tenq.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
[
X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the Quarterly Period Ended August 31, 2007
OR
[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
Commission
File Number: 1-31420
CARMAX,
INC.
(Exact
name of registrant as specified in its charter)
VIRGINIA
|
54-1821055
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
12800
TUCKAHOE CREEK PARKWAY, RICHMOND, VIRGINIA
|
23238
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(804)
747-0422
(Registrant's
telephone number, including area code)
N/A
(Former
name, former address and former fiscal year, if changed since last
report)
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.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer X
|
Accelerated
filer _
|
Non-accelerated
filer _
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Class
|
|
Outstanding
at September 30, 2007
|
Common
Stock, par value $0.50
|
|
217,942,376
|
|
|
|
A
Table
of Contents is included on Page 2 and a separate Exhibit Index is included
on
Page 35.
CARMAX,
INC. AND SUBSIDIARIES
|
Page
No.
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
|
|
Item
1. Financial Statements:
|
|
|
|
Consolidated
Statements of Earnings -
Three
Months and Six Months Ended August 31, 2007 and 2006
|
3
|
|
|
Consolidated
Balance Sheets -
August
31, 2007, and February 28, 2007
|
4
|
|
|
Consolidated
Statements of Cash Flows -
Six
Months Ended August 31, 2007 and 2006
|
5
|
|
|
Notes
to Consolidated Financial Statements
|
6
|
|
|
|
|
|
Item
2. Management's Discussion and Analysis of
Financial Condition and
Results
of Operations
|
17
|
|
|
|
|
Item
3. Quantitative and Qualitative Disclosures About
Market Risk
|
30
|
|
|
|
|
Item
4. Controls and Procedures
|
31
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
|
Item
1. Legal Proceedings
|
32
|
|
|
|
|
Item
1A. Risk Factors
|
32
|
|
|
|
|
Item
4. Submission of Matters to a Vote of Security
Holders
|
32
|
|
|
|
|
Item
6. Exhibits
|
33
|
|
|
|
|
|
|
SIGNATURES
|
34
|
|
|
|
EXHIBIT
INDEX
|
35
|
|
|
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
CARMAX,
INC. AND SUBSIDIARIES
Consolidated
Statements of Earnings
(Unaudited)
(In
thousands except per share data)
|
|
Three
Months Ended August 31
|
|
|
Six
Months Ended August 31
|
|
|
|
2007
|
|
|
|
% |
(1) |
|
2006(2)
|
|
|
|
% |
(1) |
|
2007
|
|
|
|
% |
(1) |
|
2006(2)
|
|
|
|
% |
(1) |
Sales
and operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used
vehicle sales
|
|
$ |
1,687,142
|
|
|
|
79.5
|
|
|
$ |
1,526,738
|
|
|
|
79.1
|
|
|
$ |
3,395,533
|
|
|
|
79.5
|
|
|
$ |
2,987,858
|
|
|
|
78.3
|
|
New
vehicle sales
|
|
|
104,779
|
|
|
|
4.9
|
|
|
|
121,231
|
|
|
|
6.3
|
|
|
|
217,394
|
|
|
|
5.1
|
|
|
|
239,639
|
|
|
|
6.3
|
|
Wholesale
vehicle sales
|
|
|
265,282
|
|
|
|
12.5
|
|
|
|
222,299
|
|
|
|
11.5
|
|
|
|
526,434
|
|
|
|
12.3
|
|
|
|
469,595
|
|
|
|
12.3
|
|
Other
sales and
revenues
|
|
|
65,327
|
|
|
|
3.1
|
|
|
|
59,274
|
|
|
|
3.1
|
|
|
|
130,303
|
|
|
|
3.1
|
|
|
|
117,589
|
|
|
|
3.1
|
|
Net
sales and operating revenues
|
|
|
2,122,530
|
|
|
|
100.0
|
|
|
|
1,929,542
|
|
|
|
100.0
|
|
|
|
4,269,664
|
|
|
|
100.0
|
|
|
|
3,814,681
|
|
|
|
100.0
|
|
Cost
of sales
|
|
|
1,834,336
|
|
|
|
86.4
|
|
|
|
1,676,177
|
|
|
|
86.9
|
|
|
|
3,697,249
|
|
|
|
86.6
|
|
|
|
3,313,061
|
|
|
|
86.9
|
|
Gross
profit
|
|
|
288,194
|
|
|
|
13.6
|
|
|
|
253,365
|
|
|
|
13.1
|
|
|
|
572,415
|
|
|
|
13.4
|
|
|
|
501,620
|
|
|
|
13.1
|
|
CarMax
Auto Finance
income
|
|
|
33,412
|
|
|
|
1.6
|
|
|
|
36,512
|
|
|
|
1.9
|
|
|
|
70,480
|
|
|
|
1.7
|
|
|
|
68,906
|
|
|
|
1.8
|
|
Selling,
general, and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses
|
|
|
214,196
|
|
|
|
10.1
|
|
|
|
200,049
|
|
|
|
10.4
|
|
|
|
428,010
|
|
|
|
10.0
|
|
|
|
387,015
|
|
|
|
10.1
|
|
Gain
on franchise
disposition
|
|
|
740
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
740
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
Interest
expense
|
|
|
950
|
|
|
|
―
|
|
|
|
2,335
|
|
|
|
0.1
|
|
|
|
2,966
|
|
|
|
0.1
|
|
|
|
4,282
|
|
|
|
0.1
|
|
Interest
income
|
|
|
245
|
|
|
|
―
|
|
|
|
300
|
|
|
|
―
|
|
|
|
623
|
|
|
|
―
|
|
|
|
567
|
|
|
|
―
|
|
Earnings
before income
taxes
|
|
|
107,445
|
|
|
|
5.1
|
|
|
|
87,793
|
|
|
|
4.5
|
|
|
|
213,282
|
|
|
|
5.0
|
|
|
|
179,796
|
|
|
|
4.7
|
|
Provision
for income taxes
|
|
|
42,450
|
|
|
|
2.0
|
|
|
|
33,529
|
|
|
|
1.7
|
|
|
|
82,932
|
|
|
|
1.9
|
|
|
|
68,756
|
|
|
|
1.8
|
|
Net
earnings
|
|
$ |
64,995
|
|
|
|
3.1
|
|
|
$ |
54,264
|
|
|
|
2.8
|
|
|
$ |
130,350
|
|
|
|
3.1
|
|
|
$ |
111,040
|
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
215,891
|
|
|
|
|
|
|
|
211,831
|
|
|
|
|
|
|
|
215,592
|
|
|
|
|
|
|
|
211,181
|
|
|
|
|
|
Diluted
|
|
|
220,580
|
|
|
|
|
|
|
|
215,301
|
|
|
|
|
|
|
|
220,355
|
|
|
|
|
|
|
|
214,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.30
|
|
|
|
|
|
|
$ |
0.26
|
|
|
|
|
|
|
$ |
0.60
|
|
|
|
|
|
|
$ |
0.53
|
|
|
|
|
|
Diluted
|
|
$ |
0.29
|
|
|
|
|
|
|
$ |
0.25
|
|
|
|
|
|
|
$ |
0.59
|
|
|
|
|
|
|
$ |
0.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Percents
are
calculated as a percentage of net sales and operating revenues and may not
equal
totals due to rounding.
(2)
Share and per
share amounts have been adjusted for the effect of our 2-for-1 stock split
in
March 2007.
See
accompanying notes to consolidated financial statements.
CARMAX,
INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
(In
thousands except share data)
|
August
31, 2007
|
|
February
28, 2007
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
Current
assets:
|
|
|
|
|
Cash
and cash equivalents
|
$
|
7,589
|
|
$
|
19,455
|
|
Accounts
receivable, net
|
|
56,165
|
|
|
71,413
|
|
Automobile
loan receivables held for sale
|
|
4,464
|
|
|
6,162
|
|
Retained
interest in securitized receivables
|
|
224,334
|
|
|
202,302
|
|
Inventory
|
|
820,171
|
|
|
836,116
|
|
Prepaid
expenses and other current assets
|
|
19,993
|
|
|
15,068
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
1,132,716
|
|
|
1,150,516
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
755,276
|
|
|
651,850
|
|
Deferred
income taxes
|
|
42,467
|
|
|
40,174
|
|
Other
assets
|
|
47,331
|
|
|
43,033
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
$
|
1,977,790
|
|
$
|
1,885,573
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
Accounts
payable
|
$
|
248,762
|
|
$
|
254,895
|
|
Accrued
expenses and other current liabilities
|
|
63,028
|
|
|
68,885
|
|
Accrued
income taxes
|
|
8,207
|
|
|
23,377
|
|
Deferred
income taxes
|
|
14,680
|
|
|
13,132
|
|
Short-term
debt
|
|
2,672
|
|
|
3,290
|
|
Current
portion of long-term debt
|
|
86,265
|
|
|
148,443
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
423,614
|
|
|
512,022
|
|
|
|
|
|
|
|
|
|
Long-term
debt, excluding current portion
|
|
27,361
|
|
|
33,744
|
|
Deferred
revenue and other liabilities
|
|
115,982
|
|
|
92,432
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
566,957
|
|
|
638,198
|
|
|
|
|
|
|
|
|
|
Commitments
and contingent liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
Common
stock, $0.50 par value; 350,000,000 shares authorized; 217,879,914
and
216,028,166 shares issued and outstanding at August 31, 2007,
and February 28, 2007, respectively
|
|
108,940
|
|
|
108,014
|
|
Capital
in excess of par value
|
|
617,902
|
|
|
587,546
|
|
Accumulated
other comprehensive loss
|
|
(19,303 |
) |
|
(20,332 |
) |
Retained
earnings
|
|
703,294
|
|
|
572,147
|
|
|
|
|
|
|
|
|
|
TOTAL
SHAREHOLDERS’ EQUITY
|
|
1,410,833
|
|
|
1,247,375
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$
|
1,977,790
|
|
$
|
1,885,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
CARMAX,
INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
(Unaudited)
(In
thousands)
|
|
Six
Months Ended August 31
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$
|
130,350
|
|
|
$
|
111,040
|
|
Adjustments
to reconcile net earnings to net
|
|
|
|
|
|
|
|
|
cash
provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and
amortization
|
|
|
22,026
|
|
|
|
16,727
|
|
Share-based
compensation
expense
|
|
|
17,744
|
|
|
|
19,636
|
|
(Gain)
loss on disposition of
assets
|
|
|
(28 |
) |
|
|
86
|
|
Deferred
income tax
benefit
|
|
|
(1,324 |
) |
|
|
(18,937 |
) |
Net
decrease (increase)
in:
|
|
|
|
|
|
|
|
|
Accounts
receivable,
net
|
|
|
15,248
|
|
|
|
9,931
|
|
Automobile
loan receivables held
for sale, net
|
|
|
1,698
|
|
|
|
120
|
|
Retained
interest in securitized
receivables
|
|
|
(22,032 |
) |
|
|
(31,512 |
) |
Inventory
|
|
|
15,945
|
|
|
|
(64,664 |
) |
Prepaid
expenses and other
current assets
|
|
|
(4,925 |
) |
|
|
(860 |
) |
Other
assets
|
|
|
(4,298 |
) |
|
|
144
|
|
Net
increase (decrease)
in:
|
|
|
|
|
|
|
|
|
Accounts
payable, accrued
expenses and
|
|
|
|
|
|
|
|
|
other
current liabilities, and
accrued income taxes
|
|
|
(26,695 |
) |
|
|
37,442
|
|
Deferred
revenue and other
liabilities
|
|
|
24,316
|
|
|
|
7,598
|
|
Net
cash provided by operating activities
|
|
|
168,025
|
|
|
|
86,751
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(132,092 |
) |
|
|
(54,317 |
) |
Proceeds
from sales of assets
|
|
|
1,272
|
|
|
|
3,467
|
|
Sales
of money market securities
|
|
|
4,000
|
|
|
|
20,975
|
|
Purchases
of investment securities available-for-sale
|
|
|
(4,000 |
) |
|
|
(20,975 |
) |
Net
cash used in investing activities
|
|
|
(130,820 |
) |
|
|
(50,850 |
) |
|
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
(Decrease)
increase in short-term debt, net
|
|
|
(618 |
) |
|
|
1,452
|
|
Payments
on long-term debt
|
|
|
(62,007 |
) |
|
|
(56,871 |
) |
Equity
issuances, net
|
|
|
9,947
|
|
|
|
13,928
|
|
Excess
tax benefits from share-based payment arrangements
|
|
|
3,607
|
|
|
|
7,612
|
|
Net
cash used in financing activities
|
|
|
(49,071 |
) |
|
|
(33,879 |
) |
|
|
|
|
|
|
|
|
|
|
(Decrease)
increase in cash and cash equivalents
|
|
|
(11,866 |
) |
|
|
2,022
|
|
Cash
and cash equivalents at beginning of year
|
|
|
19,455
|
|
|
|
21,759
|
|
Cash
and cash equivalents at end of period
|
|
$
|
7,589
|
|
|
$
|
23,781
|
|
See
accompanying notes to consolidated financial statements.
CARMAX,
INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
(Unaudited)
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 quality used vehicles at low, “no-haggle” prices using a
customer-friendly sales process in an attractive, modern sales facility. We
also
sell new vehicles under various franchise agreements. We provide our
customers with a full range of related 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; the
appraisal and purchase of vehicles directly from consumers; and vehicle repair
service. Vehicles purchased through our appraisal process that do not
meet our retail standards are sold at on-site wholesale auctions.
Basis
of Presentation. The
accompanying interim unaudited consolidated financial statements include
the accounts
of CarMax and our wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain previously reported amounts have been reclassified to conform with
the
current period presentation, including changes in certain retirement plan
liabilities, which have been reclassified on our consolidated statements of
cash
flows from accounts payable, accrued expenses and other current liabilities,
and
accrued income taxes to deferred revenue and other liabilities.
These
consolidated financial statements have been prepared in conformity with U.S.
generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information
and footnotes required by U.S. generally accepted accounting principles for
complete financial statements. In the opinion of management, such interim
consolidated financial statements reflect all normal recurring adjustments
considered necessary to present fairly the financial position and the results
of
operations and cash flows for the interim periods presented. The results of
operations for the interim periods are not necessarily indicative of the results
to be expected for the full fiscal year. These consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and footnotes included in our Annual Report on Form
10-K for the fiscal year ended February 28, 2007.
On
February 22, 2007, the board of directors declared a 2-for-1 stock split in
the
form of a common stock dividend for shareholders of record on March 19, 2007,
which was distributed on March 26, 2007. All share and per share
amounts included in the consolidated financial statements and accompanying
notes
have been adjusted to reflect this stock split.
Cash
and Cash Equivalents. Cash equivalents of $1.4 million at August 31,
2007, and $1.5 million at February 28, 2007, consisted of highly liquid
investments with original maturities of three months or less.
3.
|
CarMax
Auto Finance
Income
|
Our
finance operation, 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 is 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 and losses.
|
|
|
Three
Months Ended
August
31
|
|
|
Six
Months Ended
August
31
|
|
(In
millions)
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Total
gain income
|
|
|
$
|
25.0
|
|
|
$
|
28.9
|
|
|
$
|
52.8
|
|
|
$
|
53.7
|
|
Other
CAF income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing
fee income
|
|
|
|
9.2
|
|
|
|
7.9
|
|
|
|
18.1
|
|
|
|
15.3
|
|
Interest
income
|
|
|
|
7.8
|
|
|
|
6.3
|
|
|
|
15.6
|
|
|
|
12.4
|
|
Total
other CAF income
|
|
|
|
17.0
|
|
|
|
14.2
|
|
|
|
33.7
|
|
|
|
27.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
CAF expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAF
payroll and fringe benefit expense
|
|
|
|
3.8
|
|
|
|
2.9
|
|
|
|
7.4
|
|
|
|
5.7
|
|
Other
direct CAF expenses
|
|
|
|
4.7
|
|
|
|
3.7
|
|
|
|
8.5
|
|
|
|
6.8
|
|
Total
direct CAF expenses
|
|
|
|
8.5
|
|
|
|
6.6
|
|
|
|
16.0
|
|
|
|
12.5
|
|
CarMax
Auto Finance income
|
|
|
$
|
33.4
|
|
|
$
|
36.5
|
|
|
$
|
70.5
|
|
|
$
|
68.9
|
|
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 benefit 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.
We
use a
securitization program to fund substantially all of the automobile loan
receivables originated by CAF. We sell the automobile loan receivables to a
wholly owned, bankruptcy-remote, special purpose entity that transfers an
undivided interest in the receivables to a group of third-party investors.
The
special purpose entity and investors have no recourse to our assets. Our risk
is
limited to the retained interest on our consolidated balance sheets. The
investors issue 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. This program is referred to as the warehouse
facility.
We
routinely use public securitizations to refinance the receivables previously
securitized through the warehouse facility. In a public securitization, a pool
of automobile 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. Depending on the securitization structure and market
conditions, refinancing receivables in a public securitization may or may not
have a significant impact on our results. The impact of refinancing
activity will depend upon the particular securitization structures and market
conditions at the refinancing date.
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.
|
|
|
Three
Months Ended
August
31
|
|
|
Six
Months Ended
August
31
|
|
(In
millions)
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
loans originated
|
|
|
$
|
620.9
|
|
|
$
|
582.0
|
|
|
$
|
1,263.2
|
|
|
$
|
1,148.8
|
|
Total
loans sold
|
|
|
$
|
668.5
|
|
|
$
|
630.9
|
|
|
$
|
1,315.5
|
|
|
$
|
1,189.9
|
|
Total
gain income (1)
|
|
|
$
|
25.0
|
|
|
$
|
28.9
|
|
|
$
|
52.8
|
|
|
$
|
53.7
|
|
Total
gain income as a percentage of total loans sold (1)
|
|
|
|
3.7 |
% |
|
|
4.6 |
% |
|
|
4.0 |
% |
|
|
4.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes
the effects of valuation adjustments, new public securitizations,
and the
repurchase and resale of receivables in existing public securitizations,
as applicable.
|
|
Retained
Interest. We retain an interest in the automobile loan receivables that
we securitize. The retained interest, presented as a current asset on
our consolidated balance sheets, serves as a credit enhancement for the benefit
of the investors in the securitized receivables. 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, and an undivided ownership interest in the securitized
receivables, or “required excess receivables,” as described below. On
a combined basis, the reserve accounts and required excess receivables are
generally 2% to 4% of managed receivables. The special purpose
entities and the investors have no recourse to our assets.
The
fair
value of the retained interest was $224.3 million as of August 31, 2007, and
$202.3 million as of February 28, 2007. The retained interest had a
weighted average life of 1.6 years as of August 31, 2007, and 1.5 years as
of
February 28, 2007. 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 that 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, and discount rates appropriate for the type of asset and
risk.
The value of interest-only strip receivables may 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 markets;
therefore, actual performance may 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 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 and that any excess cash generated
by
the receivables 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 the company. In the public 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 the company. The amount on deposit in reserve accounts was $32.7 million
as
of August 31, 2007, and $31.5 million as of February 28, 2007.
Required
excess receivables. The total value of the securitized receivables must
exceed, by a specified amount, the principal amount owed to the investors.
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 the
company. The unpaid principal balance related to the
required excess receivables was $61.3 million
as of August 31, 2007, and $57.0 million as of
February 28, 2007.
Key
Assumptions Used in Measuring the Retained Interest and Sensitivity
Analysis. The
following table shows the key economic assumptions used in measuring the
fair
value of the retained interest at August 31, 2007, 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 may result in changes in another, which
might magnify or counteract the sensitivities.
(In
millions)
|
Assumptions
Used
|
Impact
on Fair
Value
of 10%
Adverse
Change
|
Impact
on Fair
Value
of 20%
Adverse
Change
|
Prepayment
rate
|
1.40%-1.52%
|
$8.7
|
$17.1
|
Cumulative
loss rate
|
1.20%-2.70%
|
$6.7
|
$13.5
|
Annual
discount rate
|
12.00%
|
$3.4
|
$6.6
|
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
loss rate. The cumulative loss rate, or “static pool” net losses, is
calculated by dividing the total projected credit losses of a pool of
receivables by the original pool balance. Projected 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.
Continuing
Involvement with Securitized Receivables. We continue to manage the
automobile 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 August 31
|
|
|
As
of February 28
|
|
(In
millions)
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Accounts
31+ days past due
|
|
|
$
|
75.7
|
|
|
$
|
54.2
|
|
|
$
|
56.9
|
|
|
$
|
37.4
|
|
Ending
managed receivables
|
|
|
$
|
3,596.0
|
|
|
$
|
3,068.7
|
|
|
$
|
3,311.0
|
|
|
$
|
2,772.5
|
|
Past
due accounts as a percentage of ending managed receivables
|
|
|
|
2.10 |
% |
|
|
1.77 |
% |
|
|
1.72 |
% |
|
|
1.35 |
% |
CREDIT
LOSS INFORMATION
|
|
|
Three
Months Ended
August
31
|
|
|
Six
Months Ended
August
31
|
|
(In
millions)
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
credit losses on managed receivables
|
|
|
$
|
9.2
|
|
|
$
|
4.2
|
|
|
$
|
14.7
|
|
|
$
|
7.0
|
|
Average
managed receivables
|
|
|
$
|
3,550.6
|
|
|
$
|
3,010.5
|
|
|
$
|
3,481.0
|
|
|
$
|
2,935.6
|
|
Annualized
net credit losses as a percentage of average managed
receivables
|
|
|
|
1.04 |
% |
|
|
0.56 |
% |
|
|
0.85 |
% |
|
|
0.48 |
% |
Recovery
rate
|
|
|
|
51.4 |
% |
|
|
49.5 |
% |
|
|
52.1 |
% |
|
|
51.5 |
% |
SELECTED
CASH FLOWS FROM SECURITIZED RECEIVABLES
|
|
|
Three
Months Ended
August
31
|
|
|
Six
Months Ended
August
31
|
|
(In
millions)
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Proceeds
from new securitizations
|
|
|
$
|
542.5
|
|
|
$
|
491.0
|
|
|
$
|
1,031.5
|
|
|
$
|
941.0
|
|
Proceeds
from collections reinvested in revolving period
securitizations
|
|
|
$
|
289.5
|
|
|
$
|
264.6
|
|
|
$
|
593.1
|
|
|
$
|
512.5
|
|
Servicing
fees received
|
|
|
$
|
9.1
|
|
|
$
|
7.7
|
|
|
$
|
17.8
|
|
|
$
|
15.0
|
|
Other
cash flows received from the retained interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-only
strip receivables
|
|
|
$
|
25.7
|
|
|
$
|
24.8
|
|
|
$
|
47.5
|
|
|
$
|
43.8
|
|
Reserve
account releases
|
|
|
$
|
5.5
|
|
|
$
|
8.2
|
|
|
$
|
5.8
|
|
|
$
|
8.5
|
|
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 public securitizations that were refinanced through the warehouse
facility totaled $50.7 million in the second quarter and first half of fiscal
2008 and $41.0 million in the second quarter and first half of fiscal
2007. Proceeds received when we refinance receivables in public
securitizations are excluded from this table as they are not considered new
securitizations.
Proceeds
from collections. Proceeds from collections reinvested in revolving period
securitizations represent principal amounts collected on receivables securitized
through the warehouse facility that are used to fund new
originations.
Servicing
fees. Servicing fees received represent cash fees paid to CarMax to
service the securitized receivables.
Other
cash flows received from the retained interest. Other cash flows received
from the retained interest represent cash that we receive from securitized
receivables other than servicing fees. It includes cash collected on
interest-only strip receivables and amounts released to us from reserve
accounts.
Financial
Covenants and Performance Triggers. Certain of the
securitization agreements include various financial covenants and performance
triggers. These agreements require us to meet financial covenants
related to a maximum total liabilities to tangible net worth ratio and a minimum
fixed charge coverage ratio. Performance triggers require certain
pools of securitized receivables to achieve specified thresholds related to
portfolio yields, loss rates, and delinquency rates. If these financial
covenants and/or thresholds are not met, in addition to other consequences,
we
may be unable to continue to securitize receivables through the warehouse
facility. At August 31, 2007, we were in compliance with the
financial covenants, and the securitized receivables were in compliance with
the
performance triggers.
We
enter
into amortizing fixed-pay interest rate swaps relating to our automobile loan
receivable securitizations. Swaps are used to better match funding
costs to the fixed-rate receivables being securitized by converting
variable-rate financing costs in the warehouse facility to fixed-rate
obligations. During
the second quarter of fiscal 2008, we entered into one 40-month amortizing
interest rate swap, fourteen 41-month amortizing interest rate swaps, and one
16-month amortizing interest rate swap, with initial notional amounts totaling
$557.5 million. The amortized notional amount of all outstanding
swaps related to the automobile loan receivable securitizations was
$869.3 million at August 31, 2007, and $597.5 million at February 28,
2007. The fair value of swaps included in accounts payable
totaled a net liability of $4.0 million at August 31, 2007, and $1.0
million at February 28, 2007.
The
market and credit risks associated with interest rate swaps 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 used to match
funding costs to the use of the funding. Credit risk is the exposure
to nonperformance of another party to an agreement. We mitigate
credit risk by dealing with highly rated bank counterparties.
We
have a
noncontributory defined benefit pension plan (the “pension plan”) covering the
majority of full-time employees. We also have an unfunded nonqualified plan
(the
“restoration plan”) that restores retirement benefits for certain senior
executives who are affected by the 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.
COMPONENTS
OF NET PENSION EXPENSE
|
|
Three
Months Ended August 31
|
|
|
|
Pension
Plan
|
|
|
Restoration
Plan
|
|
|
Total
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Service
cost
|
|
$ |
4,173
|
|
|
$ |
3,012
|
|
|
$ |
201
|
|
|
$ |
70
|
|
|
$ |
4,374
|
|
|
$ |
3,082
|
|
Interest
cost
|
|
|
1,639
|
|
|
|
1,024
|
|
|
|
101
|
|
|
|
97
|
|
|
|
1,740
|
|
|
|
1,121
|
|
Expected
return on plan assets
|
|
|
(1,108 |
) |
|
|
(737 |
) |
|
|
–
|
|
|
|
–
|
|
|
|
(1,108 |
) |
|
|
(737 |
) |
Amortization
of prior service cost
|
|
|
9
|
|
|
|
9
|
|
|
|
6
|
|
|
|
6
|
|
|
|
15
|
|
|
|
15
|
|
Recognized
actuarial loss
|
|
|
964
|
|
|
|
440
|
|
|
|
46
|
|
|
|
62
|
|
|
|
1,010
|
|
|
|
502
|
|
Net
pension expense
|
|
$ |
5,677
|
|
|
$ |
3,748
|
|
|
$ |
354
|
|
|
$ |
235
|
|
|
$ |
6,031
|
|
|
$ |
3,983
|
|
|
|
Six
Months Ended August 31
|
|
|
|
Pension
Plan
|
|
|
Restoration
Plan
|
|
|
Total
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Service
cost
|
|
$ |
7,836
|
|
|
$ |
6,024
|
|
|
$ |
294
|
|
|
$ |
206
|
|
|
$ |
8,130
|
|
|
$ |
6,230
|
|
Interest
cost
|
|
|
2,998
|
|
|
|
2,048
|
|
|
|
204
|
|
|
|
196
|
|
|
|
3,202
|
|
|
|
2,244
|
|
Expected
return on plan
assets
|
|
|
(1,998 |
) |
|
|
(1,474 |
) |
|
|
–
|
|
|
|
–
|
|
|
|
(1,998 |
) |
|
|
(1,474 |
) |
Amortization
of prior service cost
|
|
|
18
|
|
|
|
18
|
|
|
|
12
|
|
|
|
12
|
|
|
|
30
|
|
|
|
30
|
|
Recognized
actuarial loss
|
|
|
1,486
|
|
|
|
878
|
|
|
|
92
|
|
|
|
124
|
|
|
|
1,578
|
|
|
|
1,002
|
|
Net
pension expense
|
|
$ |
10,340
|
|
|
$ |
7,494
|
|
|
$ |
602
|
|
|
$ |
538
|
|
|
$ |
10,942
|
|
|
$ |
8,032
|
|
We
made
contributions to the pension plan totaling $2.5 million during the second
quarter of fiscal 2008. We expect to contribute approximately $11.4
million to the pension plan in fiscal 2008.
7.
|
Share-Based
Compensation
|
We
maintain long-term incentive plans for management, key employees, and the
non-employee 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 grants, or a combination of awards. To date, we have
awarded no incentive stock options.
Stock
options are awards that allow the recipient to purchase shares of our stock
at a
fixed price. Stock options are granted at an exercise price equal to the fair
market value of our stock on the grant date. Substantially all of the stock
options vest annually in equal amounts over periods of three to four years,
and
generally expire no later than ten years after the date of the
grant. Restricted stock awards are subject to specified restrictions
and a risk of forfeiture. The restrictions typically lapse three years from
the
grant date.
In
fiscal
2006 and prior years, we primarily awarded stock options to employees that
received share-based compensation. Beginning in fiscal 2007, the
substantial majority of employees receiving awards now receive restricted stock
instead of stock options. Senior management continues to receive
awards of stock options. Non-employee directors continue to receive
awards of stock options and stock grants.
COMPOSITION
OF SHARE-BASED COMPENSATION EXPENSE
|
|
|
Three
Months Ended
August
31
|
|
|
Six
Months Ended
August
31
|
|
(In
thousands)
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Cost
of sales
|
|
|
$
|
467
|
|
|
$
|
382
|
|
|
$
|
924
|
|
|
$
|
722
|
|
CarMax
Auto Finance income
|
|
|
|
296
|
|
|
|
256
|
|
|
|
597
|
|
|
|
472
|
|
Selling,
general, and administrative expenses
|
|
|
|
7,960
|
|
|
|
12,506
|
|
|
|
16,876
|
|
|
|
18,884
|
|
Share-based
compensation expense
|
|
|
$
|
8,723
|
|
|
$
|
13,144
|
|
|
$
|
18,397
|
|
|
$
|
20,078
|
|
We
measure share-based compensation cost at the grant date, based on the estimated
fair value of the award and the number of awards expected to vest. We recognize
compensation expense for stock options and restricted stock on a straight-line
basis over the requisite service period of the entire award, which is generally
the vesting period. Our employee stock purchase plan is considered a
liability-classified compensatory plan, and the associated costs of $0.7 million
in the first half of fiscal 2008 and $0.4 million in the first half of fiscal
2007 are included in share-based compensation expense. There were no
capitalized share-based compensation costs at August 31, 2007 or
2006.
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
at March 1, 2007
|
|
|
|
13,775
|
|
|
$
|
12.39
|
|
|
|
|
|
|
|
|
|
Options
granted
|
|
|
|
1,775
|
|
|
$
|
25.04
|
|
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
|
(993 |
) |
|
$
|
10.02
|
|
|
|
|
|
|
|
|
|
Options
forfeited or expired
|
|
|
|
(166 |
) |
|
$
|
17.13
|
|
|
|
|
|
|
|
|
|
Outstanding
as of August 31, 2007
|
|
|
|
14,391
|
|
|
$
|
14.06
|
|
|
|
5.9
|
|
|
$
|
124,863
|
|
Exercisable
as of August 31, 2007
|
|
|
|
8,457
|
|
|
$
|
11.46
|
|
|
|
5.3
|
|
|
$
|
92,751
|
|
For
the
six months ended August 31, 2007 and 2006, we granted to our employees
nonqualified options to purchase 1,719,760 and 1,828,200 shares of common stock,
respectively. For the six months ended August 31, 2007 and 2006, we
granted to our directors nonqualified options to purchase 55,493 and 68,040
shares of common stock, respectively. The total cash received from
employees as a result of employee stock option exercises, net of payroll taxes
withheld, was $9.9 million in the first half of fiscal 2008 and $13.9
million in the first half of fiscal 2007. We settle employee stock option
exercises with authorized but unissued shares of our common stock. The total
intrinsic value of options exercised was $15.2 million for the first six
months of fiscal 2008 and $25.8 million for the first six months of fiscal
2007. We realized related income tax benefits of $5.6 million in the first
half of fiscal 2008 and $9.8 million in the first half of fiscal
2007.
OUTSTANDING
STOCK OPTIONS
As
of August 31, 2007
|
|
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
|
|
$2.44 |
|
|
473
|
|
|
|
0.5
|
|
|
$
|
2.44
|
|
|
|
473
|
|
|
$
|
2.44
|
|
$7.02
to $9.30 |
|
|
2,447
|
|
|
|
5.5
|
|
|
$
|
7.16
|
|
|
|
2,447
|
|
|
$
|
7.16
|
|
$10.74
to $13.42 |
|
|
4,890
|
|
|
|
6.2
|
|
|
$
|
13.21
|
|
|
|
2,862
|
|
|
$
|
13.23
|
|
$14.13
to $15.72 |
|
|
3,017
|
|
|
|
6.5
|
|
|
$
|
14.70
|
|
|
|
2,214
|
|
|
$
|
14.67
|
|
$16.33
to $22.29 |
|
|
1,833
|
|
|
|
5.7
|
|
|
$
|
17.14
|
|
|
|
458
|
|
|
$
|
17.12
|
|
$24.99
to $25.79 |
|
|
1,731
|
|
|
|
6.6
|
|
|
$
|
25.04
|
|
|
|
3
|
|
|
$
|
25.67
|
|
Total
|
|
|
14,391
|
|
|
|
5.9
|
|
|
$
|
14.06
|
|
|
|
8,457
|
|
|
$
|
11.46
|
|
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 employees 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 the contractual term of the option, the probability that the option
will
be exercised prior to the end of its contractual life, and the probability
of
termination or retirement of the option holder. For this reason, we believe
that
the binomial model provides a fair value that is more representative of actual
experience and future expected experience than that value calculated using
the
Black-Scholes model. For grants to nonemployee directors, we continue
to use the Black-Scholes model to estimate the fair value of stock option awards
due to the comparatively small population of recipients of these
awards. Estimates of fair value are not intended to predict actual
future events or the value ultimately realized by the recipients of share-based
awards.
The
weighted average fair values at the date of grant for options granted during
the
six month periods ended August 31, 2007 and 2006, were $8.58 and $7.08 per
share, respectively. The unrecognized compensation costs related to
nonvested options totaled $32.9 million at August 31,
2007. These costs are expected to be recognized over a weighted
average period of 2.2 years.
ASSUMPTIONS
USED TO ESTIMATE OPTION VALUES
|
Six
Months Ended August 31
|
|
2007
|
2006
|
Dividend
yield
|
0.0%
|
0.0%
|
Expected
volatility factor(1)
|
28.0%
- 54.0%
|
29.8%
- 63.4%
|
Weighted
average expected volatility
|
38.8%
|
47.4%
|
Risk-free
interest rate(2)
|
4.6%
- 5.0%
|
4.8%
- 5.1%
|
Expected
term (in years)(3)
|
4.2
- 4.4
|
4.5
- 4.6
|
(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
(In
thousands)
|
|
|
Number
of Shares
|
|
|
Weighted
Average Grant Date Fair Value
|
|
Outstanding
as of March 1, 2007
|
|
|
|
920
|
|
|
$
|
17.20
|
|
Restricted
stock granted
|
|
|
|
904
|
|
|
$
|
24.99
|
|
Restricted
stock vested or cancelled
|
|
|
|
(57 |
) |
|
$
|
21.19
|
|
Outstanding
as of August 31, 2007
|
|
|
|
1,767
|
|
|
$
|
21.05
|
|
For
the
six month periods ended August 31, 2007 and 2006, we granted to our employees
restricted stock of 903,815 shares and 983,500 shares, respectively. The fair
value of a restricted stock award is determined and fixed based on the price
of
our stock on the grant date. The unrecognized compensation costs related to
nonvested restricted stock awards totaled $24.6 million at August 31,
2007. These costs are expected to be recognized over a weighted
average period of 2.1 years.
In
July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”),
which establishes a consistent framework for determining the appropriate level
of tax reserves to maintain for “uncertain tax positions.” This interpretation
of Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for
Income Taxes,” 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 fifty percent
likely to be realized. FIN 48 also established new disclosure requirements
related to tax reserves. We adopted FIN 48 as of March 1, 2007,
recording a decrease of $0.8 million in accrued tax reserves and a corresponding
increase in retained earnings.
At
March
1, 2007, we had $24.4 million of gross unrecognized tax benefits, $1.5 million
of which, if recognized, would affect the company’s effective tax
rate. At August 31, 2007, we had $18.7 million of gross unrecognized
tax benefits, $2.2 million of which, if recognized, would affect the company’s
effective tax rate. It is reasonably possible that the amount of the
unrecognized tax benefit with respect to certain of our unrecognized 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 position, or cash flows.
Our
continuing practice is to recognize interest and penalties related to income
tax
matters in selling, general, and administrative costs. We
had $4.7 million accrued for interest as of March 1, 2007, and $4.2 million
as
of August 31, 2007.
CarMax
is
subject to U.S. federal income tax as well as income tax of multiple states
and
local jurisdictions. With 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 2003.
9.
|
Net
Earnings per Share
|
BASIC
AND DILUTIVE NET EARNINGS PER SHARE RECONCILIATIONS
|
|
Three
Months
Ended
August 31
|
|
|
Six
Months
Ended
August 31
|
|
(In
thousands except per share data)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
earnings available to common shareholders
|
|
$
|
64,995
|
|
|
$
|
54,264
|
|
|
$
|
130,350
|
|
|
$
|
111,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
215,891
|
|
|
|
211,831
|
|
|
|
215,592
|
|
|
|
211,181
|
|
Dilutive
potential common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
4,161
|
|
|
|
3,389
|
|
|
|
4,288
|
|
|
|
3,485
|
|
Restricted
stock
|
|
|
529
|
|
|
|
82
|
|
|
|
475
|
|
|
|
41
|
|
Weighted
average common shares and dilutive potential common shares
|
|
|
220,580
|
|
|
|
215,301
|
|
|
|
220,355
|
|
|
|
214,706
|
|
Basic
net earnings per
share
|
|
$
|
0.30
|
|
|
$
|
0.26
|
|
|
$
|
0.60
|
|
|
$
|
0.53
|
|
Diluted
net earnings per
share
|
|
$
|
0.29
|
|
|
$
|
0.25
|
|
|
$
|
0.59
|
|
|
$
|
0.52
|
|
Certain
options were outstanding and not included in the calculation of diluted net
earnings per share because the options’ exercise prices were greater than the
average market price of our common stock during the respective
period. As of August 31, 2007, options to purchase 1,740,453 shares
of common stock with exercise prices ranging from $22.29 to $25.79 per share
were outstanding and not included in the calculation. As of August
31, 2006, options to purchase 2,087,686 shares with exercise prices ranging
from
$14.13 to $21.72 per share were outstanding and not included in the
calculation.
As
of
August 31, 2007, $88.5 million was outstanding under our $500 million revolving
credit facility, with the remainder fully available to us. The
outstanding balance included $2.7 million classified as short-term debt and
$85.8 million classified as current portion of long-term debt. We
classified the outstanding balance at August 31, 2007, as current portion of
long-term debt based on our expectation that this balance will not remain
outstanding for more than one year.
Obligations
under capital leases as of August 31, 2007, consisted of $0.5 million classified
as current portion of long-term debt and $27.4 million classified as long-term
debt. During the second quarter, we divested our Orlando
Chrysler-Jeep-Dodge new car franchise and terminated the capital lease on the
building site.
11.
|
Accumulated
Other Comprehensive
Loss
|
Effective
March 1, 2007, changes in the funded status of our retirement plans are
recognized in accumulated other comprehensive loss
(“AOCL”). There was no AOCL for the six months ended August 31,
2006. Changes in each component of AOCL for the six months ended
August 31, 2007, net of income taxes, are presented below.
(In
thousands)
|
|
|
Unrecognized
Actuarial Losses
|
|
|
Unrecognized
Prior Service Cost
|
|
|
Total
Accumulated Other Comprehensive Loss
|
|
Balance
as of February 28, 2007
|
|
|
$
|
20,094
|
|
|
$
|
238
|
|
|
$
|
20,332
|
|
Amortization
expense
|
|
|
|
(1,010 |
) |
|
|
(19 |
) |
|
|
(1,029 |
) |
Balance
as of August 31, 2007
|
|
|
$
|
19,084
|
|
|
$
|
219
|
|
|
$
|
19,303
|
|
On
June
12, 2007, Ms. Regina Hankins filed a putative class action lawsuit against
CarMax, Inc., in Baltimore County Circuit Court, Maryland. We operate
four stores in the state of Maryland. The plaintiff alleges that,
since May 25, 2004, CarMax has not properly disclosed its vehicles’ prior rental
history, if any. The plaintiff seeks compensatory damages, punitive damages,
injunctive relief, and the recovery of attorneys’ fees. At this time,
we continue to evaluate the allegations and our defenses. We are
unable to make a reasonable estimate of the amount or range of loss that could
result from an unfavorable outcome in this matter.
CarMax
is
subject to various other legal proceedings, claims, and liabilities that arise
in the ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these other actions will not materially
affect the financial position or results of operations of CarMax.
In
September 2007, we completed a $500 million public securitization of automobile
loan receivables. Adverse market conditions drove an increase in
asset-backed credit spreads and negatively impacted our hedge effectiveness
for
this transaction, resulting in a reduction in CAF gain income of approximately
$8 million in the third quarter of fiscal 2008. Approximately $4.7
million of the reduction resulted from increased credit spreads, and a
majority
of the remaining $3.3 million reduction resulted from unwinding interest
rate
swaps.
14.
|
Recent
Accounting
Pronouncements
|
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”), which defines fair value, establishes a framework for measuring fair
value in U.S. generally accepted accounting principles, and expands disclosures
about fair value measurements. The statement does not require new
fair value measurements, but is applied to the extent that other accounting
pronouncements require or permit fair value measurements. Companies
will be required to disclose the extent to which fair value is used to measure
assets and liabilities, the inputs used to develop the measurements, and the
effect of certain of the measurements on earnings (or changes in net assets)
for
the period. CarMax will be required to adopt SFAS 157 as of March 1,
2008. We do not expect the adoption of SFAS 157 to have a material
impact on our financial position, results of operations, and cash
flows.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an amendment of FASB
Statement No. 115” (“SFAS 159”), which permits all entities to choose to measure
many financial instruments and certain other items at fair value and
consequently report unrealized gains and losses on these items in
earnings. SFAS 159 will be effective for our fiscal year beginning
March 1, 2008. We do not expect the adoption of SFAS 159 to have a
material impact on our financial position, results of operations, and cash
flows.
ITEM
2.
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 audited consolidated financial statements, the
accompanying notes, and the MD&A included in the company's Annual Report on
Form 10-K for the fiscal year ended February 28, 2007, as well as our
consolidated financial statements and the accompanying notes included in this
Form 10-Q.
In
this
discussion, “we,” “our,” “us,” “CarMax,” “CarMax, Inc.,” and “the company” refer
to CarMax, Inc. and its wholly owned subsidiaries, unless the context requires
otherwise. Amounts and percentages in tables may not total due to
rounding. Certain prior year amounts have been reclassified to
conform with the current period 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.
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. As of August
31, 2007, we operated 81 used car superstores in 38 markets, comprised of 28
mid-sized markets, 9 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. At that date, we also operated six
new car franchises, all of which were integrated or co-located with our used
car
superstores.
We
believe the CarMax consumer offer is unique in the automobile retailing
marketplace. Our offer gives consumers a way to shop for cars in the
same manner that they shop for items at other “big box”
retailers. Our consumer offer is structured around four core
equities: low, no-haggle prices; a broad selection; high quality; and
customer-friendly service. 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 (“ESP”), and vehicle repair service. A
majority of the used vehicles we sell at retail are purchased directly from
consumers.
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 at our on-site wholesale
auctions. Wholesale auctions are conducted at the majority of our
superstores and are held on a weekly, bi-weekly, or monthly basis. 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 customers through CarMax Auto Finance (“CAF”),
the company’s finance operation, Bank of America, and through a number of other
third-party lenders. We collect fixed, prenegotiated fees from the
majority of our third-party lenders, and we periodically test additional
lenders. CarMax has no recourse liability for loans provided by
third-party lenders.
We
sell
ESPs on behalf of unrelated third parties who are the primary
obligors. We have no contractual liability to the customer under
these third-party service plans. Extended service plan revenues
represent commissions from the unrelated third parties.
We
are
still at a relatively early stage in the national rollout of our retail
concept. We believe the primary driver for future earnings growth
will be vehicle unit sales growth from comparable store sales increases and
from
geographic expansion. We target a similar dollar amount of gross
profit per used unit, regardless of retail price. Used unit sales
growth is our primary focus. We plan to open used car superstores at
a rate of approximately 15% to 20% of our used car superstore base each
year. Over the long term, we expect comparable store used unit sales
increases to average in the range of 4% to 8%, reflecting the multi-year ramp
in
sales at newly opened stores as they mature, continued market share gains at
stores that have reached basic maturity sales levels, and underlying industry
sales growth. We estimate that our stores generally reach basic
maturity sales levels in their fifth year of operation.
The
principal challenges we face in expanding our store base include our ability
to
build our management bench strength to support store growth and our ability
to
procure suitable real estate at reasonable costs.
Fiscal
2008 Second Quarter Highlights
●
|
Net
sales and operating revenues increased 10% to $2.12 billion from
$1.93
billion in the second quarter of fiscal 2007, while net earnings
increased
20% to $65.0 million, or $0.29 per share, from $54.3 million, or
$0.25 per
share.
|
●
|
Total
used vehicle unit sales increased 11%, reflecting the combination
of the
growth in our store base and a 3% increase in comparable store used
unit
sales. Wholesale vehicle unit sales increased
15%. New vehicle unit sales declined 15%, reflecting a
combination of the softer new car industry trends and the sale of
one of
our new car franchises during the
quarter.
|
●
|
We
opened one used car superstore during the second quarter, in Torrance,
Calif., bringing our store count in the Los Angeles market to
seven.
|
●
|
Our
total gross profit per retail unit increased $114 to $2,869 from
$2,755 in
the prior year’s second quarter. The majority of the increase
was attributable to an improvement in the wholesale gross profit
per
unit.
|
●
|
CAF
income decreased 8% to $33.4 million from $36.5 million in the second
quarter of fiscal 2007. In the prior year’s second quarter, CAF
income included a benefit of $6.1 million, or $0.02 per share, for
favorable items, primarily related to lowering loss rate assumptions
on
loans originated in 2003, 2004, and 2005. Excluding the effect
of adjustments, CAF income increased 9%, reflecting our retail sales
growth, a slight improvement in the gain on loans originated and
sold, and
an increase in total managed
receivables.
|
●
|
Selling,
general, and administrative expenses as a percent of net sales and
operating revenues (the “SG&A ratio”) improved to 10.1% from 10.4% in
the second quarter of fiscal 2007. In the prior year’s quarter,
the SG&A ratio included the effect of $5.4 million of share-based
compensation expense related to the accelerated vesting of stock
options
held by our former chief executive officer upon his
retirement. Excluding the effect of the accelerated vesting,
the prior year’s SG&A ratio for the second quarter would also have
been 10.1%.
|
●
|
For
the first half of the fiscal year, net cash provided by operations
increased to $168.0 million compared with $86.8 million in fiscal
2007,
primarily reflecting a reduced investment in inventory and the growth
in
fiscal 2008 net earnings.
|
CRITICAL
ACCOUNTING POLICIES
For
a
discussion of our critical accounting policies, see “Critical Accounting
Policies” in MD&A included in Item 7 of the Annual Report on Form 10-K
for the fiscal year ended February 28, 2007. These policies relate to
securitization transactions, revenue recognition, income taxes, and the defined
benefit retirement plan.
RESULTS
OF OPERATIONS
NET
SALES AND OPERATING REVENUES
|
|
|
Three
Months Ended August 31
|
|
|
Six
Months Ended August 31
|
|
(In
millions)
|
|
|
2007
|
|
|
%
|
|
|
2006
|
|
|
%
|
|
|
2007
|
|
|
%
|
|
|
2006
|
|
|
%
|
|
Used
vehicle sales
|
|
|
$
|
1,687.1
|
|
|
|
79.5
|
|
|
$
|
1,526.7
|
|
|
|
79.1
|
|
|
$
|
3,395.5
|
|
|
|
79.5
|
|
|
$
|
2,987.9
|
|
|
|
78.3
|
|
New
vehicle sales
|
|
|
|
104.8
|
|
|
|
4.9
|
|
|
|
121.2
|
|
|
|
6.3
|
|
|
|
217.4
|
|
|
|
5.1
|
|
|
|
239.6
|
|
|
|
6.3
|
|
Wholesale
vehicle sales
|
|
|
|
265.3
|
|
|
|
12.5
|
|
|
|
222.3
|
|
|
|
11.5
|
|
|
|
526.4
|
|
|
|
12.3
|
|
|
|
469.6
|
|
|
|
12.3
|
|
Other
sales and revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extended
service plan revenues
|
|
|
|
33.2
|
|
|
|
1.6
|
|
|
|
29.2
|
|
|
|
1.5
|
|
|
|
67.1
|
|
|
|
1.6
|
|
|
|
58.0
|
|
|
|
1.5
|
|
Service
department sales
|
|
|
|
25.2
|
|
|
|
1.2
|
|
|
|
23.8
|
|
|
|
1.2
|
|
|
|
49.4
|
|
|
|
1.2
|
|
|
|
47.0
|
|
|
|
1.2
|
|
Third-party
finance fees, net
|
|
|
|
6.9
|
|
|
|
0.3
|
|
|
|
6.2
|
|
|
|
0.3
|
|
|
|
13.8
|
|
|
|
0.3
|
|
|
|
12.6
|
|
|
|
0.3
|
|
Total
other sales and revenues
|
|
|
|
65.3
|
|
|
|
3.1
|
|
|
|
59.3
|
|
|
|
3.1
|
|
|
|
130.3
|
|
|
|
3.1
|
|
|
|
117.6
|
|
|
|
3.1
|
|
Total
net sales and operating revenues
|
|
|
$
|
2,122.5
|
|
|
|
100.0
|
|
|
$
|
1,929.5
|
|
|
|
100.0
|
|
|
$
|
4,269.7
|
|
|
|
100.0
|
|
|
$
|
3,814.7
|
|
|
|
100.0
|
|
RETAIL
VEHICLE SALES CHANGES
|
|
|
Three
Months
Ended
August 31
|
|
|
Six
Months
Ended
August 31
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Vehicle
units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used
vehicles
|
|
|
|
11 |
% |
|
|
15 |
% |
|
|
13 |
% |
|
|
14 |
% |
New
vehicles
|
|
|
|
(15 |
)% |
|
|
(19 |
)% |
|
|
(10 |
)% |
|
|
(15 |
)% |
Total
|
|
|
|
9 |
% |
|
|
12 |
% |
|
|
11 |
% |
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle
dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used
vehicles
|
|
|
|
11 |
% |
|
|
23 |
% |
|
|
14 |
% |
|
|
22 |
% |
New
vehicles
|
|
|
|
(14 |
)% |
|
|
(20 |
)% |
|
|
(9 |
)% |
|
|
(16 |
)% |
Total
|
|
|
|
9 |
% |
|
|
19 |
% |
|
|
12 |
% |
|
|
18 |
% |
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
|
|
|
Three
Months
Ended
August 31
|
|
|
Six
Months
Ended
August 31
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Vehicle
units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used
vehicles
|
|
|
|
3 |
% |
|
|
7 |
% |
|
|
5 |
% |
|
|
6 |
% |
New
vehicles
|
|
|
|
(13 |
)% |
|
|
(19 |
)% |
|
|
(9 |
)% |
|
|
(15 |
)% |
Total
|
|
|
|
2 |
% |
|
|
5 |
% |
|
|
4 |
% |
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle
dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used
vehicles
|
|
|
|
3 |
% |
|
|
15 |
% |
|
|
5 |
% |
|
|
14 |
% |
New
vehicles
|
|
|
|
(11 |
)% |
|
|
(21 |
)% |
|
|
(8 |
)% |
|
|
(17 |
)% |
Total
|
|
|
|
2 |
% |
|
|
11 |
% |
|
|
4 |
% |
|
|
11 |
% |
CHANGE
IN USED CAR SUPERSTORE BASE
|
|
|
Three
Months
Ended
August 31
|
|
|
Six
Months
Ended
August 31
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Used
car superstores, beginning of period
|
|
|
|
80
|
|
|
|
71
|
|
|
|
77
|
|
|
|
67
|
|
Superstore
openings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
superstores (1)
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
3
|
|
Non-production
superstores (2)
|
|
|
|
1
|
|
|
|
|
|
|
|
3
|
|
|
|
1
|
|
Total
superstore openings
|
|
|
|
1
|
|
|
|
|
|
|
|
4
|
|
|
|
4
|
|
Used
car superstores, end of period
|
|
|
|
81
|
|
|
|
71
|
|
|
|
81
|
|
|
|
71
|
|
(1) Previously
referred to
as mega and standard superstores, these are stores at which vehicle
reconditioning is performed.
(2)
Previously
referred to as satellite superstores, these are stores that do not have vehicle
reconditioning capabilities.
Used
Vehicle Sales. The 11% increase in used vehicle
revenues in the second quarter of fiscal 2008 resulted from an 11% increase
in
unit sales. There was no material change in average selling price as
normal price inflation was offset by the effect of a slight shift in sales
mix
toward compact cars and smaller SUVs. The unit sales growth reflected
sales from newer superstores not yet in the comparable store base, together
with
a 3% increase in comparable store used units. Our comparable store
used unit sales growth was supported by increases in traffic, both in our stores
and on our website, and the consistent availability of consumer credit from
CAF
and our third-party finance providers. The 3% increase in comparable
store used unit sales represented a deceleration in our growth rate compared
with recent quarters reflecting, we believe, the difficult current
macro-economic conditions and the challenging automotive retail environment
over
the past few months. Despite this deceleration, we believe that we
continued to gain share within our existing markets in the late-model used
vehicle market.
The
14%
increase in used vehicle revenues in the first half of fiscal 2008 resulted
from
a 13% increase in unit sales and a 1% increase in average selling
price. The unit sales growth reflected sales from new superstores not
yet in the comparable store base, together with a 5% increase in comparable
store used units. Similar to the second quarter, our comparable store
used unit sales growth was supported by increases in traffic and the consistent
availability of consumer credit.
New
Vehicle Sales. Compared with the
corresponding prior year periods, new vehicle revenues decreased 14% in the
second quarter of fiscal 2008 and 9% in the first half of fiscal
2008. The declines were substantially the result of decreases in unit
sales, which fell 15% in the second quarter and 10% in the first half of the
year. The declines in new vehicle unit sales reflected softer new car
industry sales trends, particularly for the domestic manufacturers that we
represent, and the divestiture of our Orlando Chrysler-Jeep-Dodge franchise
in
August 2007.
Wholesale
Vehicle Sales. Vehicles acquired
through the appraisal purchase process that do not meet our retail standards
are
sold at our on-site wholesale auctions. The 19% increase in wholesale
vehicle revenues in the second quarter of fiscal 2008 resulted from a 15%
increase in wholesale unit sales combined with a 4% increase in average
wholesale selling price. Our wholesale unit sales growth benefited
from the expansion of our store base and strong appraisal
traffic. The increase in wholesale unit sales was somewhat greater
than the 11% increase in used vehicle unit sales, reflecting the easier relative
comparison with the second quarter of the prior year. Our wholesale
auction prices usually reflect the trends in the general wholesale market for
the types of vehicles we sell, although they may also be affected by changes
in
the average age, miles, make, model, or condition of vehicles to be
wholesaled.
The
12%
increase in wholesale vehicle revenues in the first half of fiscal 2008 resulted
from an 11% increase in wholesale unit sales combined with a 1% increase in
average wholesale selling price. Similar to the second quarter, the
wholesale unit sales growth was the result of the expansion of our store base
and strong appraisal traffic.
Other
Sales and Revenues. Other sales and
revenues include commissions on the sale of ESPs, service department sales,
and
third-party finance fees. Compared with the corresponding prior year
periods, other sales and revenues increased 10% in the second quarter of fiscal
2008, and 11% in the first half of fiscal 2008. The increases were
primarily the result of growth in both extended service plan revenues and
third-party finance fees. Extended service plan revenues increased
14% in the second quarter and 16% in the first half of the year, driven
primarily by our unit sales growth. Net third-party finance fees,
which increased 11% in the second quarter and 10% in the first half of the
year,
can be affected by changes in the mix of loan originations by
provider. The fixed fees paid by our third-party finance providers
will vary by provider, reflecting their differing levels of credit risk
exposure. We record the discount at which the third-party subprime
lender purchases these loans as an offset to finance fee revenues from the
other
third-party lenders.
Seasonality. Most
of our superstores experience their strongest traffic and sales in the spring
and summer quarters. Sales are typically lowest in the fall quarter,
which coincides with the new vehicle model-year-changeover period. In
the fall, the new model year introductions and discounts on model year closeouts
generally can cause rapid depreciation in used car pricing, particularly for
late-model used cars. Customer traffic also tends to slow in the fall
as the weather gets colder and as customers shift their spending priorities
toward holiday-related expenditures. Seasonal patterns for car buying
and selling may vary in different parts of the country and, as we expand
geographically, these differences may impact the overall seasonal pattern of
our
results.
Supplemental
Sales Information.
UNIT
SALES
|
|
|
Three
Months
Ended
August 31
|
|
|
Six
Months
Ended
August 31
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Used
vehicles
|
|
|
|
96,102
|
|
|
|
86,846
|
|
|
|
192,868
|
|
|
|
171,112
|
|
New
vehicles
|
|
|
|
4,365
|
|
|
|
5,131
|
|
|
|
9,085
|
|
|
|
10,078
|
|
Wholesale
vehicles
|
|
|
|
60,476
|
|
|
|
52,648
|
|
|
|
118,190
|
|
|
|
106,434
|
|
AVERAGE
SELLING PRICES
|
|
|
Three
Months
Ended
August 31
|
|
|
Six
Months
Ended
August 31
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Used
vehicles
|
|
|
$
|
17,388
|
|
|
$
|
17,399
|
|
|
$
|
17,434
|
|
|
$
|
17,285
|
|
New
vehicles
|
|
|
$
|
23,863
|
|
|
$
|
23,476
|
|
|
$
|
23,787
|
|
|
$
|
23,626
|
|
Wholesale
vehicles
|
|
|
$
|
4,278
|
|
|
$
|
4,120
|
|
|
$
|
4,344
|
|
|
$
|
4,303
|
|
RETAIL
VEHICLE SALES MIX
|
|
|
Three
Months
Ended
August 31
|
|
|
Six
Months
Ended
August 31
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Vehicle
units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used
vehicles
|
|
|
|
96 |
% |
|
|
94 |
% |
|
|
96 |
% |
|
|
94 |
% |
New
vehicles
|
|
|
|
4
|
|
|
|
6
|
|
|
|
4
|
|
|
|
6
|
|
Total
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle
dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used
vehicles
|
|
|
|
94 |
% |
|
|
93 |
% |
|
|
94 |
% |
|
|
93 |
% |
New
vehicles
|
|
|
|
6
|
|
|
|
7
|
|
|
|
6
|
|
|
|
7
|
|
Total
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
RETAIL
STORES
|
|
Estimate
Feb.
29, 2008
|
|
|
August
31, 2007
|
|
|
Feb.
28, 2007
|
|
|
August
31, 2006
|
|
Production
superstores
|
|
|
58
|
|
|
|
54
|
|
|
|
53
|
|
|
|
51
|
|
Non-production
superstores
|
|
|
32
|
|
|
|
27
|
|
|
|
24
|
|
|
|
20
|
|
Total
used car superstores
|
|
|
90
|
|
|
|
81
|
|
|
|
77
|
|
|
|
71
|
|
Co-located
new car stores
|
|
|
3
|
|
|
|
3
|
|
|
|
4
|
|
|
|
4
|
|
Total
|
|
|
93
|
|
|
|
84
|
|
|
|
81
|
|
|
|
75
|
|
During
the second quarter of fiscal 2008, we opened a non-production used car
superstore in Torrance, California, our seventh store in the Los Angeles
market.
During
the first half of the year, in addition to the Torrance superstore, we entered
the Tucson market with a production superstore and the Milwaukee market with
two
non-production superstores. Vehicle reconditioning for the
Milwaukee stores is provided by our production superstore in
Kenosha, Wisconsin, which had available capacity. We also opened
a car-buying center in the Raleigh market, expanding the test we began in
Atlanta in fiscal 2007. The car-buying centers focus on appraisals
and vehicle purchases and are part of our long-term effort to increase vehicle
sourcing self-sufficiency.
At
August
31, 2007, we had a total of six new car franchises. Two franchises
are integrated within used car superstores, and the remaining four franchises
are operated from three facilities that are co-located with select used car
superstores. During the second quarter of fiscal 2007, we sold a
Chrysler-Jeep-Dodge franchise. The remaining franchises represent the
Chevrolet, Chrysler, Nissan, and Toyota brands.
GROSS
PROFIT
|
|
Three
Months Ended
August
31
|
|
|
Six
Months Ended
August
31
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
$
per unit (1)
|
|
|
|
% |
(2) |
|
$
per unit (1)
|
|
|
|
% |
(2) |
|
$
per unit (1)
|
|
|
|
% |
(2) |
|
$
per unit (1)
|
|
|
|
% |
(2) |
Used
vehicle gross profit
|
|
$ |
1,982
|
|
|
|
11.3
|
|
|
$ |
1,963
|
|
|
|
11.2
|
|
|
$ |
1,958
|
|
|
|
11.1
|
|
|
$ |
1,944
|
|
|
|
11.1
|
|
New
vehicle gross profit
|
|
$ |
1,072
|
|
|
|
4.5
|
|
|
$ |
1,176
|
|
|
|
5.0
|
|
|
$ |
1,039
|
|
|
|
4.3
|
|
|
$ |
1,195
|
|
|
|
5.0
|
|
Wholesale
vehicle gross profit
|
|
$ |
796
|
|
|
|
18.1
|
|
|
$ |
699
|
|
|
|
16.5
|
|
|
$ |
798
|
|
|
|
17.9
|
|
|
$ |
711
|
|
|
|
16.1
|
|
Other
gross profit
|
|
$ |
447
|
|
|
|
68.8
|
|
|
$ |
436
|
|
|
|
67.6
|
|
|
$ |
451
|
|
|
|
69.9
|
|
|
$ |
449
|
|
|
|
69.1
|
|
Total
gross profit
|
|
$ |
2,869
|
|
|
|
13.6
|
|
|
$ |
2,755
|
|
|
|
13.1
|
|
|
$ |
2,834
|
|
|
|
13.4
|
|
|
$ |
2,768
|
|
|
|
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. Compared with the
corresponding prior year periods, used vehicle gross profit per unit increased
$19 in the second quarter and $14 in the first half of fiscal
2008. We target a similar dollar amount of gross profit per used
unit, regardless of retail 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
depreciation in used vehicle values and contribute to our ability to manage
our
gross profit dollars per unit. In addition, over the past few years,
we have continued to refine our car-buying strategies, which we believe has
benefited our used vehicle gross profit per unit.
New
Vehicle Gross Profit. Compared with the
corresponding prior year periods, new vehicle gross profit per unit decreased
$104 in the second quarter and $156 in the first half of fiscal 2008, in part
reflecting the lower dealer incentives offered by certain of the domestic
manufacturers that we represent.
Wholesale
Vehicle Gross Profit. Compared with the
corresponding prior year periods, wholesale vehicle gross profit per unit
increased $97 in the second quarter and $87 in the first half of fiscal
2008. Wholesale vehicle profitability has steadily increased over the
last several years, reflecting the combined benefits of refinements in our
appraisal offer and appraisal delivery processes and increases in average dealer
attendance at our auctions.
Other
Gross Profit. Compared with the
corresponding prior year periods, other gross profit per unit increased $11
in
the second quarter and $2 in the first half of fiscal 2008. The
changes in profit per unit reflected the change in the mix of extended service
plan revenues and third-party finance fees, both of which have no associated
cost of sales.
Impact
of Inflation. Inflation has not been a
significant contributor to our results. Profitability is based on
achieving targeted unit sales and gross profit dollars per vehicle rather than
on average retail prices. However, CAF income will benefit from an
increase in the average amount financed.
CARMAX
AUTO FINANCE INCOME
CAF
provides automobile financing for our used and new car sales. Because
the purchase of an automobile is traditionally 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 automobile loan receivables, both
for CAF and for our third-party lenders. CAF provides us the
opportunity to capture additional profits and cash flows from automobile loan
receivables while managing our reliance on third-party finance
sources.
|
|
|
Three
Months Ended
August
31
|
|
|
Six
Months Ended
August
31
|
|
(In
millions)
|
|
|
2007
|
|
|
%
|
|
|
2006
|
|
|
%
|
|
|
2007
|
|
|
%
|
|
|
2006
|
|
|
%
|
|
Total
gain income (1)
|
|
|
$ |
25.0
|
|
|
|
3.7
|
|
|
$ |
28.9
|
|
|
|
4.6
|
|
|
$ |
52.8
|
|
|
|
4.0
|
|
|
$ |
53.7
|
|
|
|
4.5
|
|
Other
CAF income: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing
fee
income
|
|
|
|
9.2
|
|
|
|
1.0
|
|
|
|
7.9
|
|
|
|
1.0
|
|
|
|
18.1
|
|
|
|
1.0
|
|
|
|
15.3
|
|
|
|
1.0
|
|
Interest
income
|
|
|
|
7.8
|
|
|
|
0.9
|
|
|
|
6.3
|
|
|
|
0.8
|
|
|
|
15.6
|
|
|
|
0.9
|
|
|
|
12.4
|
|
|
|
0.8
|
|
Total
other CAF income
|
|
|
|
17.0
|
|
|
|
1.9
|
|
|
|
14.2
|
|
|
|
1.9
|
|
|
|
33.7
|
|
|
|
1.9
|
|
|
|
27.7
|
|
|
|
1.9
|
|
Direct
CAF expenses: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAF
payroll and frange benefit expense
|
|
|
|
3.8 |
|
|
|
0.4
|
|
|
|
2.9 |
|
|
|
0.4
|
|
|
|
7.4 |
|
|
|
0.4
|
|
|
|
5.7 |
|
|
|
0.4
|
|
Other
direct CAF expenses
|
|
|
|
4.7
|
|
|
|
0.5
|
|
|
|
3.7
|
|
|
|
0.5
|
|
|
|
8.5
|
|
|
|
0.5
|
|
|
|
6.8
|
|
|
|
0.5
|
|
Total
direct CAF expenses
|
|
|
|
8.5
|
|
|
|
1.0
|
|
|
|
6.6
|
|
|
|
0.9
|
|
|
|
16.0
|
|
|
|
0.9
|
|
|
|
12.5
|
|
|
|
0.9
|
|
CarMax
Auto Finance income (3)
|
|
|
$ |
33.4
|
|
|
|
1.6
|
|
|
$ |
36.5
|
|
|
|
1.9
|
|
|
$ |
70.5
|
|
|
|
1.7
|
|
|
$ |
68.9
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans sold
|
|
|
$ |
668.5
|
|
|
|
|
|
|
$ |
630.9
|
|
|
|
|
|
|
$ |
1,315.5
|
|
|
|
|
|
|
$ |
1,189.9
|
|
|
|
|
|
Average
managed receivables
|
|
|
$ |
3,550.6
|
|
|
|
|
|
|
$ |
3,010.5
|
|
|
|
|
|
|
$ |
3,481.0
|
|
|
|
|
|
|
$ |
2,935.6
|
|
|
|
|
|
Ending
managed receivables
|
|
|
$ |
3,596.0
|
|
|
|
|
|
|
$ |
3,068.7
|
|
|
|
|
|
|
$ |
3,596.0
|
|
|
|
|
|
|
$ |
3,068.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net sales and operating revenues
|
|
|
$ |
2,122.5
|
|
|
|
|
|
|
$ |
1,929.5
|
|
|
|
|
|
|
$ |
4,269.7
|
|
|
|
|
|
|
$ |
3,814.7
|
|
|
|
|
|
Percent
columns indicate:
(1)
Percent of
loans sold.
(2)
Percent of
average managed receivables.
(3)
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 benefit 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
originates automobile loans to qualified customers at competitive market rates
of interest. The majority of the profit contribution from CAF is
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.
Total
gain income includes the effects of retained interest valuation adjustments,
new
public securitizations, and the repurchase and resale of receivables in existing
public securitizations, if applicable. The table below provides
information on the aggregate effect of these items on total gain income, total
loans sold, and the gain on loans originated and sold as a percent of loans
originated and sold (the “gain percentage”).
GAIN
INCOME AND LOANS SOLD
|
|
|
Three
Months
Ended
August 31
|
|
|
Six
Months
Ended
August 31
|
|
(In
millions)
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Gain
on sales of loans originated and sold
|
|
|
$
|
24.7
|
|
|
$
|
22.8
|
|
|
$
|
52.0
|
|
|
$
|
41.6
|
|
Other
gain income
|
|
|
|
0.3
|
|
|
|
6.1
|
|
|
|
0.7
|
|
|
|
12.1
|
|
Total
gain income
|
|
|
$
|
25.0
|
|
|
$
|
28.9
|
|
|
$
|
52.8
|
|
|
$
|
53.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
originated and sold
|
|
|
$
|
617.8
|
|
|
$
|
589.9
|
|
|
$
|
1,264.9
|
|
|
$
|
1,148.9
|
|
Receivables
repurchased from public securitizations and
resold
|
|
|
|
50.7
|
|
|
|
41.0
|
|
|
|
50.7
|
|
|
|
41.0
|
|
Total
loans sold
|
|
|
$
|
668.5
|
|
|
$
|
630.9
|
|
|
$
|
1,315.5
|
|
|
$
|
1,189.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
percentage on loans originated and sold
|
|
|
|
4.0 |
% |
|
|
3.9 |
% |
|
|
4.1 |
% |
|
|
3.6 |
% |
Total
gain income as a percentage of total loans sold
|
|
|
|
3.7 |
% |
|
|
4.6 |
% |
|
|
4.0 |
% |
|
|
4.5 |
% |
In
the
second quarter of fiscal 2008, CAF income decreased 8% to $33.4 million from
$36.5 million in the prior year’s second quarter. Excluding other
gain income, CAF income increased 9% to $33.1 million from $30.4 million in
the
prior year’s second quarter. This increase reflected the growth in
retail vehicle sales, a slight improvement in the gain percentage from 3.9%
to
4.0%, and an increase in total managed receivables.
In
the
second quarter of fiscal 2008, CAF income included $0.3 million of other gain
income. This other gain income included an unfavorable adjustment
related to increasing the loss rate assumption on the 2007-1 pool of receivables
to 2.70% from 2.45%. There were no other loss rate assumption changes
in the second quarter of fiscal 2008. This unfavorable loss rate
adjustment was more than offset, however, by a variety of small, favorable
retained interest valuation adjustments on other outstanding pools of
receivables. In the second quarter of fiscal 2007, CAF income
included $6.1 million of other gain income, primarily related to lowering loss
rate assumptions on loans originated in 2003, 2004, and 2005.
In
the
first half of fiscal 2008, CAF income increased 2% to $70.5 million from $68.9
million in the first half of the prior year. In the first half of
fiscal 2007, CAF income included $12.1 million of other gain income, again
primarily related to lowering loss rate assumptions on loans originated in
2003,
2004, and 2005. Excluding the effect of other gain income, CAF income
increased 23% to $69.8 million from $56.8 million in the prior year’s first
half. This increase reflected an improvement in the gain percentage
from 3.6% to 4.1% and the increases in retail vehicle sales and total managed
receivables.
Compared
with the corresponding periods of the prior year, the increases in other CAF
income and direct CAF expenses in the second quarter and the first half of
fiscal 2008 were proportionate to the growth in managed
receivables.
Our
securitizations typically contain an option to repurchase the securitized
receivables when the outstanding balance in a pool of automobile loan
receivables falls below 10% of the original pool balance. When
exercised, the remaining eligible automobile loan receivables are typically
resold into the warehouse facility. In the second quarter of fiscal
2008, we exercised this repurchase option on the 2003-2
securitization, and, as a result, $50.7 million of previously securitized
receivables were resold into the warehouse facility. In the second
quarter of fiscal 2007, we exercised this repurchase option on the 2002-2
securitization and, as a result, $41.0 million of previously securitized
receivables were resold into the warehouse facility. Neither of these
transactions had a material effect on total gain income. In future
periods, the effects of repurchase or resale activity could be favorable or
unfavorable depending on the securitization structure and market conditions
at
the transaction date.
PAST
DUE ACCOUNT INFORMATION
|
|
|
As
of August 31
|
|
|
As
of February 28
|
|
(In
millions)
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Loans
securitized
|
|
|
$
|
3,524.6
|
|
|
$
|
2,991.9
|
|
|
$
|
3,242.1
|
|
|
$
|
2,710.4
|
|
Loans
held for sale or investment
|
|
|
|
71.4
|
|
|
|
76.8
|
|
|
|
68.9
|
|
|
|
62.0
|
|
Total
managed receivables
|
|
|
$
|
3,596.0
|
|
|
$
|
3,068.7
|
|
|
$
|
3,311.0
|
|
|
$
|
2,772.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
31+ days past due
|
|
|
$
|
75.7
|
|
|
$
|
54.2
|
|
|
$
|
56.9
|
|
|
$
|
37.4
|
|
Past
due accounts as a percentage of total managed
receivables
|
|
|
|
2.10 |
% |
|
|
1.77 |
% |
|
|
1.72 |
% |
|
|
1.35 |
% |
CREDIT
LOSS INFORMATION
|
|
|
Three
Months
Ended
August 31
|
|
|
Six
Months
Ended
August 31
|
|
(In
millions)
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
credit losses on managed receivables
|
|
|
$
|
9.2
|
|
|
$
|
4.2
|
|
|
$
|
14.7
|
|
|
$
|
7.0
|
|
Average
managed receivables
|
|
|
$
|
3,550.6
|
|
|
$
|
3,010.5
|
|
|
$
|
3,481.0
|
|
|
$
|
2,935.6
|
|
Annualized
net credit losses as a percentage of
average
managed receivables
|
|
|
|
1.04 |
% |
|
|
0.56 |
% |
|
|
0.85 |
% |
|
|
0.48 |
% |
Recovery
rate
|
|
|
|
51.4 |
% |
|
|
49.5 |
% |
|
|
52.1 |
% |
|
|
51.5 |
% |
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 impacted.
Compared
with the prior-year periods, we experienced increases in both past due
accounts as a percentage of total managed receivables and annualized net credit
losses as a percentage of average managed receivables in the second quarter
and
in the first half of fiscal 2008. We believe these increases were the
result of a combination of factors, including an expansion of our credit offers
as well as less favorable general economic and industry trends.
We
continually strive to refine CAF’s origination strategy in order to optimize
profitability and sales while controlling risk. Receivables
originated in calendar years 2003, 2004, and early 2005 have experienced loss
rates well below both CAF’s historical averages and our targeted loss
rates. We believe this favorability was due, in part, to the credit
scorecard implemented in late 2002. As it became evident that the
scorecard was resulting in lower-than-expected loss rates, CAF gradually
expanded its credit offers beginning in late 2004. As a result,
receivables originated in late 2005 and in 2006 and 2007 have been experiencing
higher delinquency and loss rates compared with the receivables originated
in
these earlier years. While the delinquency rates in the first half of
fiscal 2008 on the more recent originations were higher than our expectations,
the net loss performance has been generally consistent with our expectations
thus far and is reflected in our net loss assumptions used to value our retained
interest in the securitized receivables.
The
recovery rate represents the average percentage of the outstanding principal
balance we receive when a vehicle is repossessed and liquidated at wholesale
auction.
Selling,
General, and Administrative
Expenses. The SG&A ratio improved
to 10.1% in the second quarter of fiscal 2008 compared with 10.4% in the second
quarter of the prior year. In the second quarter of the prior year,
the SG&A ratio included the effect of $5.4 million of share-based
compensation expense related to the accelerated vesting of stock options held
by
our former chief executive officer upon his retirement. Excluding the
effect of the accelerated vesting, last year’s second quarter SG&A ratio
would have been 10.1%.
For
the
six months ended August 31, 2007, the SG&A ratio improved to 10.0% compared
with 10.1% in the first six months of the prior year. Excluding the
effect of the accelerated vesting, the SG&A ratio for the first half of last
year would have been 10.0%. As expected, SG&A spending in the
first half of fiscal 2008 related to planned strategic, operational, and
Internet initiatives precluded achieving overhead leverage when excluding the
effect of the accelerated vesting from the prior year period.
Income
Taxes. The effective income tax rate was
39.5% in the second quarter of fiscal 2008, compared with 38.2% in the second
quarter of fiscal 2007. For the first half of the year, the effective
tax rate was 38.9% in fiscal 2008 compared with 38.2% in fiscal
2007. The higher effective tax rate, which reduced second quarter
fiscal 2008 earnings by approximately $0.01 per share, was primarily the result
of the establishment of a valuation allowance against certain deferred tax
assets.
OPERATIONS
OUTLOOK
Fiscal
2008 Comparable Store Sales and Earnings Per Share
Expectations. Our sales and profits for
the first half of fiscal 2008 fell short of our original
expectations. We believe the shortfall was largely the result of the
market environment and the industry-wide slowdown in automobile
sales. While it is difficult to predict how long the current
conditions may persist, we believe it is appropriate to revise our expectations
for comparable store used unit sales growth and earnings per share for the
current fiscal year. Our revised expectations contemplate that the
conditions present during the second quarter will remain relatively unchanged
for the remainder of the fiscal year.
We
now
expect fiscal 2008 comparable store used vehicle unit growth in the range of
1%
to 3%, compared with the 9% achieved in fiscal 2007. We previously
expected comparable store used unit sales growth in the range of 3% to
9%.
We
now
expect fiscal 2008 earnings per share in the range of $0.92 to $0.98, compared
with the $0.92 per share reported in fiscal 2007. Fiscal 2008
earnings per share were previously expected to be in the range of $1.03 to
$1.14.
The
new
fiscal 2008 expectations reflect:
-
Our
missed sales and earnings targets.
-
The
slower anticipated pace of comparable store used unit sales growth
and its
effect on other related revenue and income streams.
-
Continued
planned spending related to our strategic, operational, and Internet
initiatives, which, together with the revised comparable store used
unit sales
expectations, will likely result in an increase in the SG&A ratio in the
second half of the year.
-
A
reduction in CAF gain income of approximately $8 million in the
third quarter
of fiscal 2008, associated with the $500 million public securitization
completed in September.
-
Reduced
CAF gain spreads due to continued credit market
volatility.
-
The
higher anticipated effective tax rate for the fiscal year,
resulting from the
establishment of a valuation allowance against certain deferred
tax
assets.
Store
Openings and Capital Expenditures.
FY08
– SECOND HALF PLANNED SUPERSTORE OPENINGS
Location
|
Television
Market
|
Market
Status
|
Production
Superstores
|
Non-Production
Superstores
|
Planned
third quarter openings:
|
|
|
|
|
Roswell,
Ga. (1)
|
Atlanta
|
Existing
|
─
|
1
|
Newport
News, Va.(1)
|
Norfolk
/ Virginia Beach
|
Existing
|
─
|
1
|
Gastonia,
N.C.(1)
|
Charlotte
|
Existing
|
1
|
─
|
Riverside,
Calif.
|
Los
Angeles
|
Existing
|
─
|
1
|
Kearny Mesa,
Calif.
|
San
Diego
|
New
|
─
|
1
|
Planned
fourth quarter openings:
|
|
|
|
|
Omaha,
Neb.
|
Omaha
|
New
|
1
|
─
|
Jackson,
Miss.
|
Jackson
|
New
|
1
|
─
|
Ellicott
City,
Md.
|
DC/Baltimore
|
Existing
|
─
|
1
|
Modesto,
Calif.
|
Sacramento
|
Existing
|
1
|
─
|
FY08
second half planned superstore
openings
|
4
|
5
|
(1) Opened
early
in the third quarter of fiscal 2008.
FY09
– FIRST HALF PLANNED SUPERSTORE OPENINGS
Location
|
Television
Market
|
Market
Status
|
Production
Superstores
|
Non-Production
Superstores
|
San
Antonio, Tex.
|
San
Antonio
|
Existing
|
─
|
1
|
Phoenix,
Ariz.
|
Phoenix
|
New
|
2
|
─
|
Colorado
Springs,
Col.
|
Colorado
Springs
|
New
|
1
|
─
|
Charleston,
S.C.
|
Charleston
|
New
|
─
|
1
|
Huntsville,
Ala.
|
Huntsville
|
New
|
1
|
─
|
Tulsa,
Okla.
|
Tulsa
|
New
|
1
|
─
|
Costa
Mesa,
Calif.
|
Los
Angeles
|
Existing
|
─
|
1
|
FY09
first half planned superstore
openings
|
5
|
3
|
Normal
construction, permitting, or other scheduling delays could shift opening dates
of stores into a later period.
In
the
second half of fiscal 2008, we also plan to expand our car-buying center test
with the opening of our third and fourth centers, including one in Dallas and
one in Tampa. These sites will expand the test begun in fiscal 2007,
when we opened our first car buying center in the Atlanta market.
We
currently estimate gross capital expenditures will total approximately $300
million in fiscal 2008. Compared with the approximately $192 million
spent in fiscal 2007, the fiscal 2008 capital spending estimate reflects more
real estate purchases for future development in larger, multi-store
markets. In addition, the fiscal 2007 capital spending amount was
lower than originally projected, due in part to the acquisition of some store
sites pursuant to ground leases.
FINANCIAL
CONDITION
Liquidity
and Capital Resources.
Operating
Activities. Net cash from operations increased to
$168.0 million in the first half of fiscal 2008 from $86.8 million in the first
half of fiscal 2007, primarily reflecting a reduced investment in inventory
and
the growth in net earnings for the first half of fiscal 2008. In the
first half of fiscal 2008, inventory declined $15.9 million, reflecting a $13
million reduction in inventory resulting from the sale of the Orlando
Chrysler-Jeep-Dodge franchise. In the first half of fiscal 2007,
inventory increased $64.7 million, reflecting inventory purchases to support
sales and new store openings.
In
conjunction with the sale of our Orlando Chrysler-Jeep-Dodge franchise, we
received approximately $14 million, primarily representing payment for vehicle
inventory and miscellaneous furniture and fixtures, and recognized a pretax
gain
of $0.7 million.
The
aggregate principal amount of outstanding automobile loan receivables funded
through securitizations, which are discussed in Notes 3 and 4 to our
consolidated financial statements, totaled $3.52 billion at August 31, 2007,
and
$2.99 billion at August 31, 2006. At August 31, 2007, the warehouse
facility limit was $1.0 billion and unused warehouse capacity totaled $130.5
million. The facility limit was $825 million at February 28, 2007,
and was increased to $1.0 billion during the second quarter of fiscal 2008
in
response to the growth in our business. The warehouse facility
matures in July 2008. We anticipate that we will be able to renew,
expand, or enter into new securitization arrangements to meet CAF’s future
needs.
Subsequent
to the end of the second quarter, we
completed a $500 million public securitization of automobile loan
receivables. Adverse market conditions drove an increase in
asset-backed credit spreads and negatively impacted our hedge effectiveness
for
this transaction, resulting in a reduction in CAF gain income of approximately
$8 million in the third quarter of fiscal 2008. Approximately $4.7
million of the reduction resulted from increased credit spreads, and a majority
of the remaining $3.3 million reduction resulted from unwinding interest
rate
swaps. To the extent we experience continued market volatility,
future public securitizations could have an unfavorable impact on
earnings.
Investing
Activities. Net cash used in investing activities
was $130.8 million in the first half of fiscal 2008, compared with $50.9 million
in the first half of the prior year. Cash used in investing
activities consists almost entirely of capital expenditures, which primarily
includes store construction costs and the cost of land acquired for future
year
store openings. These expenditures will vary from quarter to quarter
based on the timing of store openings and land acquisitions.
Historically,
capital expenditures have been funded with internally generated funds, short-
and long-term debt, and sale-leaseback transactions. At August 31,
2007, we owned 24 superstores currently in operation, as well as our home office
in Richmond, Virginia. In addition, five superstores are accounted
for as capital leases.
Financing
Activities. Net cash used in financing activities
was $49.1 million in the first half of fiscal 2008, compared with $33.9 million
in the first half of fiscal 2007. In
the first half of fiscal 2008, we used cash generated from operations to reduce
debt by $62.6 million compared with a $55.4 million reduction in the first
half
of fiscal 2007.
As
of
August 31, 2007, $88.5 million was outstanding under our $500 million revolving
credit facility, with the remainder fully available. The outstanding
balance included $2.7 million classified as short-term debt, and $85.8 million
classified as current portion of long-term debt. We classified the
outstanding balance at August 31, 2007, as current portion of long-term debt
based on our expectation that this balance will not remain outstanding for
more
than one year.
We
expect
that cash generated by operations; proceeds from securitization transactions;
and, if needed, additional debt and sale-leaseback transactions will be
sufficient to fund capital expenditures and working capital for the foreseeable
future.
FORWARD-LOOKING
STATEMENTS
We
caution readers that the statements contained in this report about our future
business plans,
operations, opportunities, or prospects, including without limitation any
statements or factors regarding expected sales, margins, or earnings, are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based upon management’s current knowledge and
assumptions about future events and involve risks and uncertainties that could
cause actual results to differ materially from anticipated
results. We disclaim any intent or obligation to update these
statements. Among the factors that could cause actual results and
outcomes to differ materially from those contained in the forward-looking
statements are the following:
-
Changes
in the general U.S. or
regional U.S. economy.
-
Intense
competition within our industry.
-
Significant
changes in retail prices for used and new
vehicles.
-
A
reduction in the availability or our access to sources of
inventory.
-
Our
ability to acquire suitable real
estate.
-
The
significant loss of key employees from our store, regional,
or corporate
management teams.
-
The
efficient operation of our information
systems.
-
Changes
in the availability or cost of capital and working capital
financing.
-
Changes
in the market for asset-backed
financing.
-
The
occurrence of adverse weather
events.
-
Seasonal
fluctuations in our
business.
-
The
geographic concentration of our
superstores.
-
The
regulatory environment in which we
operate.
-
The
effect of various litigation
matters.
-
The
effect of new accounting requirements or
changes to U.S. generally accepted
accounting
principles.
-
The
occurrence of certain other material
events.
For
more
details on factors that could affect expectations, see Part II, Item 1A. “Risk
Factors” on page 32 of this report, our Annual Report on Form 10-K for the
fiscal year ended February 28, 2007, and our quarterly or current reports as
filed with or furnished to the Securities and Exchange
Commission. Our filings are publicly available on our investor
information home page at investor.carmax.com. Requests for
information may also be made to our Investor Relations Department by email
to
[email protected] or by calling 1-804-747-0422, ext.
4489.
ITEM
3.
QUANTITATIVE
AND QUALITATIVE
DISCLOSURES
ABOUT MARKET RISK
Automobile
Installment Loan Receivables. At
August 31, 2007, and February 28, 2007, all loans in our portfolio of automobile
loan receivables were fixed-rate installment loans. Financing for
these automobile loan receivables is achieved through asset securitization
programs that, in turn, issue both fixed- and floating-rate
securities. We manage the interest rate exposure relating to
floating-rate securitizations through the use of interest rate
swaps. 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, changes in interest rates associated with
underlying swaps may 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.
COMPOSITION
OF AUTOMOBILE LOAN RECEIVABLES
(In
millions)
|
|
|
August
31, 2007
|
|
|
February
28, 2007
|
|
Principal
amount of:
|
|
|
|
|
|
|
|
|
|
Fixed-rate
securitizations
|
|
|
$
|
2,655.1
|
|
|
$
|
2,644.1
|
|
Floating-rate
securitizations synthetically altered
to fixed
|
|
|
|
869.3
|
|
|
|
597.5
|
|
Floating-rate
securitizations
|
|
|
|
0.2
|
|
|
|
0.6
|
|
Loans
held for investment (1)
|
|
|
|
66.9
|
|
|
|
62.7
|
|
Loans
held for sale (2)
|
|
|
|
4.5
|
|
|
|
6.2
|
|
Total
|
|
|
$
|
3,596.0
|
|
|
$
|
3,311.0
|
|
(1)
The
majority is held by a bankruptcy-remote special purpose
entity.
(2) 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 the debt is floating-rate debt based
on
LIBOR. A 100-basis point increase in market interest rates would have decreased
our net earnings per share by less than $0.01 for the three months and the
six
months ended August 31, 2007.
Item
4.
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. There
was no change in our internal control over financial reporting that occurred
during the quarter ended August 31, 2007, that has materially affected, or
is
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II. OTHER INFORMATION
Item
1.
|
Legal
Proceedings
|
On
June
12, 2007, Ms. Regina Hankins filed a putative class action lawsuit against
CarMax, Inc., in Baltimore County Circuit Court, Maryland. We operate
four stores in the state of Maryland. The plaintiff alleges that,
since May 25, 2004, CarMax has not properly disclosed its vehicles’ prior rental
history, if any. The plaintiff seeks compensatory damages, punitive damages,
injunctive relief, and the recovery of attorneys’ fees. At this time,
we continue to evaluate the allegations and our defenses. We are
unable to make a reasonable estimate of the amount or range of loss that could
result from an unfavorable outcome in this matter.
CarMax
is
subject to various other legal proceedings, claims, and liabilities that arise
in the ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these other actions will not materially
affect the financial position or results of operations of
CarMax.
In
connection with information set forth in this Form 10-Q, the factors discussed
under “Risk Factors” in our Form 10-K for fiscal year ended February 28, 2007,
should be considered. Additionally, we are subject to the risk set
forth below:
The
Market for Asset-Backed Financing. We use and have historically
relied upon a securitization program to fund substantially all of the automobile
loan receivables originated by CAF. Initially, we sell these
receivables into our warehouse facility. We periodically refinance
the receivables through public securitizations. Although the
asset-backed market is large and well-established, if this market greatly
deteriorated, 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 operating results, sales and profitability.
The
risks
included in the Form 10-K and as set forth above could materially and adversely
affect our business, financial condition, and results of
operations.
Other
than as set forth above, there have been no material changes to the factors
discussed in our Form 10-K.
Item
4.
|
Submission
of Matters to a Vote of Security
Holders
|
The
annual meeting of the company’s shareholders was held June 26,
2007. Information on the matters voted upon and the votes cast with
respect to each matter was previously reported in our Quarterly Report on Form
10-Q for the quarter ended May 31, 2007.
|
10.1
|
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. 001-31420), is incorporated by this
reference.
|
|
10.2
|
CarMax,
Inc. Benefit Restoration Plan, as amended and restated effective
as of
January 1, 2008, filed as Exhibit 10.2 to CarMax’s Current Report on Form
8-K, filed June 29, 2007 (File No. 001-31420), is incorporated by
this
reference.
|
|
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.
|
SIGNATURES
Pursuant
to the requirements 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
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Keith
D. Browning
|
|
|
Keith
D. Browning
|
|
|
Executive
Vice President and
|
|
|
Chief
Financial Officer
|
October
9, 2007
EXHIBIT
INDEX
|
10.1
|
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. 001-31420), is incorporated by this
reference.
|
|
10.2
|
CarMax,
Inc. Benefit Restoration Plan, as amended and restated effective
as of
January 1, 2008, filed as Exhibit 10.2 to CarMax’s Current Report on Form
8-K, filed June 29, 2007 (File No. 001-31420), is incorporated by
this
reference.
|
|
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.
|
Page
35 of
35