inventory
|
1,960 | 2,108 | ||||||
Stock
compensation
|
44,526 | 45,687 | ||||||
Capital
loss carry forward
|
2,514 | 2,413 | ||||||
Total
gross deferred tax assets
|
98,081 | 122,498 | ||||||
Less: valuation
allowance
|
(2,514 | ) | (2,413 | ) | ||||
Net
gross deferred tax assets
|
95,567 | 120,085 | ||||||
Deferred
tax liabilities:
|
||||||||
Securitized
receivables
|
― | 18,620 | ||||||
Prepaid
expenses
|
8,832 | 8,168 | ||||||
Depreciation
and amortization
|
21,763 | 2,263 | ||||||
Other
|
2,143 | ― | ||||||
Total
gross deferred tax liabilities
|
32,738 | 29,051 | ||||||
Net
deferred tax asset
|
$ | 62,829 | $ | 91,034 |
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 will generate
sufficient taxable income to realize the deferred tax assets. The
valuation allowance as of February 28, 2010, relates to capital loss
carryforwards that are not more likely than not to be utilized prior to their
expiration.
As of
March 1, 2007, we adopted an accounting pronouncement related to FASB ASC Topic
740, “Income Taxes,” which established a consistent framework for determining
the appropriate level of tax reserves to maintain for “uncertain tax positions”
(formerly FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”)). Topic 740 uses a two-step approach in which a tax
benefit is recognized if a position is more likely than not to be
sustained. The amount of the benefit is then measured as the highest
tax benefit that is greater than 50% likely to be realized upon
settlement. Topic 740 also established new disclosure requirements
related to tax reserves. In accordance with Topic 740, we recorded a
decrease of $0.4 million in accrued tax reserves and a corresponding increase in
retained earnings in fiscal 2008.
59
Reconciliation
of Unrecognized Tax Benefits
Years
Ended February 28 or 29
|
||||||||||||
(In
thousands)
|
2010
|
2009
|
2008
|
|||||||||
Balance
at beginning of year
|
$ | 25,584 | $ | 32,669 | $ | 24,957 | ||||||
Increases
for tax positions of prior years
|
4,756 | 10,757 | 12,485 | |||||||||
Decreases
for tax positions of prior years
|
(5,114 | ) | (10,265 | ) | (6,321 | ) | ||||||
Increases
based on tax positions related to the current year
|
6,186 | 136 | 1,608 | |||||||||
Settlements
|
(9,460 | ) | (7,713 | ) | (60 | ) | ||||||
Balance
at end of year
|
$ | 21,952 | $ | 25,584 | $ | 32,669 |
As of
February 28, 2010, we had $22.0 million of gross unrecognized tax benefits, $1.7
million of which, if recognized, would affect our effective tax
rate. It is reasonably possible that the amount of the unrecognized
tax benefit with respect to certain of our uncertain tax positions 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, 2009, we had $25.6 million of gross
unrecognized tax benefits, $2.6 million of which, if recognized, would affect
our effective tax rate. As of February 29, 2008, we had $32.7 million
of gross unrecognized tax benefits, $2.8 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. In fiscal 2010, our accrual for
interest decreased $2.1 million to $3.1 million as of February 28, 2010,
from $5.2 million as of February 28, 2009. In fiscal 2009,
our accrual for interest decreased $0.4 million to $5.2 million as of
February 28, 2009, from $5.6 million as of
February 29, 2008.
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 2004.
9.
|
BENEFIT
PLANS
|
(A)
Retirement Benefit Plans
We have a
noncontributory defined benefit pension plan (the “pension plan”) covering the
majority of full-time associates. We also have an unfunded
nonqualified plan (the “restoration plan”) that restores retirement benefits for
certain associates who are affected by Internal Revenue Code limitations on
benefits provided under the pension plan. We use a fiscal year end
measurement date for both the pension plan and the restoration
plan.
Effective
December 31, 2008, we froze both the pension plan and the restoration
plan. No additional benefits have accrued under these plans since
that date. These changes resulted in the recognition of a non-cash
net curtailment gain of $7.4 million in fiscal 2009. In connection
with benefits earned prior to the freeze, we have a continuing obligation to
fund the pension plan and will continue to recognize net periodic pension
expense for both plans.
60
Benefit
Plan Information
Years
Ended February 28
|
||||||||||||||||||||||||
Pension
Plan
|
Restoration
Plan
|
Total
|
||||||||||||||||||||||
(In
thousands)
|
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
||||||||||||||||||
Change
in projected benefit
|
||||||||||||||||||||||||
obligation:
|
||||||||||||||||||||||||
Obligation
at beginning of year
|
$ | 83,766 | $ | 103,342 | $ | 8,930 | $ | 12,244 | $ | 92,696 | $ | 115,586 | ||||||||||||
Service
cost
|
― | 10,548 | ― | 832 | ― | 11,380 | ||||||||||||||||||
Interest
cost
|
5,710 | 6,343 | 605 | 739 | 6,315 | 7,082 | ||||||||||||||||||
Actuarial
loss (gain)
|
19,540 | (2,691 | ) | (671 | ) | 2,809 | 18,869 | 118 | ||||||||||||||||
Curtailment
gain
|
― | (32,857 | ) | ― | (7,521 | ) | ― | (40,378 | ) | |||||||||||||||
Benefits
paid
|
(1,214 | ) | (919 | ) | (173 | ) | (173 | ) | (1,387 | ) | (1,092 | ) | ||||||||||||
Obligation
at end of year
|
107,802 | 83,766 | 8,691 | 8,930 | 116,493 | 92,696 | ||||||||||||||||||
Change
in fair value of plan assets:
|
||||||||||||||||||||||||
Plan
assets at beginning of year
|
42,789 | 54,769 | ― | ― | 42,789 | 54,769 | ||||||||||||||||||
Actual
return on plan assets
|
21,112 | (26,667 | ) | ― | ― | 21,112 | (26,667 | ) | ||||||||||||||||
Employer
contributions
|
15,036 | 15,606 | 173 | 173 | 15,209 | 15,779 | ||||||||||||||||||
Benefits
paid
|
(1,214 | ) | (919 | ) | (173 | ) | (173 | ) | (1,387 | ) | (1,092 | ) | ||||||||||||
Plan
assets at end of year
|
77,723 | 42,789 | ― | ― | 77,723 | 42,789 | ||||||||||||||||||
Funded status
recognized
|
$ | (30,079 | ) | $ | (40,977 | ) | $ | (8,691 | ) | $ | (8,930 | ) | $ | (38,770 | ) | $ | (49,907 | ) | ||||||
Amounts
recognized in the consolidated
balance sheets:
|
||||||||||||||||||||||||
Current
liability
|
$ | ― | $ | ― | $ | (406 | ) | $ | (336 | ) | $ | (406 | ) | $ | (336 | ) | ||||||||
Noncurrent
liability
|
(30,079 | ) | (40,977 | ) | (8,285 | ) | (8,594 | ) | (38,364 | ) | (49,571 | ) | ||||||||||||
Net
amount recognized
|
$ | (30,079 | ) | $ | (40,977 | ) | $ | (8,691 | ) | $ | (8,930 | ) | $ | (38,770 | ) | $ | (49,907 | ) | ||||||
Accumulated benefit
obligation
|
$ | 107,802 | $ | 83,766 | $ | 8,691 | $ | 8,930 | $ | 116,493 | $ | 92,696 |
Benefit
Obligations. Accumulated and
projected benefit obligations (“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 as
of December 31, 2008, the ABO and PBO balances are equal to one another at all
subsequent dates.
Assumptions
Used to Determine Benefit Obligations
As
of February 28
|
||||||||||||||||
Pension
Plan
|
Restoration
Plan
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Discount
rate
|
6.10 | % | 6.85 | % | 6.10 | % | 6.85 | % |
Plan
Assets. The fair value of plan assets is measured using
current market values. Our pension plan assets are held in trust and
management sets the investment policies and strategies. Long-term
strategic investment objectives include asset preservation and appropriately
balancing risk and return. We oversee the investment allocation
process, which includes selecting investment managers, setting long-term
strategic targets and monitoring asset allocations and
performance. Target allocations for plan assets are guidelines, not
limitations, and occasionally plan fiduciaries will approve allocations above or
below the targets. We target allocating 75% of plan assets to equity
and 25% to fixed income securities. Equity securities are currently
composed of 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 mutual funds that include investments in debt securities, mortgage-backed
securities, corporate bonds and other debt obligations primarily in the United
States. We do not expect any plan assets to be returned to us during
the fiscal year ended February 28, 2011.
61
Fair
Value of Plan Assets
Quoted
Prices in Active markets For identical Assets (Level 1)
As
of
|
||||
(In
thousands)
|
February
28, 2010
|
|||
Cash
and cash equivalents
|
$ | 861 | ||
Investment
income receivables, net
|
3 | |||
Mutual
funds:
|
||||
Equity
securities (1)
|
46,539 | |||
Equity
securities – international (2)
|
10,882 | |||
Fixed
income securities (3)
|
19,438 | |||
Total
|
$ | 77,723 |
(1)
|
Includes
large-, mid- and small-cap companies primarily from diverse U.S.
industries including pharmaceuticals, banks, computers,
telecommunications, internet and commercial and business services sectors;
approximately 85% of securities relate to U.S. entities and 15% of
securities relate to non-U.S.
entities.
|
(2)
|
Consists
of equity securities of primarily foreign corporations from diverse
industries including commercial and business services, financial services,
banks, oil and gas, and mining sectors; approximately 95% of securities
relate to non-U.S. entities and 5% of securities relate to U.S.
entities.
|
(3)
|
Includes
debt securities of U.S. and foreign governments, their agencies and
corporations, and diverse investments in mortgage-backed securities,
corporate bonds, and other debt obligations; approximately 75% of
securities relate to U.S. entities and 25% of securities relate to
non-U.S. entities.
|
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 do not expect to contribute to the pension plan in
fiscal 2011. For the non-funded restoration plan, we contribute an
amount equal to the benefit payments.
Estimated
Future Benefit Payments
Pension
|
Restoration
|
|||||||
(In
thousands)
|
Plan
|
Plan
|
||||||
Fiscal
2011
|
$ | 1,400 | $ | 406 | ||||
Fiscal
2012
|
$ | 1,693 | $ | 436 | ||||
Fiscal
2013
|
$ | 2,030 | $ | 450 | ||||
Fiscal
2014
|
$ | 2,362 | $ | 456 | ||||
Fiscal
2015
|
$ | 2,708 | $ | 464 | ||||
Fiscal
2016 to 2020
|
$ | 19,439 | $ | 2,556 |
Components
of Net Pension Expense
Years
Ended February 28 or 29
|
||||||||||||||||||||||||||||||||||||
(In
thousands)
|
Pension
Plan
|
Restoration
Plan
|
Total
|
|||||||||||||||||||||||||||||||||
2010
|
2009
|
2008
|
2010 | 2009 | 2008 |
2010
|
2009
|
2008
|
||||||||||||||||||||||||||||
Service
cost
|
$ | ― | $ | 10,548 | $ | 15,670 | $ | ― | $ | 832 | $ | 688 | $ | ― | $ | 11,380 | $ | 16,358 | ||||||||||||||||||
Interest
cost
|
5,710 | 6,343 | 5,996 | 605 | 739 | 468 | 6,315 | 7,082 | 6,464 | |||||||||||||||||||||||||||
Expected
return on plan assets
|
(6,487 | ) | (5,572 | ) | (3,994 | ) | ― | ― | ― | (6,487 | ) | (5,572 | ) | (3,994 | ) | |||||||||||||||||||||
Amortization
of prior service cost
|
― | 23 | 37 | ― | 74 | 119 | ― | 97 | 156 | |||||||||||||||||||||||||||
Recognized
actuarial
(gain) loss
|
― | (1,244 | ) | 2,973 | ― | 247 | 172 | ― | (997 | ) | 3,145 | |||||||||||||||||||||||||
Pension
(benefit) expense
|
(777 | ) | 10,098 | 20,682 | 605 | 1,892 | 1,447 | (172 | ) | 11,990 | 22,129 | |||||||||||||||||||||||||
Curtailment
(gain) loss
|
― | (8,229 | ) | ― | ― | 800 | ― | ― | (7,429 | ) | ― | |||||||||||||||||||||||||
Net
pension (benefit) expense
|
$ | (777 | ) | $ | 1,869 | $ | 20,682 | $ | 605 | $ | 2,692 | $ | 1,447 | $ | (172 | ) | $ | 4,561 | $ | 22,129 |
62
Changes
Not Recognized in Net Pension Expense but
Recognized
in Other Comprehensive Income
Year
Ended February 28, 2010
|
||||||||||||
Pension
|
Restoration
|
|||||||||||
(In
thousands, pretax)
|
Plan
|
Plan
|
Total
|
|||||||||
Net
actuarial loss (gain)
|
$ | 4,914 | $ | (671 | ) | $ | 4,243 |
In fiscal
2011, we anticipate that $0.3 million in estimated actuarial losses of the
pension plan will be amortized from accumulated other comprehensive
loss. We do not anticipate that any estimated actuarial losses will
be amortized from accumulated other comprehensive loss for the restoration
plan.
Assumptions
Used to Determine Net Pension Expense
Years
Ended February 28 or 29
|
||||||||||||||||||||||||
Pension
Plan
|
Restoration
Plan
|
|||||||||||||||||||||||
2010
|
2009
|
2008
|
2010
|
2009
|
2008
|
|||||||||||||||||||
Discount
rate (1)
|
6.85 | % | 6.85 | % | 5.75 | % | 6.85 | % | 6.85 | % | 5.75 | % | ||||||||||||
Expected
rate of return on plan assets
|
7.75 | % | 8.00 | % | 8.00 | % | ― | ― | ― | |||||||||||||||
Rate
of compensation increase
|
― | 5.00 | % | 5.00 | % | ― | 7.00 | % | 7.00 | % |
(1)
|
For
fiscal 2009, a discount rate of 7.70% was used to determine the effects of
the curtailment at October 21,
2008.
|
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 future expected service
of the active employees in the pension plan.
Given the
frozen status of the pension and benefit restoration plans, the rate of
compensation increases is not applicable for periods subsequent to December 31,
2008. Prior to this date, we determined the rate of compensation
increases based upon our long-term plans for these
increases. Mortality rate assumptions are based on the life
expectancy of the population and were updated as of February 28, 2009, to
account for increases in life expectancy.
(B)
Retirement Savings 401(k) Plan
We
sponsor a 401(k) plan for all associates meeting certain eligibility
criteria. In conjunction with the retirement benefit plan
curtailments, enhancements were made to the 401(k) plan effective January 1,
2009. The enhancements increased the maximum salary contribution for
eligible associates and increased our matching
contribution. Additionally, an annual company-funded contribution
regardless of associate participation was implemented, as well as an additional
company-funded contribution to those associates meeting certain age and service
requirements. The total cost for company contributions was $20.1
million in fiscal 2010, $5.7 million in fiscal 2009 and $3.2 million in fiscal
2008.
(C)
Retirement Restoration Plan
Effective
January 1, 2009, we replaced the frozen restoration plan with a new
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 provide the annual company-funded contribution made regardless of
associate participation, as well as the additional company-funded contribution
to the associates meeting the same age and service requirements. This
plan is unfunded with lump sum payments to be made upon the associate’s
retirement. The total cost for this plan was not material in fiscal
2010 or fiscal 2009.
63
10.
|
DEBT
|
As
of February 28
|
||||||||
(In
thousands)
|
2010
|
2009
|
||||||
Revolving
credit agreement
|
$ | 122,483 | $ | 308,478 | ||||
Obligations
under capital leases
|
28,088 | 28,569 | ||||||
Total
debt
|
150,571 | 337,047 | ||||||
Less
short-term debt and current portion:
|
||||||||
Revolving
credit agreement
|
122,483 | 158,478 | ||||||
Obligations
under capital leases
|
717 | 507 | ||||||
Total
long-term debt, excluding current portion
|
$ | 27,371 | $ | 178,062 |
We have a
$700 million revolving credit facility (the “credit facility”) with Bank of
America, N.A. and various other financial institutions. The credit
facility is secured by vehicle inventory and contains customary representations
and warranties, conditions and covenants. The financial covenants
include a maximum total liabilities to tangible net worth ratio and a minimum
fixed charge coverage ratio. Borrowings under this credit
facility are limited to 80% of qualifying inventory, and they are available for
working capital and general corporate purposes. Borrowings accrue
interest at variable rates based on LIBOR, the federal funds rate, or the prime
rate, depending on the type of borrowing. We pay a commitment fee on
the used and unused portions of the available funds. All outstanding
principal amounts will be due and payable in December 2011, and there are no
penalties for prepayment.
As of
February 28, 2010, $122.5 million was outstanding under the credit facility and
$505.4 million of the remaining borrowing limit was available to
us. The outstanding balance included $0.9 million classified as
short-term debt and $121.6 million classified as current portion of long-term
debt. We classified $121.6 million as current portion of long-term
debt based on our expectation that this balance will not remain outstanding for
more than one year.
The
weighted average interest rate on outstanding short-term and long-term debt was
1.6% in fiscal 2010, 3.5% in fiscal 2009 and 5.9% in fiscal 2008.
We
capitalize interest in connection with the construction of certain
facilities. Capitalized interest totaled $0.3 million in fiscal
2010, $1.9 million in fiscal 2009 and $5.0 million in fiscal 2008.
We have
recorded five capital leases for store facilities. The related
capital lease assets are included in property and equipment. These
leases were structured at varying interest rates with initial lease terms
ranging from 15 to 20 years with payments made monthly. The present
value of future minimum lease payments totaled $28.1 million as of February 28,
2010, and $28.6 million as of February 28, 2009.
11.
|
STOCK
AND STOCK-BASED INCENTIVE PLANS
|
(A)
Shareholder Rights Plan and Undesignated Preferred Stock
In
conjunction with our shareholder rights plan, shareholders received preferred
stock purchase rights as a dividend at the rate of one right for each share of
CarMax, Inc. common stock owned. The rights are exercisable only upon
the attainment of, or the commencement of a tender offer to attain, a 15% or
greater ownership interest in the company by a person or group. When
exercisable, and as adjusted for our March 2007 2-for-1 stock split, each right
would entitle the holder to buy one half of one one-thousandth of a share of
Cumulative Participating Preferred Stock, Series A, $20 par value, at an
exercise price of $140 per share, subject to adjustment. A total of
120,000 shares of such preferred stock, which has preferential dividend and
liquidation rights, have been authorized and designated. No such
shares are outstanding. In the event that an acquiring person or
group acquires the specified ownership percentage of CarMax, Inc. common stock
(except pursuant to a cash tender offer for all outstanding shares determined to
be fair by the board of directors) or engages in certain transactions with the
company after the rights become exercisable, each right will be converted into a
right to purchase, for half the current market price at that time, shares of
CarMax, Inc. common stock valued at two times the exercise price. We
also have an additional 19,880,000 authorized shares of undesignated preferred
stock of which no shares are outstanding.
64
(B)
Stock Incentive Plans
We
maintain long-term incentive plans for management, key employees and the
nonemployee members of our board of directors. The plans allow for
the grant 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 awarded no incentive stock
options.
Prior to
fiscal 2007, the majority of associates who received share-based compensation
awards primarily received nonqualified stock options. From fiscal
2007 through fiscal 2009, these associates primarily received restricted stock
instead of stock options, and beginning in fiscal 2010, these associates
primarily received cash-settled restricted stock units instead of restricted
stock awards. Senior management and other key associates continue to
receive awards of nonqualified stock options and, starting in fiscal 2010,
stock-settled restricted stock units. Nonemployee directors continue
to receive awards of nonqualified stock options and stock grants.
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. Substantially all of the stock options vest annually in equal
amounts over periods of three to four years. These options are
subject to forfeiture and expire no later than ten years after the date of the
grant.
Restricted
Stock. Restricted stock
awards are awards of our common stock that are subject to specified restrictions
and a risk of forfeiture. The restrictions typically lapse three
years from the grant date. Participants
holding restricted stock are entitled to vote on matters submitted to holders of
our common stock for a vote.
Stock-Settled
Restricted Stock Units. Also referred to
as market stock units, or MSUs, these are awards to eligible key associates that
are converted into between zero and two shares of common stock for each unit
granted 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 forty trading days of the three-year vesting period by our stock price
on the grant date, with the resulting quotient capped at two. This
quotient is then multiplied by the number of MSUs granted to yield the number of
shares awarded. MSUs are subject to forfeiture and do not have voting
rights.
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 at the end of a three-year vesting period. However,
the cash payment per RSU will not be greater than 200% or less than 75% of the
fair market value of a share of our common stock on the grant
date. RSUs are liability awards that are subject to forfeiture and do
not have voting rights.
As of
February 28, 2010, a total of 39,200,000 shares of our common stock have 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 7,613,036 as of February 28, 2010.
(C)
Share-Based Compensation
Composition
of Share-Based Compensation Expense
Years
Ended February 28 or 29
|
||||||||||||
(In
thousands)
|
2010
|
2009
|
2008
|
|||||||||
Cost
of sales
|
$ | 2,103 | $ | 2,136 | $ | 1,945 | ||||||
CarMax
Auto Finance income
|
1,334 | 1,181 | 1,250 | |||||||||
Selling,
general and administrative expenses
|
35,407 | 33,201 | 31,487 | |||||||||
Share-based
compensation expense, before income taxes
|
$ | 38,844 | $ | 36,518 | $ | 34,682 |
65
Composition
of Share-Based
Compensation Expense – By Grant Type
Years
Ended February 28 or 29
|
||||||||||||
(In
thousands)
|
2010
|
2009
|
2008
|
|||||||||
Nonqualified
stock options
|
$ | 17,404 | $ | 19,031 | $ | 21,490 | ||||||
Restricted
stock
|
11,571 | 15,823 | 11,656 | |||||||||
Cash-settled
restricted stock units
|
5,718 | ― | ― | |||||||||
Stock-settled
restricted stock units
|
2,614 | ― | ― | |||||||||
Employee
stock purchase plan
|
987 | 1,081 | 1,214 | |||||||||
Stock
grants to non-employee directors
|
550 | 583 | 322 | |||||||||
Share-based
compensation expense, before income taxes
|
$ | 38,844 | $ | 36,518 | $ | 34,682 |
We
recognize compensation expense for stock options, restricted stock and MSUs on a
straight-line basis (net of estimated forfeitures) over the requisite service
period, which is generally the vesting period of the award. The
variable expense associated with RSUs is recognized over their vesting period
(net of expected forfeitures) and is calculated based on the closing market
price of our common stock at the end of each reporting period. There
were no capitalized share-based compensation costs as of the end of fiscal 2010,
fiscal 2009 or fiscal 2008.
Stock
Option Activity
(Shares
and intrinsic value in thousands)
|
Number
of
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Aggregate
Intrinsic
Value
|
||||||||||||
Outstanding
as of March 1, 2009
|
14,844 | $ | 15.40 | |||||||||||||
Options
granted
|
2,948 | $ | 11.52 | |||||||||||||
Options
exercised
|
(3,086 | ) | $ | 11.41 | ||||||||||||
Options
forfeited or expired
|
(965 | ) | $ | 13.66 | ||||||||||||
Outstanding
as of February 28, 2010
|
13,741 | $ | 15.58 | 4.7 | $ | 71,446 | ||||||||||
Exercisable
as of February 28, 2010
|
7,895 | $ | 15.16 | 4.2 | $ | 43,864 |
We
granted nonqualified options to purchase 2,948,150 shares of common stock in
fiscal 2010 and 2,219,857 shares of common stock in fiscal 2009. The
total cash received as a result of stock option exercises was $35.2 million in
fiscal 2010, $10.2 million in fiscal 2009 and $14.7 million in fiscal
2008. We settle stock option exercises with authorized but unissued
shares of our common stock. The total intrinsic value of options
exercised was $25.8 million for fiscal 2010, $5.7 million for fiscal 2009 and
$26.8 million for fiscal 2008. We realized related tax benefits of
$10.1 million for fiscal 2010, $2.2 million for fiscal 2009 and $10.6 million
for fiscal 2008.
Outstanding
Stock Options
As
of February 28, 2010
|
||||||||||||||||||||||
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||
(Shares
in thousands)
Range
of Exercise Prices
|
Number
of
Shares
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Weighted
Average
Exercise
Price
|
Number
of
Shares
|
Weighted
Average
Exercise
Price
|
|||||||||||||||||
$ | 7.02 to $7.15 | 976 | 3.0 | $ | 7.14 | 976 | $ | 7.14 | ||||||||||||||
$ | 10.74 to $11.43 | 2,880 | 6.0 | $ | 11.42 | 56 | $ | 10.75 | ||||||||||||||
$ | 13.19 | 2,096 | 5.3 | $ | 13.19 | 2,096 | $ | 13.19 | ||||||||||||||
$ | 14.13 to $14.86 | 2,295 | 4.2 | $ | 14.66 | 2,145 | $ | 14.66 | ||||||||||||||
$ | 15.17 to $17.44 | 1,679 | 3.2 | $ | 17.07 | 1,237 | $ | 17.08 | ||||||||||||||
$ | 19.36 to $19.82 | 2,138 | 5.1 | $ | 19.80 | 532 | $ | 19.78 | ||||||||||||||
$ | 22.28 to $25.79 | 1,677 | 4.1 | $ | 25.03 | 853 | $ | 25.03 | ||||||||||||||
Total
|
13,741 | 4.7 | $ | 15.58 | 7,895 | $ | 15.16 |
For all
stock options granted prior to March 1, 2006, the fair value was estimated as of
the date of grant using a Black-Scholes option-pricing model. For
stock options granted to associates on or after March 1, 2006, 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 the Black-Scholes model, such as 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 the Black-Scholes
model. For grants to nonemployee directors prior to fiscal 2009, we
used the Black-Scholes model to estimate the fair value of stock option
awards. Beginning in fiscal 2009, we used the binomial
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.
66
The
weighted average fair values at the date of grant for options granted were $5.30
per share in fiscal 2010, $7.16 per share in fiscal 2009 and $8.43 per share in
fiscal 2008. The unrecognized compensation costs related to nonvested
options totaled $19.9 million as of February 28, 2010. These costs
are expected to be recognized over a weighted average period of 2.3
years.
Assumptions
Used to Estimate Option Values
Years
Ended February 28 or 29
|
|||
2010
|
2009
|
2008
|
|
Dividend
yield
|
0.0%
|
0.0%
|
0.0%
|
Expected
volatility factor (1)
|
52.2%-73.4%
|
34.8%-60.9%
|
28.0%-54.0%
|
Weighted
average expected volatility
|
57.3%
|
44.1%
|
38.5%
|
Risk-free
interest rate (2)
|
0.2%-3.2%
|
1.5%-3.7%
|
4.3%-5.0%
|
Expected
term (in years) (3)
|
5.2-5.5
|
4.8-5.2
|
4.2-4.4
|
(1)
|
Measured
using historical daily price changes of our stock for a period
corresponding to the term of the option and the implied volatility derived
from the market prices of traded options on our
stock.
|
(2)
|
Based
on the U.S. Treasury yield curve in effect at the time of
grant.
|
(3)
|
Represents
the estimated number of years that options will be outstanding prior to
exercise.
|
Restricted
Stock Activity
(Shares
in thousands)
|
Number
of
Shares
|
Weighted
Average
Grant
Date
Fair
Value
|
||||||
Outstanding
as of March 1, 2009
|
2,633 | $ | 20.55 | |||||
Restricted
stock granted
|
― | $ | ― | |||||
Restricted
stock vested
|
(819 | ) | $ | 17.25 | ||||
Restricted
stock cancelled
|
(151 | ) | $ | 21.65 | ||||
Outstanding
as of February 28, 2010
|
1,663 | $ | 22.08 |
We granted no shares of restricted stock to our employees in fiscal 2010 and 1,078,580 shares in fiscal 2009. The fair value of a restricted stock award is determined and fixed based on the fair market value of our stock on the grant date.
We
realized related tax benefits of $4.1 million from the vesting of restricted
stock in fiscal 2010. The realized tax benefits
in fiscal 2009 and in fiscal 2008 were immaterial. The unrecognized
compensation costs related to nonvested restricted stock awards totaled $6.6
million as of February 28, 2010. These costs are expected to be
recognized over a weighted average period of 0.7 years.
67
Stock-Settled
Restricted Stock Unit Activity
(Shares
in thousands)
|
Number
of
Shares
|
Weighted
Average
Grant
Date
Fair
Value
|
||||||
Outstanding
as of March 1, 2009
|
― | $ | ― | |||||
Stock
units granted
|
406 | $ | 16.34 | |||||
Stock
units vested and converted
|
(6 | ) | $ | 16.34 | ||||
Stock
units cancelled
|
(5 | ) | $ | 16.34 | ||||
Outstanding
as of February 28, 2010
|
395 | $ | 16.34 |
The fixed fair value per share for MSUs granted in fiscal 2010 was determined to be $16.34 at the grant date using a Monte-Carlo simulation and was based on the expected market price of our common stock on the vesting date and the expected number of converted common shares. The unrecognized compensation costs related to these nonvested MSUs totaled $3.8 million as of February 28, 2010. These costs are expected to be recognized over a weighted average period of 2.1 years.
Cash-Settled
Restricted Stock Units. The initial fair market
value per share for the liability-classified RSUs granted in fiscal 2010 was
$11.43 at the grant date. As of February 28, 2010, we expect the
total cash settlement upon vesting to range between $7.0 million to $18.6
million.
(D)
Employee Stock Purchase Plan
We
sponsor an employee stock purchase plan for all associates meeting certain
eligibility criteria. Associate contributions are limited to 10% of
eligible compensation, up to a maximum of $7,500 per year. For each
$1.00 contributed to the plan by associates, we match $0.15. We have
authorized up to 8,000,000 shares of common stock for the employee stock
purchase plan. Shares are acquired through open-market
purchases.
As of
February 28, 2010, a total of 4,727,259 shares remained available under the
plan. Shares purchased on the open market on behalf of associates
totaled 452,936 during fiscal 2010; 677,944 during fiscal 2009; and 409,004
during fiscal 2008. The average price per share for purchases under
the plan was $16.71 in fiscal 2010, $12.22 in fiscal 2009 and $22.24 in fiscal
2008. The total costs for matching contributions are included in
share-based compensation expense.
12.
|
NET
EARNINGS PER SHARE
|
On March
1, 2009, the company adopted the accounting pronouncement related to
participating securities, with retrospective application, which was subsequently
integrated into the FASB Accounting Standards Codification (“FASB ASC”) Topic
260, “Earnings Per Share.” This pronouncement addresses whether
instruments granted in share-based payment transactions are “participating
securities” prior to vesting, and therefore need to be included in the earnings
allocation in computing earnings per share under the two-class method, as
described in this pronouncement. Nonvested share-based payment awards
that contain nonforfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities and should be included in the
computation of earnings per share pursuant to the two-class
method. Our restricted stock awards are considered participating
securities because they contain nonforfeitable rights to
dividends. Nonvested MSUs and RSUs granted after
February 28, 2009, do not receive nonforfeitable dividend equivalent
rights and are therefore not considered participating securities. The
adoption had no impact on previously reported basic net EPS for fiscal 2009 or
2008. The adoption had no impact on previously reported diluted net
EPS for the fiscal year ended February 28, 2009, and it decreased the previously
reported diluted net EPS for the fiscal year ended February 29, 2008, by
$0.01.
68
Basic
and Dilutive Net Earnings per Share Reconciliations
Years
Ended February 28 or 29
|
||||||||||||
(In
thousands except per share data)
|
2010
|
2009 |
2008
|
|||||||||
Net
earnings
|
$ | 281,668 | $ | 59,213 | $ | 182,025 | ||||||
Less
net earnings allocable to restricted stock
|
2,377 | 703 | 1,410 | |||||||||
Net
earnings available for basic common shares
|
279,291 | 58,510 | 180,615 | |||||||||
Adjustment
for dilutive potential common shares
|
29 | 5 | 25 | |||||||||
Net
earnings available for diluted common shares
|
$ | 279,320 | $ | 58,515 | $ | 180,640 | ||||||
Weighted
average common shares outstanding
|
219,527 | 217,537 | 216,045 | |||||||||
Dilutive
potential common shares:
|
||||||||||||
Stock
options
|
2,415 | 1,820 | 3,918 | |||||||||
Stock-settled
restricted stock units
|
292 | ― | ― | |||||||||
Weighted
average common shares and dilutive potential
|
||||||||||||
common
shares
|
222,234 | 219,357 | 219,963 | |||||||||
Basic
net earnings per share
|
$ | 1.27 | $ | 0.27 | $ | 0.84 | ||||||
Diluted
net earnings per share
|
$ | 1.26 | $ | 0.27 | $ | 0.82 |
Certain
weighted-average options to purchase shares of common stock were outstanding and
not included in the calculation of diluted net EPS because their inclusion would
be antidilutive. In fiscal 2010, options to purchase 5,425,666 shares
were not included. In fiscal 2009, options to purchase 8,340,996
shares were not included. In fiscal 2008, options to purchase
1,586,357 shares were not included.
13.
|
ACCUMULATED
OTHER COMPREHENSIVE LOSS
|
Years
Ended February 28 or 29
|
||||||||||||
(In
thousands, net of income taxes)
|
Unrecognized
Actuarial Losses (Gains)
|
Unrecognized
Prior
Service
Cost
|
Total
Accumulated
Other
Comprehensive
Loss
|
|||||||||
Balance
as of February 28, 2007
|
$ | 20,094 | $ | 238 | $ | 20,332 | ||||||
Amounts
arising during the year
|
(2,177 | ) | 662 | (1,515 | ) | |||||||
Amortization
recognized in net pension expense
|
(1,991 | ) | (98 | ) | (2,089 | ) | ||||||
Balance
as of February 29, 2008
|
15,926 | 802 | 16,728 | |||||||||
Amounts
arising during the year
|
20,363 | ― | 20,363 | |||||||||
Amortization
recognized in net pension expense
|
604 | (65 | ) | 539 | ||||||||
Curtailment
of retirement plans
|
(20,033 | ) | (737 | ) | (20,770 | ) | ||||||
Balance
as of February 28, 2009
|
16,860 | ― | 16,860 | |||||||||
Amounts
arising during the year
|
2,686 | ― | 2,686 | |||||||||
Balance
as of February 28, 2010
|
$ | 19,546 | $ | ― | $ | 19,546 |
Changes
in the funded status of our retirement plans are recognized in accumulated other
comprehensive loss. The cumulative balances are net of deferred tax
of $11.5 million as of February 28, 2010, and $9.9 million as of February 28,
2009.
14.
|
LEASE
COMMITMENTS
|
We
conduct a majority of our business in leased premises. Our lease
obligations are based upon contractual minimum rates. Most leases
provide that we pay taxes, maintenance, insurance and operating expenses
applicable to the premises. The initial term of most real property
leases will expire within the next 20 years; however, most of the leases have
options providing for renewal periods of 5 to 20 years at terms similar to the
initial terms. For operating leases, rent is recognized on a
straight-line basis over the lease term, including scheduled rent increases and
rent holidays. Rent expense for all operating leases was $85.3
million in fiscal 2010, $82.1 million in fiscal 2009 and $78.9 million in fiscal
2008.
69
Future
Minimum Lease Obligations
As
of February 28, 2010
|
||||||||
Capital
|
Operating
Lease
|
|||||||
(In
thousands)
|
Leases
(1)
|
Commitments
(1)
|
||||||
Fiscal
2011
|
$ | 3,608 | $ | 82,832 | ||||
Fiscal
2012
|
3,608 | 82,788 | ||||||
Fiscal
2013
|
3,608 | 82,688 | ||||||
Fiscal
2014
|
3,643 | 83,026 | ||||||
Fiscal
2015
|
3,884 | 83,041 | ||||||
Fiscal
2016 and thereafter
|
37,056 | 557,452 | ||||||
Total
minimum lease payments
|
55,407 | $ | 971,827 | |||||
Less
amounts representing interest
|
(27,319 | ) | ||||||
Present
value of net minimum capital lease payments
|
$ | 28,088 |
(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.
|
We did
not enter into any sale-leaseback transactions in fiscal 2010 or fiscal
2008. We completed sale-leaseback transactions involving two
superstores valued at approximately $31.3 million in fiscal 2009. All
sale-leaseback transactions are structured at competitive
rates. Gains or losses on sale-leaseback transactions are recorded as
deferred rent and amortized over the lease term. Other than
occupancy, we do not have continuing involvement under the sale-leaseback
transactions. In conjunction with certain sale-leaseback
transactions, we must meet financial covenants relating to minimum tangible net
worth and minimum coverage of rent expense. We were in compliance
with all such covenants as of February 28, 2010.
15.
|
SUPPLEMENTAL
FINANCIAL STATEMENT INFORMATION
|
(A)
Goodwill and Other Intangibles
Other
assets included goodwill and other intangibles with a carrying value of $10.1
million as of February 28, 2010, and
February 28, 2009. No impairment of goodwill or intangible
assets resulted from our annual impairment tests in fiscal 2010, fiscal 2009 or
fiscal 2008.
(B)
Restricted Investments
Restricted
investments, included in other assets, consisted of $30.7 million in money
market securities as of February 28, 2010, and $28.5 million in money market
securities and $2.2 million in other debt securities as of February 28,
2009. For fiscal 2010, proceeds from the sales of other debt
securities totaled $2.2 million. For fiscal 2009, there were no
proceeds from the sales of other debt securities. Due to the
short-term nature and/or variable rates associated with these financial
instruments, the carrying value approximates fair value.
(C)
Other Accrued Expenses
As of
February 28, 2010 and 2009, accrued expenses and other current liabilities
included accrued compensation and benefits of $62.1 million and $24.3 million,
respectively, and loss reserves for general liability and workers’ compensation
insurance of $23.9 million and $22.2 million, respectively.
(D)
Advertising Expense
SG&A
expenses included advertising expense of $75.1 million in fiscal 2010, $101.5
million in fiscal 2009 and $108.8 million in fiscal 2008. Advertising
expenses were 1.0% of net sales and operating revenues for fiscal 2010, 1.5% for
fiscal 2009 and 1.3% for fiscal year 2008.
16.
|
CONTINGENT
LIABILITIES
|
(A)
Litigation
On April
2, 2008, Mr. John Fowler filed a putative class action lawsuit against CarMax
Auto Superstores California, LLC and CarMax Auto Superstores West Coast, Inc. in
the Superior Court of California, County of Los
Angeles. Subsequently, two other lawsuits, Leena Areso et al.
v. CarMax Auto Superstores California, LLC and Justin Weaver v.
CarMax Auto Superstores California, LLC, were consolidated as part of the Fowler
case. The allegations in the consolidated case involved: (1) failure
to provide meal and rest breaks or compensation in lieu thereof; (2) failure to
pay wages of terminated or resigned employees related to meal and rest breaks
and overtime; (3) failure to pay overtime; (4) failure to comply with itemized
70
employee
wage statement provisions; and (5) unfair competition. The putative
class consisted of sales consultants, sales managers, and other hourly employees
who worked for the company in California from April 2, 2004, to the
present. On May 12, 2009, the court dismissed all of the class claims
with respect to the sales manager putative class. On June 16, 2009,
the court dismissed all claims related to the failure to comply with the
itemized employee wage statement provisions. The court also granted
CarMax's motion for summary adjudication with regard to CarMax's alleged failure
to pay overtime to the sales consultant putative class. The
plaintiffs have appealed the court's ruling regarding the sales consultant
overtime claim. In addition to the plaintiffs' appeal of the overtime
claim, the claims currently remaining in the lawsuit regarding the sales
consultant putative class are: (1) failure to provide meal and rest breaks or
compensation in lieu thereof; (2) failure to pay wages of terminated or resigned
employees related to meal and rest breaks; and (3) unfair
competition. On June 16, 2009, the court entered a stay of these
claims pending the outcome of a California Supreme Court case involving related
legal issues. The lawsuit seeks compensatory and special damages,
wages, interest, civil and statutory penalties, restitution, injunctive relief
and the recovery of attorneys’ fees. We are unable to make a
reasonable estimate of the amount or range of loss that could result from an
unfavorable outcome in these matters.
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 or results of operations.
(B)
Other Matters
In
accordance with the terms of real estate lease agreements, we generally agree to
indemnify the lessor from certain liabilities arising as a result of the use of
the leased premises, including environmental liabilities and repairs to leased
property upon termination of the lease. Additionally, in accordance
with the terms of agreements entered into for the sale of properties, we
generally agree to indemnify the buyer from certain liabilities and costs
arising subsequent to the date of the sale, including environmental liabilities
and liabilities resulting from the breach of representations or warranties made
in accordance with the agreements. We do not have any known material
environmental commitments, contingencies or other indemnification issues arising
from these arrangements.
As part
of our customer service strategy, we guarantee the used vehicles we retail with
a 30-day limited warranty. A vehicle in need of repair within 30 days
of the customer's purchase will be repaired free of charge. As a
result, each vehicle sold has an implied liability associated with
it. Accordingly, we record a provision for estimated future repairs
during the guarantee period for each vehicle sold based on historical
trends. The liability for this guarantee was $2.6 million as of
February 28, 2010, and $2.0 million as of February 28, 2009, and is included in
accrued expenses and other current liabilities.
17.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
As of
March 1, 2010, we adopted FASB ASUs 2009-16 and 2009-17 (formerly Statement of
Financial Accounting Standards (“SFAS”) No. 166 and 167,
respectively). ASU 2009-16 amended FASB ASC Topic 860, “Transfers and
Servicing,” and ASU 2009-17 amended FASB ASC Topic 810,
“Consolidation.” ASU 2009-16 removed the concept of a qualifying
special-purpose entity (“QSPE”) from Topic 860 and removed the provision
within Topic 810 exempting these entities from consolidation. These
pronouncements also clarified the requirements for isolation and the limitations
on the portions of financial assets that are eligible for sale accounting
treatment.
Pursuant
to these pronouncements, we will recognize existing and future transfers of auto
loan receivables into term securitizations as secured borrowings, which will
result in recording the auto loan receivables and the related notes payable to
the investors on our consolidated balance sheets. Existing term
securitizations will be consolidated based on the unpaid principal balance, less
an appropriate reserve for credit losses. We will also account for
future transfers of receivables into our warehouse facility as secured
borrowings.
As of
March 1, 2010, we amended our warehouse facility agreement. As a
result, existing transfers of auto loan receivables no longer qualify for sale
treatment. The receivables that were funded in the warehouse facility
at that date will be consolidated, along with the related notes payable, at
their fair value.
As of
March 1, 2010, we expect to record a $3.7 billion increase in total assets (net
of a reserve for credit losses of approximately $58 million) and a $3.8 billion
increase in total liabilities. Included in these amounts will be the
following adjustments:
71
·
|
Consolidation
of the auto loan receivables and the related non-recourse notes payable
funded in existing term
securitizations.
|
·
|
Consolidation
of the auto loan receivables and the related non-recourse notes payable
funded in the warehouse facility as of March 1,
2010.
|
·
|
Recognition
of a reserve for credit losses on the consolidated auto loan
receivables.
|
·
|
Consolidation
of customer loan payments received but not yet distributed by the
securitization trusts. These payments are included in
restricted cash.
|
·
|
Reclassification
of auto loan receivables held for sale to auto loans
receivable.
|
·
|
Reclassification
of certain balances previously included in retained interest in
securitized receivables that relate to existing term
securitizations.
|
·
|
Write-off
of the remaining interest-only strip receivables related to term
securitizations, previously recorded in retained interest in securitized
receivables, and the related deferred tax liability. These write-off
are charged against retained
earnings.
|
·
|
Recording
of a net deferred tax asset, primarily related to the establishment of the
reserve for credit losses.
|
In future
periods, CAF income included in the consolidated statements of earnings will no
longer include a gain on the sale of loans originated and sold, but instead will
reflect the net interest margin generated by the auto loan receivables less
direct CAF expenses. The net interest margin will include the
interest and certain other income associated with the auto loan receivables less
a provision for estimated credit losses and the interest expense associated with
the non-recourse debt issued to fund these receivables. Because our securitization
transactions will be accounted for under the new accounting rules as secured
borrowings rather than asset sales, the cash flows from these transactions will
be presented as cash flows from financing activities rather than cash flows from
operating or investing activities.
In June
2009, the FASB issued SFAS No. 168, “The ‘FASB Accounting Standards
Codification’ and the Hierarchy of Generally Accepted Accounting Principles”
(“SFAS 168”) and integrated it into FASB ASC Topic 105, “Generally Accepted
Accounting Principles,” (“Topic 105"), as subsequently updated by FASB ASUs
2009-01 through 2010-15. Topic 105 establishes the FASB ASC, which
officially launched July 1, 2009, as the source of authoritative U.S. GAAP
recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritative U.S. GAAP for SEC registrants. The
subsequent issuances of new standards will be in the form of FASB ASUs that will
be included in the FASB ASC. Generally, the FASB ASC is not expected
to change U.S. GAAP. All other accounting literature excluded from
the FASB ASC will be considered nonauthoritative. Topic 105 is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. We adopted this pronouncement for
our quarter ended November 30, 2009. References to authoritative
accounting literature are in accordance with the FASB ASC.
In April
2008, the FASB issued an accounting pronouncement that amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset (FASB ASC Topic 350),
which requires an entity to consider its own historical experience (or, if no
experience, market participant assumptions) adjusted for entity-specific
factors. The requirements are effective for financial statements
issued for fiscal years beginning after December 15, 2008, with early
adoption prohibited. The guidance for determining the useful life of
a recognized intangible asset shall be applied prospectively to intangible
assets acquired after the effective date. The disclosure requirements
shall be applied prospectively to all intangible assets recognized as of, and
subsequent to, the effective date. The adoption of this pronouncement
did not have an impact on our consolidated financial statements.
In June
2008, the FASB issued guidance on determining whether instruments granted in
share-based payment transactions are participating securities prior to vesting
in determining earnings per share (FASB ASC Topic 260). We adopted
the guidance effective March 1, 2009, via retrospective
application. See Note 12 for additional information.
In
December 2008, the FASB issued an accounting pronouncement related to employers’
disclosures about postretirement benefit plan assets (FASB ASC Topic 715), which
will require employers to disclose information about how investment allocation
decisions are made, the fair value of each major category of plan assets and
information about the inputs and valuation techniques used to develop the fair
value measurements of plan assets. This pronouncement is effective
for fiscal years ending after December 15, 2009. We have
included the newly required disclosures in our consolidated financial statements
and notes for the fiscal year ending February 28, 2010. The
adoption of this pronouncement had no impact on our results of operations,
financial condition or cash flows. See Note 9 for additional
information.
72
In April
2009, the FASB issued an accounting pronouncement related to fair value
measurements (FASB ASC Topic 820), which provides guidance on estimating fair
value when market activity has decreased and on identifying transactions that
are not orderly. Additionally, entities are required to disclose in
interim and annual periods the inputs and valuation techniques used to measure
fair value. This pronouncement is effective for interim and annual
periods ending after June 15, 2009. As these requirements
are consistent with our previous practice, the adoption of this pronouncement
did not have an impact on our consolidated financial statements.
In May
2009, the FASB issued an accounting pronouncement related to subsequent events
(FASB ASC Topic 855), which established general standards of accounting for and
disclosure of events that occur after the balance sheet date but before the date
the financial statements are issued or available to be issued. This
pronouncement requires companies to reflect in their financial statements the
effects of subsequent events that provide additional evidence about conditions
at the balance-sheet date. Subsequent events that provide evidence
about conditions that arose after the balance-sheet date should be disclosed if
the financial statements would otherwise be misleading. Disclosures
should include the nature of the event and either an estimate of its financial
effect or a statement that an estimate cannot be made. This
pronouncement is effective for interim and annual financial periods ending after
June 15, 2009, and should be applied prospectively. As
these requirements are consistent with our previous practice, the adoption of
this pronouncement did not have an impact on our consolidated financial
statements.
In August
2009, the FASB issued an accounting pronouncement related to fair value
measurements and disclosures (FASB ASC Topic 820), which provides clarification
in measuring the fair value of liabilities in circumstances in which a quoted
price in an active market for the identical liability is not available and in
circumstances in which a liability is restricted from being
transferred. This pronouncement also clarifies that both a quoted
price in an active market for the identical liability at the measurement date
and the quoted price for the identical liability when traded as an asset in an
active market when no adjustments to the quoted price of the asset are required
are Level 1 fair value measurements. This pronouncement was effective
for our quarter ended November 30, 2009. As we did not elect the fair
value option for our financial liabilities not already within the scope of this
pronouncement, its adoption did not have an impact on our current consolidated
financial statements.
In
January 2010, the FASB issued an additional accounting pronouncement related to
fair value measurement disclosures (FASB ASC Topic 820), which requires fair
value hierarchy disclosures to be further disaggregated by class of assets and
liabilities. A class is often a subset of assets or liabilities
within a line item in the consolidated balance sheet. In addition,
significant transfers in and out of Levels 1 and 2 of the fair value hierarchy
and the reasons for the transfers will be required to be
disclosed. This provision of the pronouncement is effective for
reporting periods beginning after December 15, 2009. If
applicable, we will include these newly required disclosures for our fiscal year
beginning March 1, 2010. An additional provision, effective
for reporting periods beginning after December 15, 2010, requires that
the reconciliation of Level 3 activity present information about purchases,
sales, issuances and settlements on a gross basis instead of as one net
number. If applicable, we will include these newly required
disclosures for our fiscal year beginning March 1, 2011.
In
February 2010, the FASB issued an additional accounting pronouncement that
amended certain requirements for subsequent events (FASB ASC Topic 855), which
requires an SEC filer or a conduit bond obligor to evaluate subsequent events
through the date the financial statements are available to be issued and removes
the previous requirement to disclose the date through which subsequent events
have been evaluated. The amended amendments were effective on
issuance of the final pronouncement. The adoption of this
pronouncement had no effect on our consolidated financial
statements.
73
18.
|
SELECTED
QUARTERLY FINANCIAL DATA
(UNAUDITED)
|
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
Fiscal
Year
|
||||||||||||||||
(In
thousands, except per share data)
|
2010
|
2010
|
2010
|
2010
|
2010
|
|||||||||||||||
Net
sales and operating revenues
|
$ | 1,834,300 | $ | 2,076,671 | $ | 1,725,977 | $ | 1,833,245 | $ | 7,470,193 | ||||||||||
Gross
profit
|
$ | 276,237 | $ | 314,549 | $ | 242,863 | $ | 265,221 | $ | 1,098,870 | ||||||||||
CarMax
Auto Finance (loss) income
|
$ | (21,636 | ) | $ | 72,130 | $ | 65,806 | $ | 58,917 | $ | 175,217 | |||||||||
Selling,
general and administrative expenses
|
$ | 206,225 | $ | 218,122 | $ | 192,140 | $ | 202,204 | $ | 818,691 | ||||||||||
Net
earnings
|
$ | 28,748 | $ | 102,971 | $ | 74,589 | $ | 75,360 | $ | 281,668 | ||||||||||
Net
earnings per share:
|
||||||||||||||||||||
Basic
|
$ | 0.13 | $ | 0.47 | $ | 0.34 | $ | 0.34 | $ | 1.27 | ||||||||||
Diluted
|
$ | 0.13 | $ | 0.46 | $ | 0.33 | $ | 0.33 | $ | 1.26 | ||||||||||
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
Fiscal
Year
|
||||||||||||||||
(In
thousands, except per share data)
|
2009 | 2009 | 2009 | 2009 | 2009 | |||||||||||||||
Net
sales and operating revenues
|
$ | 2,208,763 | $ | 1,839,054 | $ | 1,455,632 | $ | 1,470,517 | $ | 6,973,966 | ||||||||||
Gross
profit
|
$ | 282,714 | $ | 255,913 | $ | 199,236 | $ | 230,307 | $ | 968,170 | ||||||||||
CarMax
Auto Finance income (loss)
|
$ | 9,819 | $ | (7,141 | ) | $ | (15,360 | ) | $ | 27,968 | $ | 15,286 | ||||||||
Selling,
general and administrative expenses
|
$ | 242,984 | $ | 225,148 | $ | 217,482 | $ | 196,744 | $ | 882,358 | ||||||||||
Net
earnings (loss)
|
$ | 29,558 | $ | 14,006 | $ | (21,874 | ) | $ | 37,523 | $ | 59,213 | |||||||||
Net
earnings (loss) per share:
|
||||||||||||||||||||
Basic
|
$ | 0.13 | $ | 0.06 | $ | (0.10 | ) | $ | 0.17 | $ | 0.27 | |||||||||
Diluted
|
$ | 0.13 | $ | 0.06 | $ | (0.10 | ) | $ | 0.17 | $ | 0.27 |
74
Item
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item
9A. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures (“disclosure controls”) that are
designed to ensure that information required to be disclosed in our reports
filed under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the U.S. Securities
and Exchange Commission’s rules and forms. Disclosure controls are
also designed to ensure that this information is accumulated and communicated to
management, including the chief executive officer (“CEO”) and the chief
financial officer (“CFO”), as appropriate, to allow timely decisions regarding
required disclosure.
As of the
end of the period covered by this report, we evaluated the effectiveness of the
design and operation of our disclosure controls. This evaluation was
performed under the supervision and with the participation of management,
including the CEO and CFO. Based upon that evaluation, the CEO and
CFO concluded that our disclosure controls were effective as of the end of the
period.
Changes
in Internal Control over Financial Reporting
There was
no change in our internal control over financial reporting that occurred during
the quarter ended February 28, 2010, that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
Management's
Report on Internal Control over Financial Reporting
Management's
annual report on internal control over financial reporting is included in Item
8, Consolidated Financial Statements and Supplementary Data, of this Form 10-K
and is incorporated herein by reference.
Item
9B. Other Information.
None.
75
Part
III
With the
exception of the information incorporated by reference from our 2010 Proxy
Statement in Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on
Form 10-K, our 2010 Proxy Statement is not to be deemed filed as a part of this
Form 10-K.
The
following table identifies our executive officers as of February 28,
2010. We are not aware of any family relationships among any of our
executive officers or between any of our executive officers and any
directors. All executive officers are elected annually and serve for
one year or until their successors are elected and qualify. The next
election of officers will occur in June 2010.
Name
|
Age
|
Office
|
Thomas
J. Folliard
|
45
|
President,
Chief Executive Officer and Director
|
Keith
D. Browning
|
57
|
Executive
Vice President, Chief Financial Officer and Director
|
Michael
K. Dolan
|
60
|
Executive
Vice President and Chief Administrative Officer
|
Joseph
S. Kunkel
|
47
|
Senior
Vice President, Marketing and Strategy
|
Richard
M. Smith
|
52
|
Senior
Vice President and Chief Information Officer
|
Eric
M. Margolin
|
56
|
Senior
Vice President, General Counsel and Corporate Secretary
|
William
C. Wood, Jr.
|
43
|
Senior
Vice President, Sales
|
Mr.
Folliard joined CarMax in 1993 as senior buyer and became director of purchasing
in 1994. He was promoted to vice president of merchandising in 1996,
senior vice president of store operations in 2000 and executive vice president
of store operations in 2001. Mr. Folliard became president and chief
executive officer and a director of CarMax in 2006.
Mr.
Browning joined CarMax in 1996 as vice president and chief financial officer
after spending 14 years at Circuit City, his last position being corporate
controller and vice president. He has been involved in the
development of accounting procedures, systems and internal controls for CarMax
since its inception. Mr. Browning was promoted to executive vice
president and chief financial officer in 2001. He has served as a
director of CarMax since 1997.
Mr. Dolan
joined CarMax in 1997 as vice president and chief information
officer. He was named senior vice president in 2001 and was promoted
to executive vice president and chief administrative officer in
2006. Mr. Dolan had prior executive experience in information systems
with H.E. Butt Grocery Company, a privately held grocery retailer, where he was
vice president and chief information officer.
Mr.
Kunkel joined CarMax in 1998 as vice president, marketing and
strategy. Mr. Kunkel was named senior vice president in
2001. Prior to joining CarMax, Mr. Kunkel was president of Wholesome
Kidfoods, Inc. and a senior manager with McKinsey and Company.
Mr. Smith
was the first full-time associate of CarMax, having worked on the original
CarMax concept while at Circuit City in 1991. He has held various
positions in technology and operations throughout his tenure with CarMax and was
promoted to vice president, management information systems, in
2005. He was promoted to senior vice president and chief information
officer in 2006.
Mr.
Margolin joined CarMax in 2007 as senior vice president, general counsel and
corporate secretary. Prior to joining CarMax, he was senior vice
president, general counsel and corporate secretary with Advance Auto Parts, Inc.
and vice president, general counsel and corporate secretary with Tire Kingdom,
Inc.
Mr. Wood
joined CarMax in 1993 as a buyer-in-training. He has served as buyer,
purchasing manager, district manager, regional director and director of buyer
development. He was named vice president, merchandising in 1998 and
was promoted to vice president of sales operations in 2007. In
February 2010, Mr. Wood was promoted to senior vice president,
sales. Prior to joining CarMax, Mr. Wood worked at Circuit City from
1989 to 1993.
76
The
information concerning our directors required by this Item is incorporated by
reference to the section titled “Proposal One - Election of Directors” in our
2010 Proxy Statement.
The
information concerning the audit committee of our board of directors and the
audit committee financial expert required by this Item is incorporated by
reference to the information included in the sub-section titled “Committees of
the Board – Audit Committee” in our 2010 Proxy Statement.
The
information concerning compliance with Section 16(a) of the Securities Exchange
Act of 1934 required by this Item is incorporated by reference to the
sub-section titled “Section 16(a) Beneficial Ownership Reporting Compliance” in
our 2010 Proxy Statement.
The
information concerning our code of ethics (“Code of Business Conduct”) for
senior management required by this Item is incorporated by reference to the
sub-section titled “Corporate Governance Policies and Practices” in our 2010
Proxy Statement.
We have
not made any material change to the procedures by which our shareholders may
recommend nominees to our board of directors.
The
information required by this Item is incorporated by reference to the section
titled “Executive Compensation” appearing in our 2010 Proxy
Statement. Additional information required by this Item is
incorporated by reference to the sub-section titled “Non-Employee Director
Compensation in Fiscal 2010” in our 2010 Proxy Statement.
Item
12. Security Ownership of Certain Beneficial Owners and
Management and
Related Stockholder Matters.
The
information required by this Item is incorporated by reference to the section
titled “CarMax Share Ownership” and the sub-section titled “Equity Compensation
Plan Information” in our 2010 Proxy Statement.
Item
13. Certain Relationships and Related Transactions and Director
Independence.
The
information required by this Item is incorporated by reference to the section
titled “Certain Relationships and Related Transactions” in our 2010 Proxy
Statement.
The
information required by this Item concerning director independence is
incorporated by reference to the sub-section titled “Director Independence” in
our 2010 Proxy Statement.
The
information required by this Item is incorporated by reference to the
sub-section titled “Auditor Information” in our 2010 Proxy
Statement.
77
Part
IV
Item
15. Exhibits and Financial Statement Schedules.
(a) The
following documents are filed as part of this report:
1.
|
Financial
Statements. All financial statements as set forth under Item 8
of this Form 10-K.
|
2.
|
Financial Statement
Schedules. “Schedule II – Valuation and Qualifying
Accounts and Reserves” and the accompanying Report of Independent
Registered Public Accounting Firm on CarMax, Inc. Financial Statement
Schedule for the fiscal years ended February 28 or 29, 2010, 2009, and
2008, are filed as part of this Form 10-K and should be read in
conjunction with the Consolidated Financial Statements of CarMax, Inc. and
Notes thereto, included in Item 8 of this Form
10-K.
|
Schedules
not listed above have been omitted because they are not applicable, are
not required or the information required to be set forth therein is
included in the Consolidated Financial Statements and Notes
thereto.
|
3.
|
Exhibits. The
Exhibits listed on the accompanying Index to Exhibits immediately
following the financial statement schedule are filed as part of, or
incorporated by reference into, this Form
10-K.
|
(b)
Exhibits
See Item
15(a)(3) above.
(c)
Financial Statement Schedules
See Item
15(a)(2) above.
78
Signatures
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CARMAX, INC.
|
|||||||
By:
|
/s/ THOMAS J. FOLLIARD
Thomas J. Folliard President
and Chief Executive Officer
April
26, 2010
|
By:
|
/s/ KEITH D. BROWNING
Keith
D. Browning
Executive
Vice President and Chief Financial Officer
April
26, 2010
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
/s/ THOMAS J. FOLLIARD
Thomas
J. Folliard
President,
Chief Executive Officer and Director
April
26, 2010
|
/s/ W.
ROBERT GRAFTON
*
W.
Robert Grafton
Director
April
26, 2010
|
/s/ KEITH D. BROWNING
Keith
D. Browning
Executive
Vice President, Chief Financial Officer,
Chief
Accounting Officer and Director
April
26, 2010
|
/s/ EDGAR H. GRUBB
*
Edgar
H. Grubb
Director
April
26, 2010
|
/s/ JEFFREY E. GARTEN
*
Jeffrey
E. Garten
Director
April
26, 2010
|
/s/ BETH A. STEWART*
Beth
A. Stewart
Director
April
26, 2010
|
/s/ RONALD E. BLAYLOCK *
Ronald
E. Blaylock
Director
April
26, 2010
|
/s/ THOMAS G. STEMBERG
*
Thomas
G. Stemberg
Director
April
26, 2010
|
/s/ JAMES F. CLINGMAN, JR.*
James
F. Clingman, Jr.
Director
April
26, 2010
|
/s/ VIVIAN M. STEPHENSON*
Vivian
M. Stephenson
Director
April
26, 2010
|
/s/ JEFFREY E. GARTEN
*
Jeffrey
E. Garten
Director
April
26, 2010
|
/s/ BETH A. STEWART*
Beth
A. Stewart
Director
April
26, 2010
|
/s/ SHIRA GOODMAN
*
Shira
Goodman
Director
April
26, 2010
|
/s/ WILLIAM R. TIEFEL*
William
R. Tiefel
Director
April
26, 2010
|
*By:
|
/s/ THOMAS J. FOLLIARD
Thomas J. Folliard Attorney-In-Fact
|
The
original powers of attorney authorizing Thomas J. Folliard and Keith D.
Browning, or either of them, to sign this annual report on behalf of certain
directors and officers of the company are included as Exhibit 24.1.
79
Schedule
II
CARMAX,
INC. AND SUBSIDIARIES
Valuation
and Qualifying Accounts and Reserves
(In
thousands)
|
Balance
at
Beginning
of
Fiscal
Year
|
Charged
to
Income
|
Charge-offs
Less
Recoveries
|
Balance
at
End
of
Fiscal
Year
|
||||||||||||
Year
ended February 29, 2008:
|
||||||||||||||||
Allowance
for doubtful accounts
|
$ | 7,083 | $ | 4,336 | $ | (2,738 | ) | $ | 8,681 | |||||||
Year
ended February 28, 2009:
|
||||||||||||||||
Allowance
for doubtful accounts
|
$ | 8,681 | $ | 4,908 | $ | (3,641 | ) | $ | 9,948 | |||||||
Year
ended February 28, 2010:
|
||||||||||||||||
Allowance
for doubtful accounts
|
$ | 9,948 | $ | 3,265 | $ | (2,872 | ) | $ | 10,341 |
80
INDEX
TO EXHIBITS
2.1
|
|
Separation
Agreement, dated May 21, 2002, between Circuit City Stores, Inc. and
CarMax, Inc., filed as Exhibit 2.1 to CarMax’s Registration Statement on
Form S-4/A, filed June 6, 2002 (File No. 333-85240), is incorporated by
this reference.
|
3.1
|
|
CarMax,
Inc. Amended and Restated Articles of Incorporation, effective June 6,
2002, filed as Exhibit 3.1 to CarMax’s Current Report on Form 8-K, filed
October 3, 2002 (File No. 1-31420), is incorporated by this
reference.
|
3.2
|
CarMax,
Inc. Articles of Amendment to the Amended and Restated Articles of
Incorporation, effective June 6, 2002, filed as Exhibit 3.2 to CarMax’s
Current Report on Form 8-K, filed October 3, 2002 (File No. 1-31420), is
incorporated by this reference.
|
|
3.3
|
|
CarMax,
Inc. Bylaws, as amended and restated April 20, 2009, filed as Exhibit 3.1
to CarMax’s Current Report on Form 8-K, filed April 22, 2009 (File No.
1-31420), is incorporated by this reference.
|
4.1
|
|
Rights
Agreement, dated as of May 21, 2002, between CarMax, Inc. and Wells Fargo
Bank Minnesota, N.A., as Rights Agent, filed as Exhibit 4.1 to CarMax’s
Registration Statement on Form S-4/A, filed June 6, 2002 (File No.
333-85240), is incorporated by this reference.
|
4.2
|
Appointment,
Assignment and Assumption Agreement, dated as of November 28, 2008,
between CarMax, Inc. and American Stock Transfer & Trust Company, LLC,
as Rights Agent, filed as Exhibit 4.2 to CarMax’s Quarterly Report on Form
10-Q, filed January 8, 2009 (File No. 1-31420), is incorporated by this
reference.
|
|
10.1
|
|
Employment
Agreement between CarMax, Inc. and Thomas J. Folliard, filed as Exhibit
10.1 to CarMax’s Current Report on Form 8-K/A, filed October 23, 2006
(File No. 1-31420) is incorporated by this reference. *
|
10.2
|
|
Severance
Agreement between CarMax, Inc. and Keith D. Browning, filed as Exhibit
10.1 to CarMax’s Current Report on Form 8-K, filed February 21, 2007 (File
No. 1-31420) is incorporated by this reference. *
|
10.3
|
|
Severance
Agreement between CarMax, Inc. and Michael K. Dolan, filed as Exhibit 10.2
to CarMax’s Current Report on Form 8-K, filed February 21, 2007 (File No.
1-31420) is incorporated by this reference. *
|
10.4
|
|
Severance
Agreement between CarMax, Inc. and Joseph S. Kunkel, filed as Exhibit 10.3
to CarMax’s Current Report on Form 8-K, filed February 21, 2007 (File No.
1-31420) is incorporated by this reference. *
|
10.5
|
|
Severance
Agreement between CarMax, Inc. and Eric M. Margolin, filed herewith.
*
|
10.6
|
Form
Amendment to CarMax, Inc. Employment/Severance Agreement for Executive
Officer, dated as of November 3, 2008, filed as Exhibit 10.3 to CarMax’s
Quarterly Report on Form 10-Q, filed January 8, 2009 (File No. 1-31420),
is incorporated by this reference. *
|
|
10.7
|
|
CarMax,
Inc. Benefit Restoration Plan, as amended and restated effective as of
January 1, 2008, filed as Exhibit 10.2 to CarMax’s Quarterly Report on
Form 10-Q, filed July 10, 2008 (File No. 1-31420), is incorporated by this
reference. *
|
10.8
|
CarMax,
Inc. Retirement Restoration Plan, effective as of January 1, 2009, filed
as Exhibit 10.2 to CarMax’s Current Report on Form 8-K, filed October 23,
2008 (File No. 1-31420), is incorporated by this reference.
*
|
|
81
10.9
|
Amendment
to CarMax, Inc. Benefit Restoration Plan, effective as of January 1, 2009,
filed as Exhibit 10.1 to CarMax’s Current Report on Form 8-K, filed
October 23, 2008 (File No. 1-31420), is incorporated by this reference.
*
|
|
10.10
|
|
CarMax,
Inc. Non-Employee Directors Stock Incentive Plan, as amended and restated
June 24, 2008, filed as Exhibit 10.1 to CarMax’s Quarterly Report on Form
10-Q, filed July 10, 2008 (File No. 1-31420), is incorporated by this
reference. *
|
10.11
|
|
CarMax,
Inc. 2002 Stock Incentive Plan, as amended and restated June 23, 2009,
filed as Exhibit 10.1 to CarMax’s Current Report on Form 8-K, filed June
26, 2009 (File No. 1-31420), is incorporated by this reference.
*
|
10.12
|
|
CarMax,
Inc. Annual Performance-Based Bonus Plan, as amended and restated June 26,
2007, filed as Exhibit 10.1 to CarMax’s Current Report on Form 8-K, filed
June 29, 2007 (File No. 1-31420), is incorporated by this reference.
*
|
10.13
|
|
CarMax,
Inc. 2002 Employee Stock Purchase Plan, as amended and restated June 23,
2009, filed as Exhibit 10.1 to CarMax’s Quarterly Report on Form 10-Q,
filed July 9, 2009 (File No. 1-31420), is incorporated by this
reference.
|
10.14
|
|
Credit
Agreement, dated August 24, 2005, among CarMax Auto Superstores, Inc.,
CarMax, Inc., various subsidiaries of CarMax, various Lenders named
therein and Bank of America N.A., as Administrative Agent, filed as
Exhibit 10.1 to CarMax’s Quarterly Report on Form 10-Q, filed October 7,
2005 (File No. 1-31420), is incorporated by this
reference. Certain non-material schedules and exhibits have
been omitted from the Credit Agreement as filed. CarMax agrees
to furnish supplementally to the Commission upon request a copy of such
schedules and exhibits.
|
10.15
|
|
Security
Agreement, dated August 24, 2005, among CarMax, Inc., CarMax Auto
Superstores, Inc., various subsidiaries of CarMax named therein and Bank
of America N.A., as Administrative Agent, filed as Exhibit 10.2 to
CarMax’s Quarterly Report on Form 10-Q, filed October 7, 2005 (File No.
1-31420), is incorporated by this reference.
|
10.16
|
|
Company
Guaranty Agreement, dated August 24, 2005, between CarMax, Inc. and Bank
of America N.A., as Administrative Agent, filed as Exhibit 10.3 to
CarMax's Quarterly Report on Form 10-Q, filed October 7, 2005 (File No.
1-31420), is incorporated by this reference.
|
10.17
|
|
Amendment
No. 1 to Credit Agreement and Joinder Agreement, dated December 8, 2006,
among CarMax Auto Superstores, Inc., CarMax, Inc, various subsidiaries of
CarMax, various Lenders named therein and Bank of America N.A., as
Administrative Agent, filed as Exhibit 10.1 to CarMax’s Current Report on
Form 8-K, filed December 14, 2006 (File No. 1-31420), is incorporated by
this reference. Certain non-material schedules and exhibits
have been omitted from Amendment No.1 as filed. CarMax agrees
to furnish supplementally to the Commission upon request a copy of such
schedules and exhibits.
|
10.18
|
Amendment
No. 2 to Credit Agreement and Joinder Agreement, dated as of July 17,
2008, among CarMax Auto Superstores, Inc., CarMax, Inc, various
subsidiaries of CarMax, various Lenders named therein and Bank of America
N.A., as Administrative Agent, filed as Exhibit 10.1 to CarMax’s Current
Report on Form 8-K, filed July 22, 2008 (File No. 1-31420), is
incorporated by this reference. Certain non-material schedules
and exhibits have been omitted from Amendment No. 2 as
filed. CarMax agrees to furnish supplementally to the
Commission upon request a copy of such schedules and
exhibits.
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|
10.19
|
Amended
and Restated Tax Allocation Agreement between Circuit City Stores, Inc.
and CarMax, Inc., dated October 1, 2002, filed as Exhibit 99.2 to CarMax’s
Current Report on Form 8-K, filed October 3, 2002 (File No. 1-31420), is
incorporated by this reference.
|
|
10.20
|
Employee
Benefits Agreement between Circuit City Stores, Inc. and CarMax, Inc.,
dated October 1, 2002, filed as Exhibit 99.4 to CarMax’s Current Report on
Form 8-K, filed October 3, 2002 (File No. 1-31420), is incorporated by
this reference.
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82
10.21
|
Confidentiality
Agreement between Circuit City Stores, Inc. and CarMax, Inc., dated
October 1, 2002, filed as Exhibit 99.5 to CarMax’s Current Report on Form
8-K, filed October 3, 2002 (File No. 1-31420), is incorporated by this
reference.
|
|
10.22
|
Form
of Notice of Stock Option Grant between CarMax, Inc. and certain named and
other executive officers, effective as of January 1, 2009, filed as
Exhibit 10.1 to CarMax’s Quarterly Report on Form 10-Q, filed January 8,
2009 (File No. 1-31420), is incorporated by this reference.
*
|
|
10.23
|
Form
of Notice of Restricted Stock Grant between CarMax, Inc. and certain
executive officers, effective as of January 1, 2009, filed as Exhibit 10.2
to CarMax’s Quarterly Report on Form
10-Q,
filed January 8, 2009 (File No. 1-31420), is incorporated by this
reference. *
|
|
10.24
|
Form
of Notice of Market Stock Unit Grant between CarMax, Inc. and certain
named and other executive officers, effective as of March 27, 2009, filed
as Exhibit 10.2 to CarMax’s Current Report on Form 8-K, filed April 2,
2009 (File No. 1-31420), is incorporated by this reference.
*
|
|
10.25
|
Form
of Notice of Restricted Stock Unit Grant between CarMax, Inc. and certain
executive officers, effective as of March 27, 2009, filed as Exhibit 10.3
to CarMax’s Current Report on Form 8-K, filed April 2, 2009 (File No.
1-31420), is incorporated by this reference. *
|
|
10.26
|
Form
of Directors Stock Option Grant Agreement between CarMax, Inc. and certain
non-employee directors of the CarMax, Inc. board of directors, filed as
Exhibit 10.3 to CarMax’s Quarterly Report on Form 10-Q, filed July 10,
2008 (File No. 1-31420), is incorporated by this reference.
*
|
|
10.27
|
Form
of Stock Grant Notice Letter from CarMax, Inc. to certain non-employee
directors of the CarMax, Inc. board of directors, filed as Exhibit 10.20
to CarMax’s Annual Report on Form 10-K, filed May 13, 2005 (File
No. 1-31420), is incorporated by this reference. *
|
|
21.1
|
|
CarMax,
Inc. Subsidiaries, filed herewith.
|
23.1
|
|
Consent
of KPMG LLP, filed herewith.
|
|
24.1
|
|
Powers
of Attorney, filed herewith.
|
|
31.1
|
Certification
of the Chief Executive Officer Pursuant to Rule 13a-14(a), filed
herewith.
|
||
31.2
|
Certification
of the Chief Financial Officer Pursuant to Rule 13a-14(a), filed
herewith.
|
||
32.1
|
Certification
of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, filed
herewith.
|
||
32.2
|
Certification
of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, filed
herewith.
|
*
|
Indicates
management contracts, compensatory plans or arrangements of the company
required to be filed as an
exhibit.
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83