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 May 31, 2008
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, a non-accelerated filer or a smaller reporting
company. See definition of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer X
|
Accelerated
filer __
|
|
|
Non-accelerated
filer __
|
Smaller
reporting
company __
|
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 as of June
30, 2008
|
Common
Stock, par value $0.50
|
|
220,374,201
|
|
|
|
A Table
of Contents is included on Page 2 and a separate Exhibit Index is included on
Page 38.
CARMAX, INC. AND
SUBSIDIARIES
TABLE OF
CONTENTS
|
Page
No.
|
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
|
|
Item
1. Financial Statements:
|
|
|
|
Consolidated
Statements of Earnings - Three
Months Ended May 31, 2008 and 2007
|
3
|
|
|
Consolidated
Balance Sheets - May
31, 2008, and February 29, 2008
|
4
|
|
|
Consolidated
Statements of Cash Flows - Three
Months Ended May 31, 2008 and 2007 |
5
|
|
|
Notes
to Consolidated Financial Statements
|
6
|
|
|
|
|
|
Item
2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations
|
20
|
|
|
|
|
Item
3. Quantitative and Qualitative Disclosures About
Market Risk
|
33
|
|
|
|
|
Item
4. Controls and Procedures
|
34
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
|
Item
1. Legal Proceedings
|
35
|
|
|
|
|
Item
1A. Risk Factors
|
35
|
|
|
|
|
Item
4. Submission of Matters to a Vote of Security
Holders
|
35
|
|
|
|
|
Item
6. Exhibits
|
36
|
|
|
|
SIGNATURES
|
37
|
|
|
|
EXHIBIT
INDEX
|
38
|
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 May 31
|
|
|
|
2008
|
|
|
|
% |
(1) |
|
2007
|
|
|
|
% |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used
vehicle sales
|
|
$ |
1,816,848 |
|
|
|
82.3 |
|
|
$ |
1,708,391 |
|
|
|
79.6 |
|
New
vehicle sales
|
|
|
82,070 |
|
|
|
3.7 |
|
|
|
112,615 |
|
|
|
5.2 |
|
Wholesale
vehicle sales
|
|
|
242,327 |
|
|
|
11.0 |
|
|
|
261,152 |
|
|
|
12.2 |
|
Other
sales and revenues
|
|
|
67,518 |
|
|
|
3.1 |
|
|
|
64,976 |
|
|
|
3.0 |
|
Net
sales and operating revenues
|
|
|
2,208,763 |
|
|
|
100.0 |
|
|
|
2,147,134 |
|
|
|
100.0 |
|
Cost
of sales
|
|
|
1,926,049 |
|
|
|
87.2 |
|
|
|
1,862,913 |
|
|
|
86.8 |
|
Gross
profit
|
|
|
282,714 |
|
|
|
12.8 |
|
|
|
284,221 |
|
|
|
13.2 |
|
CarMax
Auto Finance income
|
|
|
9,819 |
|
|
|
0.4 |
|
|
|
37,068 |
|
|
|
1.7 |
|
Selling,
general and administrative expenses
|
|
|
242,984 |
|
|
|
11.0 |
|
|
|
213,814 |
|
|
|
10.0 |
|
Interest
expense
|
|
|
2,058 |
|
|
|
0.1 |
|
|
|
2,016 |
|
|
|
0.1 |
|
Interest
income
|
|
|
264 |
|
|
|
– |
|
|
|
378 |
|
|
|
– |
|
Earnings
before income taxes
|
|
|
47,755 |
|
|
|
2.2 |
|
|
|
105,837 |
|
|
|
4.9 |
|
Provision
for income taxes
|
|
|
18,197 |
|
|
|
0.8 |
|
|
|
40,482 |
|
|
|
1.9 |
|
Net
earnings
|
|
$ |
29,558 |
|
|
|
1.3 |
|
|
$ |
65,355 |
|
|
|
3.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common
shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
217,094 |
|
|
|
|
|
|
|
215,293 |
|
|
|
|
|
Diluted
|
|
|
221,346 |
|
|
|
|
|
|
|
220,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.14 |
|
|
|
|
|
|
$ |
0.30 |
|
|
|
|
|
Diluted
|
|
$ |
0.13 |
|
|
|
|
|
|
$ |
0.30 |
|
|
|
|
|
(1)
Percents are calculated as a percentage of net sales and operating
revenues and may not equal totals due to
rounding.
|
See
accompanying notes to consolidated financial statements.
CARMAX, INC. AND
SUBSIDIARIES
Consolidated Balance
Sheets
(Unaudited)
(In
thousands except share data)
|
|
May
31, 2008
|
|
|
February
29, 2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$ |
11,891 |
|
|
$ |
12,965 |
|
Accounts
receivable,
net
|
|
|
75,393 |
|
|
|
73,228 |
|
Auto
loan receivables held for
sale
|
|
|
10,009 |
|
|
|
4,984 |
|
Retained
interest in securitized
receivables
|
|
|
268,613 |
|
|
|
270,761 |
|
Inventory
|
|
|
933,957 |
|
|
|
975,777 |
|
Prepaid
expenses and other current
assets
|
|
|
23,324 |
|
|
|
19,210 |
|
|
|
|
|
|
|
|
|
|
Total
current
assets
|
|
|
1,323,187 |
|
|
|
1,356,925 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment,
net
|
|
|
926,348 |
|
|
|
862,497 |
|
Deferred
income
taxes
|
|
|
79,352 |
|
|
|
67,066 |
|
Other
assets
|
|
|
47,186 |
|
|
|
46,673 |
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
2,376,073 |
|
|
$ |
2,333,161 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
274,560 |
|
|
$ |
306,013 |
|
Accrued
expenses and other current
liabilities
|
|
|
70,393 |
|
|
|
58,054 |
|
Accrued
income
taxes
|
|
|
28,943 |
|
|
|
7,569 |
|
Deferred
income
taxes
|
|
|
15,804 |
|
|
|
17,710 |
|
Short-term
debt
|
|
|
8,403 |
|
|
|
21,017 |
|
Current
portion of long-term
debt
|
|
|
79,988 |
|
|
|
79,661 |
|
|
|
|
|
|
|
|
|
|
Total
current
liabilities
|
|
|
478,091 |
|
|
|
490,024 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt, excluding current
portion
|
|
|
227,017 |
|
|
|
227,153 |
|
Deferred
revenue and other
liabilities
|
|
|
134,124 |
|
|
|
127,058 |
|
TOTAL
LIABILITIES
|
|
|
839,232 |
|
|
|
844,235 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingent
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock, $0.50 par value; 350,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
220,294,040
and 218,616,069 shares issued and outstanding as of
|
|
|
|
|
|
|
|
|
May
31, 2008, and February 29, 2008, respectively
|
|
|
110,147 |
|
|
|
109,308 |
|
Capital
in excess of par
value
|
|
|
659,115 |
|
|
|
641,766 |
|
Accumulated
other comprehensive
loss
|
|
|
(16,559 |
) |
|
|
(16,728 |
) |
Retained
earnings
|
|
|
784,138 |
|
|
|
754,580 |
|
|
|
|
|
|
|
|
|
|
TOTAL
SHAREHOLDERS’
EQUITY
|
|
|
1,536,841 |
|
|
|
1,488,926 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$ |
2,376,073 |
|
|
$ |
2,333,161 |
|
See
accompanying notes to consolidated financial statements.
CARMAX, INC. AND
SUBSIDIARIES
Consolidated Statements of
Cash Flows
(Unaudited)
(In
thousands)
|
|
Three
Months Ended May 31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Operating
Activities:
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
29,558 |
|
|
$ |
65,355 |
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and
amortization
|
|
|
13,248 |
|
|
|
10,835 |
|
Share-based
compensation
expense
|
|
|
9,921 |
|
|
|
9,332 |
|
Loss
on disposition of
assets
|
|
|
519 |
|
|
|
46 |
|
Deferred
income tax
benefit
|
|
|
(14,290 |
) |
|
|
(6,486 |
) |
Net
(increase) decrease in:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(2,165 |
) |
|
|
3,046 |
|
Auto
loan receivables held for sale, net
|
|
|
(5,025 |
) |
|
|
4,752 |
|
Retained
interest in securitized receivables
|
|
|
2,148 |
|
|
|
(19,592 |
) |
Inventory
|
|
|
41,820 |
|
|
|
(27,395 |
) |
Prepaid
expenses and other current assets
|
|
|
(4,122 |
) |
|
|
3,952 |
|
Other
assets
|
|
|
350 |
|
|
|
335 |
|
Net
increase in:
|
|
|
|
|
|
|
|
|
Accounts
payable, accrued expenses and other current liabilities and accrued income
taxes
|
|
|
328 |
|
|
|
10,522 |
|
Deferred
revenue and other liabilities
|
|
|
7,066 |
|
|
|
20,697 |
|
Net
cash provided by operating
activities
|
|
|
79,356 |
|
|
|
75,399 |
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(75,732 |
) |
|
|
(60,883 |
) |
Proceeds
from sales of
assets
|
|
|
225 |
|
|
|
4 |
|
(Purchases)
sales of money market
securities
|
|
|
(863 |
) |
|
|
4,000 |
|
Purchases
of investments
available-for-sale
|
|
|
– |
|
|
|
(4,000 |
) |
Net
cash used in investing
activities
|
|
|
(76,370 |
) |
|
|
(60,879 |
) |
|
|
|
|
|
|
|
|
|
Financing
Activities:
|
|
|
|
|
|
|
|
|
(Decrease)
increase in short-term debt,
net
|
|
|
(12,614 |
) |
|
|
390 |
|
Issuances
of long-term debt
|
|
|
193,200 |
|
|
|
191,600 |
|
Payments
on long-term
debt
|
|
|
(193,009 |
) |
|
|
(209,054 |
) |
Equity
issuances,
net
|
|
|
8,229 |
|
|
|
3,725 |
|
Excess
tax benefits from share-based payment arrangements
|
|
|
134 |
|
|
|
1,393 |
|
Net
cash used in financing
activities
|
|
|
(4,060 |
) |
|
|
(11,946 |
) |
|
|
|
|
|
|
|
|
|
(Decrease)
increase in cash and cash equivalents
|
|
|
(1,074 |
) |
|
|
2,574 |
|
Cash
and cash equivalents at beginning of year
|
|
|
12,965 |
|
|
|
19,455 |
|
Cash
and cash equivalents at end of
period
|
|
$ |
11,891 |
|
|
$ |
22,029 |
|
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 high quality used vehicles at competitively 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 customers with a full range of related
products and services, including the financing of vehicle purchases through our
own finance operation, CarMax Auto Finance (“CAF”), and third-party lenders; the
sale of extended service plans and accessories; the appraisal and purchase of
vehicles directly from consumers; and vehicle repair
service. Vehicles purchased through the appraisal process that do not
meet our retail standards are sold to licensed dealers through on-site wholesale
auctions.
Basis of Presentation and Use of
Estimates. The accompanying interim unaudited consolidated
financial statements include the accounts
of CarMax and our wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in
consolidation. The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and
liabilities. Actual results could differ from those
estimates. Amounts and percentages in tables may not total due to
rounding. Certain previously reported amounts have been reclassified
to conform to the current period presentation.
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 29, 2008.
Cash and Cash
Equivalents. Cash equivalents of $1.9 million as of May 31,
2008, and $2.0 million as of February 29, 2008, consisted of highly liquid
investments with original maturities of three months or less.
3.
|
CarMax Auto Finance
Income
|
|
|
Three
Months Ended May 31
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
Gain
on sales of loans originated and sold
|
|
$ |
17.1 |
|
|
$ |
27.4 |
|
Other
(losses)
gains
|
|
|
(20.0 |
) |
|
|
0.4 |
|
Total
(loss)
gain
|
|
|
(2.9 |
) |
|
|
27.8 |
|
Other
CAF income:
|
|
|
|
|
|
|
|
|
Servicing
fee
income
|
|
|
10.2 |
|
|
|
8.9 |
|
Interest
income
|
|
|
11.1 |
|
|
|
7.8 |
|
Total
other CAF
income
|
|
|
21.3 |
|
|
|
16.7 |
|
|
|
|
|
|
|
|
|
|
Direct
CAF expenses:
|
|
|
|
|
|
|
|
|
CAF
payroll and fringe benefit expense
|
|
|
4.4 |
|
|
|
3.6 |
|
Other
direct CAF
expenses
|
|
|
4.2 |
|
|
|
3.8 |
|
Total
direct CAF
expenses
|
|
|
8.6 |
|
|
|
7.4 |
|
CarMax
Auto Finance
income
|
|
$ |
9.8 |
|
|
$ |
37.1 |
|
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 typically 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. Other losses or gains include the effects of changes in
valuation assumptions or funding costs related to loans originated and sold
during previous fiscal years. In addition, other losses or gains
could include the effects of new securitizations, changes in the valuation of
retained subordinated bonds and the resale of receivables in existing
securitizations, as applicable.
CAF
income does not include any allocation of indirect costs or
income. We present this information on a direct basis to avoid making
arbitrary decisions regarding the indirect 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 auto loan receivables
originated by CAF. We sell the auto 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 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. The return requirements of
investors in asset-backed commercial paper may fluctuate significantly depending
on market conditions. In addition, the warehouse facility renews on
an annual basis. At renewal both the cost and structure of the
facility could change. These changes could have a significant impact
on our funding costs.
We
routinely use public, and more recently private, securitizations to refinance
the receivables previously securitized through the warehouse
facility. In these transactions, a pool of auto loan receivables is
sold to a bankruptcy-remote, special purpose entity that in turn transfers the
receivables to a special purpose securitization trust. The
securitization trust issues asset-backed securities, secured or otherwise
supported by the transferred receivables, and the proceeds from the sale of the
securities are used to pay for the securitized receivables. Depending
on the securitization structure and market conditions, refinancing receivables
in a public or private securitization could have a significant impact on our
results of operations. The impact of refinancing activity will depend
upon the particular securitization structures and market conditions at the
refinancing date.
The
special purpose entity and investors have no recourse to our
assets. Our risk is limited to the retained interest. All
transfers of receivables are accounted for as sales. When the
receivables are securitized, we recognize a gain or loss on the sale of the
receivables as described in Note 3.
|
|
Three
Months Ended May 31
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
Net
loans
originated
|
|
$ |
631.5 |
|
|
$ |
642.3 |
|
Total
loans
sold
|
|
$ |
626.5 |
|
|
$ |
647.0 |
|
Total
(loss) gain(1)
|
|
$ |
(2.9 |
) |
|
$ |
27.8 |
|
Total
(loss) gain as a percentage of total loans sold(1)
|
|
|
(0.5 |
)% |
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
(1)
Includes the effects of valuation adjustments, new securitizations
and the repurchase and resale of receivables in existing public and
private securitizations,
as
applicable.
|
Retained
Interest. We retain an interest in the auto loan receivables
that we securitize. The retained interest includes the present value
of the expected residual cash flows generated by the securitized receivables, or
“interest-only strip receivables,” various reserve accounts, required excess
receivables and retained subordinated bonds, as described below. On a
combined basis, the reserve accounts and required excess receivables are
generally 2% to 4% of managed receivables. The interest-only strip
receivables, reserve accounts and required excess receivables serve as a credit
enhancement for the benefit of the investors in the securitized
receivables.
The fair
value of the retained interest was $268.6 million as of May 31, 2008, and $270.8
million as of February 29, 2008. Additional information on fair value
measurements is included in Note 6. The retained interest had a
weighted average life of 1.5 years as of May 31, 2008, and February 29,
2008. 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, funding costs 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 and private 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 $41.1 million as of May 31, 2008, and $37.0
million as of February 29, 2008.
Required excess
receivables. The total value of the securitized receivables
must exceed the principal amount owed to the investors by a specified
amount. The required excess receivables balance represents this
specified amount. Any cash flows generated by the required excess
receivables are used, if needed, to make payments to the
investors. Any remaining cash flows from the required excess
receivables are released through the special purpose entity to the
company. The unpaid principal balance related to the required excess
receivables was $69.9 million as of May 31, 2008, and $63.0 million as of
February 29, 2008.
Retained subordinated
bonds. In
fiscal 2009 and 2008, we retained subordinated bonds issued by a securitization
trust. We receive interest payments on the bonds. The
bonds are carried at fair value and changes in fair value are included in
earnings as a component of CAF income. We base our valuation on
observable market prices of the same or similar instruments when available;
however, observable market prices are not currently available for these assets
due to illiquidity in the credit markets. Our current valuations are
primarily based on current market spread quotes from third party investment
banks. By applying these spreads to current bond benchmarks, as determined
through the use of a widely accepted third-party bond pricing model, we have
measured a current fair value. The value of retained subordinated
bonds was $66.2 million as of May 31, 2008, and $43.1 million as of February 29,
2008.
Key Assumptions Used in Measuring the
Fair Value of the Retained Interest and Sensitivity
Analysis. The following table shows the key economic
assumptions used in measuring the fair value of the retained interest as of May
31, 2008, 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.
KEY
ASSUMPTIONS
(In
millions)
|
|
Assumptions
Used
|
|
|
Impact
on Fair
Value
of 10%
Adverse
Change
|
|
|
Impact
on Fair
Value
of 20%
Adverse
Change
|
|
Prepayment
rate
|
|
|
1.33%
- 1.50
|
% |
|
$ |
7.9 |
|
|
$ |
15.3 |
|
Cumulative
loss
rate
|
|
|
1.29%
- 3.00 |
% |
|
$ |
8.6 |
|
|
$ |
17.1 |
|
Annual
discount
rate
|
|
|
17.00 |
% |
|
$ |
4.5 |
|
|
$ |
8.8 |
|
Warehouse
facility costs(1)
|
|
|
2.05 |
% |
|
$ |
2.1 |
|
|
$ |
4.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Expressed as a spread above appropriate benchmark
rates. Applies only to retained interest in receivables securitized
through the warehouse facility. As of May 31, 2008, there were $642.0
million receivables in the warehouse facility.
|
|
Prepayment
rate. We use the Absolute Prepayment Model or “ABS” to
estimate prepayments. This model assumes a rate of prepayment each
month relative to the original number of receivables in a pool of
receivables. ABS further assumes that all the receivables are the
same size and amortize at the same rate and that each receivable in each month
of its life will either be paid as scheduled or prepaid in full. For
example, in a pool of receivables originally containing 10,000 receivables, a 1%
ABS rate means that 100 receivables prepay each month.
Cumulative 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.
Annual discount
rate. The discount rate is the interest rate used for
computing the present value of future cash flows and is determined based on the
perceived market risk of the underlying auto loan receivables and current market
conditions.
Warehouse facility
costs. While
receivables are securitized in the warehouse facility, our retained interest is
exposed to changes in credit spreads and other variable funding
costs. The warehouse facility costs are expressed as a spread above
appropriate benchmark rates.
Continuing Involvement with
Securitized Receivables. We continue to manage the auto loan
receivables that we securitize. We receive servicing fees of
approximately 1% of the outstanding principal balance of the securitized
receivables. We believe that the servicing fees specified in the
securitization agreements adequately compensate us for servicing the securitized
receivables. No servicing asset or liability has been
recorded. We are at risk for the retained interest in the securitized
receivables and, if the securitized receivables do not perform as originally
projected, the value of the retained interest would be impacted.
PAST
DUE ACCOUNT INFORMATION
|
|
As
of May 31
|
|
|
As
of February 29 or 28
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Accounts
31+ days past
due
|
|
$ |
95.8 |
|
|
$ |
68.4 |
|
|
$ |
86.1 |
|
|
$ |
56.9 |
|
Ending
managed receivables
|
|
$ |
3,977.9 |
|
|
$ |
3,475.9 |
|
|
$ |
3,838.5 |
|
|
$ |
3,311.0 |
|
Past
due accounts as a percentage of ending managed receivables
|
|
|
2.41 |
% |
|
|
1.97 |
% |
|
|
2.24 |
% |
|
|
1.72 |
% |
CREDIT
LOSS INFORMATION
|
|
Three
Months Ended May 31
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
Net
credit losses on managed
receivables
|
|
$ |
10.3 |
|
|
$ |
5.5 |
|
Average
managed
receivables
|
|
$ |
3,940.9 |
|
|
$ |
3,411.4 |
|
Annualized
net credit losses as a percentage of average managed
receivables
|
|
|
1.04 |
% |
|
|
0.64 |
% |
Recovery
rate
|
|
|
46.9 |
% |
|
|
52.8 |
% |
SELECTED
CASH FLOWS FROM SECURITIZED RECEIVABLES
|
|
Three
Months Ended May 31
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
Proceeds
from new
securitizations
|
|
$ |
530.0 |
|
|
$ |
489.0 |
|
Proceeds
from collections
|
|
$ |
276.6 |
|
|
$ |
303.6 |
|
Servicing
fees
received
|
|
$ |
10.0 |
|
|
$ |
8.7 |
|
Other
cash flows received from the retained interest:
|
|
|
|
|
|
|
|
|
Interest-only
strip
receivables
|
|
$ |
31.2 |
|
|
$ |
21.8 |
|
Reserve
account
releases
|
|
$ |
0.2 |
|
|
$ |
0.3 |
|
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. There were no
balances previously outstanding in public securitizations that were refinanced
through the warehouse facility in the first quarters of fiscal 2009 or fiscal
2008. Proceeds received when we refinance receivables from the
warehouse facility are excluded from this table as they are not considered new
securitizations.
Proceeds from
collections. Proceeds from collections represent principal
amounts collected on receivables securitized through the warehouse facility that
are used to fund new originations.
Servicing
fees. Servicing fees received represent cash fees paid to
us to service the securitized receivables.
Other cash flows received
from the retained interest. Other cash flows received from the
retained interest represents cash that we receive from 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. The securitization agreement related to the
warehouse facility includes various financial covenants and performance
triggers. This agreement requires 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 that the
pool of securitized receivables in the warehouse facility achieve specified
thresholds related to portfolio yield, loss rate and delinquency
rate. If these financial covenants and/or thresholds are not met, we
could be unable to continue to securitize receivables through the warehouse
facility. In addition, the warehouse facility investors could have us
replaced as servicer and charge us a higher rate of
interest. Further, we may be forced to deposit collections on the
securitized receivables with the warehouse agent on a daily basis, deliver
executed lockbox agreements to the warehouse facility agent and obtain a
replacement counterparty for the interest rate cap agreement related to the
warehouse facility. As of May 31, 2008, we were in
compliance with the financial covenants and the securitized receivables were in
compliance with the performance triggers.
We
utilize interest rate swaps relating to our auto loan receivable securitizations
and our investment in retained subordinated bonds. Swaps are used to
better match funding costs to the interest on the fixed-rate receivables being
securitized and the retained subordinated bonds and to minimize the funding
costs related to certain of our securitizations trusts. During
the first quarter of fiscal 2009, we entered into 29 interest rate swaps with
initial notional amounts totaling $608.4 million and terms ranging from 41 to 43
months. The notional amount of outstanding swaps was $712.4
million as of May 31, 2008, and $898.7 million as of
February 29, 2008. The fair value of swaps included in
prepaid expenses and other current assets totaled an asset of $5.6 million as of
May 31, 2008, and the fair value of swaps included in accounts payable
totaled a liability of $15.1 million as of
February 29, 2008. Additional information on fair value
measurements is included in Note 6.
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 predominantly used
to match funding costs to the use of the funding. However,
disruptions in the credit markets could impact the effectiveness of our hedging
strategies. Credit risk is the exposure to nonperformance of another
party to an agreement. We mitigate credit risk by dealing with highly
rated bank counterparties.
6.
|
Fair Value
Measurements
|
We
adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair
Value Measurements” ("SFAS 157"), on March
1, 2008. SFAS 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value
measurements. SFAS 157 defines “fair value” as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the principal market, or if none
exists, the most advantageous market, for the specific asset or liability at the
measurement date (referred to as the “exit price”). The fair value
should be based on assumptions that market participants would use, including a
consideration of non-performance risk.
We assess
the inputs used to measure fair value using the three-tier hierarchy in
accordance with SFAS 157 and as disclosed in the tables below. The
hierarchy indicates the extent to which inputs used in measuring fair value are
observable in the market.
Level 1
|
Inputs
include unadjusted quoted prices in active markets for identical assets or
liabilities that we can access at the measurement
date.
|
Level 2
|
Inputs
other than quoted prices included within Level 1 that are observable for
the asset or liability, either directly or indirectly, including quoted
prices for similar assets in active markets and observable inputs such as
interest rates and yield curves.
|
Level 3
|
Inputs
that are significant to the measurement that are not observable in the
market and include management's judgments about the assumptions market
participants would use in pricing the asset or liability (including
assumptions about
risk).
|
Our fair
value processes include controls that are designed to ensure that fair values
are appropriate. Such controls include model validation, review of
key model inputs, analysis of period-over-period fluctuations and reviews by
senior management.
VALUATION
METHODOLOGIES
Money market
securities. Money market securities
are cash equivalents, which are included in either cash and cash equivalents or
other assets, and consist of highly liquid investments with original maturities
of three months or less. We use quoted market prices for identical
assets to measure fair value. Therefore, all money market securities
are classified as Level 1.
Retained interest in
securitized receivables. We retain an interest in the auto
loan receivables that we securitize, including interest-only strip receivables,
various reserve accounts, required excess receivables and retained subordinated
bonds. Excluding the retained subordinated bonds, we estimate the
fair value of the retained interest using internal valuation models. These
models included a combination of market inputs and our own assumptions as
described in Note 4. As the valuation models include significant
unobservable inputs, we classified the retained interest as Level
3.
For the
retained subordinated bonds, we base our valuation on observable market prices
for similar assets when available. Otherwise, our valuations are
based on input from independent third parties and internal valuation models, as
described in Note 4. As the key assumption is based on unobservable
inputs, we classified the retained subordinated bonds as Level 3.
Financial
derivatives. Financial derivatives are included in either
prepaids and other assets or accrued expenses and other current liabilities. As
part of our risk management strategy, we utilize interest rate swaps relating to
our auto loan receivable securitizations and our investment in retained
subordinated bonds. Swaps are used to better match funding costs to
the interest on the fixed-rate receivables being securitized and the retained
subordinated bonds and to minimize the funding costs related to certain of our
securitization trusts. Our derivatives are not exchange-traded and
are over-the-counter customized derivative transactions. All of our
derivative exposures are with highly rated bank counterparties.
We
measure derivative fair values assuming that the unit of account is an
individual derivative transaction and that derivatives are sold or transferred
on a stand-alone basis. We estimate the fair value of our derivatives
using quotes determined by the swap counterparties. We validate these
quotes using our own internal model. Both our internal model and
quotes received from bank counterparties project future cash flows and discount
the future amounts to a present value using market-based expectations for
interest rates and the contractual terms of the derivative
instruments. Because model inputs can typically be observed in the
liquid market and the models do not require significant judgment, these
derivatives are classified as Level 2.
Our
derivative fair value measurements consider assumptions about counterparty and
our own non-performance risk. We monitor counterparty and our own
non-performance risk and, in the event that we determine that a party is
unlikely to perform under terms of the contract, we would adjust the derivative
fair value to reflect the non-performance risk.
ITEMS
MEASURED AT FAIR VALUE ON A RECURRING BASIS
|
|
As
of May 31, 2008
|
|
(In
millions)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market securities
|
|
$ |
27.3 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
27.3 |
|
Retained
interest in securitized
receivables
|
|
|
– |
|
|
|
– |
|
|
|
268.6 |
|
|
|
268.6 |
|
Financial
derivatives
|
|
|
– |
|
|
|
5.6 |
|
|
|
– |
|
|
|
5.6 |
|
Total
assets at fair value
|
|
$ |
27.3 |
|
|
$ |
5.6 |
|
|
$ |
268.6 |
|
|
$ |
301.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of total assets at fair
value
|
|
|
9.1 |
% |
|
|
1.9 |
% |
|
|
89.0 |
% |
|
|
100.0 |
% |
Percent
of total assets
|
|
|
1.2 |
% |
|
|
0.2 |
% |
|
|
11.3 |
% |
|
|
12.7 |
% |
CHANGES
IN THE LEVEL 3 ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS
(In
millions)
|
|
Retained
interest in securitized receivables
|
|
Balance
as of March 1, 2008
|
|
$ |
270.8 |
|
Total
realized/unrealized losses
|
|
|
(16.0 |
) |
Purchases,
sales issuances and settlements
|
|
|
13.8 |
|
Balance
as of May 31, 2008
|
|
$ |
268.6 |
|
|
|
|
|
|
Change
in unrealized losses on assets
still held(1)
|
|
$ |
(8.4 |
) |
|
|
|
|
|
(1)
Reported in CarMax Auto Finance income on the income
statement.
|
|
We had
$29.6 million of gross unrecognized tax benefits as of May 31, 2008,
and $32.7 million as of February 29, 2008. During the first
quarter of fiscal 2009, we settled liabilities of $6.9 million related to the
Internal Revenue Service audit of fiscal years 2003 and 2004. There
were no other significant changes to the unrecognized tax benefits as reported
for the year ended February 29, 2008, during the first quarter, as all other
activity was related to positions taken on tax returns filed or intended to be
filed in the current fiscal year.
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 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 May 31
|
|
|
|
Pension
Plan
|
|
|
Restoration
Plan
|
|
|
Total
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Service
cost
|
|
$ |
3,653 |
|
|
$ |
3,663 |
|
|
$ |
214 |
|
|
$ |
93 |
|
|
$ |
3,867 |
|
|
$ |
3,756 |
|
Interest
cost
|
|
|
1,766 |
|
|
|
1,359 |
|
|
|
208 |
|
|
|
103 |
|
|
|
1,974 |
|
|
|
1,462 |
|
Expected
return on plan assets
|
|
|
(1,175 |
) |
|
|
(890 |
) |
|
|
– |
|
|
|
– |
|
|
|
(1,175 |
) |
|
|
(890 |
) |
Amortization
of prior service cost
|
|
|
9 |
|
|
|
9 |
|
|
|
30 |
|
|
|
6 |
|
|
|
39 |
|
|
|
15 |
|
Recognized
actuarial loss
|
|
|
129 |
|
|
|
522 |
|
|
|
99 |
|
|
|
46 |
|
|
|
228 |
|
|
|
568 |
|
Net
pension expense
|
|
$ |
4,382 |
|
|
$ |
4,663 |
|
|
$ |
551 |
|
|
$ |
248 |
|
|
$ |
4,933 |
|
|
$ |
4,911 |
|
We made
contributions to the pension plan totaling $2.8 million during the first
quarter of fiscal 2009. We expect to contribute approximately $14.8
million to the pension plan in fiscal 2009.
As of May
31, 2008, $287.9 million was outstanding under our $500 million revolving credit
facility, with the remainder fully available to us. The outstanding
balance included $8.4 million classified as short-term debt, $79.5 million
classified as current portion of long-term debt and $200.0 million classified as
long-term debt. We classified $79.5 million of the outstanding
balance as of May 31, 2008, 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 May 31, 2008, consisted of $0.5 million
classified as current portion of long-term debt and $27.0 million classified as
long-term debt.
10.
|
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 volume-weighted average 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. These options 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.
COMPOSITION
OF SHARE-BASED COMPENSATION EXPENSE
|
|
Three
Months Ended May 31
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
Cost
of
sales
|
|
$ |
475 |
|
|
$ |
457 |
|
CarMax
Auto Finance
income
|
|
|
158 |
|
|
|
301 |
|
Selling,
general and administrative expenses
|
|
|
9,288 |
|
|
|
8,916 |
|
Share-based
compensation expense, before income taxes
|
|
$ |
9,921 |
|
|
$ |
9,674 |
|
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 (net of estimated forfeitures) over the requisite service
period, which is generally the vesting period of the award. Our
employee stock purchase plan is considered a liability-classified compensatory
plan; the associated costs of $0.3 million in the first quarter of fiscal 2009
and fiscal 2008 are included in share-based compensation
expense. There were no capitalized share-based compensation costs as
of May 31, 2008 or 2007.
STOCK
OPTION ACTIVITY
(Shares
and intrinsic value in thousands)
|
|
Number
of Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
as of March 1, 2008
|
|
|
13,648 |
|
|
$ |
14.55 |
|
|
|
|
|
|
|
Options
granted
|
|
|
2,102 |
|
|
$ |
19.82 |
|
|
|
|
|
|
|
Options
exercised
|
|
|
(626 |
) |
|
$ |
13.12 |
|
|
|
|
|
|
|
Options
forfeited or expired
|
|
|
(67 |
) |
|
$ |
17.09 |
|
|
|
|
|
|
|
Outstanding
as of May 31, 2008
|
|
|
15,057 |
|
|
$ |
15.34 |
|
|
|
5.7 |
|
|
|
74,598 |
|
Exercisable
as of May 31, 2008
|
|
|
8,667 |
|
|
$ |
13.04 |
|
|
|
5.1 |
|
|
$ |
59,510 |
|
For the
three months ended May 31, 2008 and 2007, we granted nonqualified options to
purchase 2,102,326 and 1,659,760 shares of common stock,
respectively. The total cash received as a result of stock option
exercises was $8.2 million in the first quarter of fiscal 2009 and $3.7 million
in the first quarter of fiscal 2008. We settle stock option exercises
with authorized but unissued shares of CarMax common stock. The total
intrinsic value of options exercised was $4.9 million for the first quarter of
fiscal 2009 and $6.0 million for the first quarter of fiscal 2008. We
realized related tax benefits of $1.9 million in the first quarter of fiscal
2009 and $2.2 million in the first quarter of fiscal 2008.
OUTSTANDING
STOCK OPTIONS
As
of May 31, 2008
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6.62
to $9.30
|
|
|
|
2,266
|
|
|
|
4.8 |
|
|
$ |
7.16 |
|
|
|
2,266 |
|
|
$ |
7.16 |
|
$ |
10.74
to $13.42
|
|
|
|
4,329 |
|
|
|
5.7 |
|
|
$ |
13.20 |
|
|
|
2,361 |
|
|
$ |
13.21 |
|
$ |
14.13
to $15.72
|
|
|
|
2,770 |
|
|
|
5.8 |
|
|
$ |
14.70 |
|
|
|
2,770 |
|
|
$ |
14.70 |
|
$ |
16.33
to $22.29
|
|
|
|
3,993 |
|
|
|
6.0 |
|
|
$ |
18.61 |
|
|
|
866 |
|
|
$ |
17.12 |
|
$ |
24.99
to $25.79
|
|
|
|
1,699 |
|
|
|
5.8 |
|
|
$ |
25.04 |
|
|
|
404 |
|
|
$ |
24.99 |
|
Total
|
|
|
|
15,057 |
|
|
|
5.7 |
|
|
$ |
15.34 |
|
|
|
8,667 |
|
|
$ |
13.04 |
|
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 the value calculated using the Black-Scholes
model. For grants to nonemployee directors prior to fiscal 2009, we
used the Black-Scholes model to estimate the fair value of stock option
awards. Beginning in fiscal 2009, we used the binomial
model. Estimates of fair value are not intended to predict actual
future events or the value ultimately realized by the recipients of share-based
awards.
The
weighted average fair values at the date of grant for options granted during the
three month periods ended May 31, 2008 and 2007, was $7.25 and $8.56 per share,
respectively. The unrecognized compensation costs related to
nonvested options totaled $30.1 million as of
May 31, 2008. These costs are expected to be recognized
over a weighted average period of 2.4 years.
ASSUMPTIONS
USED TO ESTIMATE OPTION VALUES
|
|
Three
Months Ended May 31
|
|
|
|
2008
|
|
|
2007
|
|
Dividend
yield
|
|
|
0.0 |
% |
|
|
0.0 |
% |
Expected
volatility factor(1)
|
|
|
34.8%
- 60.9 |
% |
|
|
28.0%
- 54.0 |
% |
Weighted
average expected volatility
|
|
|
44.4 |
% |
|
|
39.8 |
% |
Risk-free
interest rate(2)
|
|
|
1.5%
- 3.1 |
% |
|
|
4.6%
- 5.0 |
% |
Expected
term (in years)(3)
|
|
|
4.8
- 5.2 |
|
|
|
4.2
- 4.4 |
|
(1)
|
Measured
using historical daily price changes of our stock for a period
corresponding to the term of the option and the implied volatility derived
from the market prices of traded options on our stock.
|
(2)
|
Based
on the U.S. Treasury yield curve in effect at the time of
grant.
|
(3)
|
Represents
the estimated number of years that options will be outstanding prior to
exercise.
|
RESTRICTED
STOCK ACTIVITY
(In
thousands)
|
|
Number
of Shares
|
|
|
Weighted
Average Grant Date Fair Value
|
|
Outstanding
as of March 1, 2008
|
|
|
1,721 |
|
|
$ |
21.04 |
|
Restricted
stock granted
|
|
|
1,079 |
|
|
$ |
19.82 |
|
Restricted
stock vested or cancelled
|
|
|
(29 |
) |
|
$ |
21.14 |
|
Outstanding
as of May 31, 2008
|
|
|
2,771 |
|
|
$ |
20.56 |
|
For the
three months ended May 31, 2008, and May 31, 2007, we granted 1,078,546 and
903,515 shares of restricted stock, respectively. The fair value of a
restricted stock award is determined and fixed based on the volume-weighted
average fair market value of our stock on the grant date. The
unrecognized compensation costs related to nonvested restricted stock awards
totaled $32.5 million as of May 31, 2008. These costs are
expected to be recognized over a weighted average period of 1.9
years.
11.
|
Net Earnings per
Share
|
BASIC
AND DILUTIVE NET EARNINGS PER SHARE RECONCILIATIONS
|
|
Three
Months Ended May
31
|
|
(In thousands except per share
data)
|
|
|
2008
|
|
|
|
2007
|
|
Net
earnings available to common shareholders
|
|
$ |
29,558 |
|
|
$ |
65,355 |
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
217,094 |
|
|
|
215,293 |
|
Dilutive
potential common shares:
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
3,390 |
|
|
|
4,416 |
|
Restricted
stock
|
|
|
862 |
|
|
|
421 |
|
Weighted
average common shares and dilutive potential common shares
|
|
|
221,346 |
|
|
|
220,130 |
|
Basic
net earnings per share
|
|
$ |
0.14 |
|
|
$ |
0.30 |
|
Diluted
net earnings per share
|
|
$ |
0.13 |
|
|
$ |
0.30 |
|
|
|
Certain
options were outstanding and not included in the calculation of diluted net
earnings per share because their inclusion would be antidilutive. As
of May 31, 2008, options to purchase 3,956,369 shares of common stock
were outstanding and not included in the calculation. As of
May 31, 2007, options to purchase 1,668,760 shares of common were
outstanding and not included in the calculation.
12.
|
Accumulated Other
Comprehensive Loss
|
(In
thousands)
|
|
Unrecognized
Actuarial Losses
|
|
|
Unrecognized
Prior Service Cost
|
|
|
Total
Accumulated Other Comprehensive Loss
|
|
Balance
as of February 29, 2008
|
|
$ |
15,926 |
|
|
$ |
802 |
|
|
$ |
16,728 |
|
Amortization
expense
|
|
|
(144 |
) |
|
|
(25 |
) |
|
|
(169 |
) |
Balance
as of May 31,
2008
|
|
$ |
15,782 |
|
|
$ |
777 |
|
|
$ |
16,559 |
|
The
cumulative balances are net of deferred tax of $9.7 million as of May 31, 2008,
and $9.8 million as of February 29, 2008.
13.
|
Contingent
Liabilities
|
On June
12, 2007, Ms. Regina Hankins filed a putative class action lawsuit against
CarMax, Inc., in Baltimore County Circuit Court, Maryland. We operate
five 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. We
are currently in settlement discussions regarding this matter.
We are
involved in various other legal proceedings in the normal course of
business. Based upon our evaluation of information currently available, we
believe that the ultimate resolution of any such proceedings will not have a
material adverse effect, either individually or in the aggregate, on our
financial condition or results of operations.
14.
|
Recent Accounting
Pronouncements
|
SFAS No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities –
Including an amendment of FASB Statement No. 115” (“SFAS 159”) was effective for
our fiscal year beginning March 1, 2008. SFAS 159 permits
entities to measure certain financial assets and liabilities at fair
value. The fair value option may be elected on an
instrument-by-instrument basis and is irrevocable. Unrealized gains
and losses on items for which the fair value option has been elected are
recognized in earnings at each subsequent reporting date. We did not
elect to apply the fair value option to any of our financial assets or
liabilities not already within the scope of SFAS 157.
In April
2008 and reaffirmed in June 2008, the Financial Accounting Standards Board
(“FASB”) voted to eliminate qualifying special purpose entities from the
guidance of SFAS No. 140, “Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities,” and FASB Interpretation 46 (revised
December 2003), “Consolidation of Variable Interest Entities - an interpretation
of ARB No. 51,” as well as other modifications. While the proposed
revised pronouncements have not been finalized and the proposals are subject to
further public comment, the changes could have a significant impact on our
consolidated financial statements as we could potentially be precluded from
using sales accounting treatment for our securitization transactions, which
would change the timing of the recognition of CAF income. In addition, the
changes could result in the consolidation of the financial assets and
liabilities transferred to our qualified special purpose
entities. The changes could be effective as early as March 1, 2009,
on a prospective basis.
In
December 2007, the Financial Accounting Standards Board issued SFAS
No. 141(R), “Business Combinations (revised 2007)” (“SFAS
141(R)”). SFAS 141(R) replaces SFAS No. 141, “Business
Combinations” (“SFAS 141”), but retains the requirement that the purchase method
of accounting for acquisitions be used for all business
combinations. SFAS 141(R) expands on the disclosures previously
required by SFAS 141, better defines the acquirer and the acquisition date in a
business combination and establishes principles for recognizing and measuring
the assets acquired (including goodwill), the liabilities assumed and any
noncontrolling interests in the acquired business. SFAS 141(R) also
requires an acquirer to record an adjustment to income tax expense for changes
in valuation allowances or uncertain tax positions related to acquired
businesses. SFAS 141(R) is effective for all business combinations
with an acquisition date in the first annual period following December 15,
2008; early adoption is not permitted. We will apply the provisions
of SFAS 141(R) when applicable.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS
160”). SFAS 160 requires that noncontrolling (or minority) interests
in subsidiaries be reported in the equity section of our balance sheet, rather
than in a mezzanine section of the balance sheet between liabilities and
equity. SFAS 160 also changes the manner in which the net income of
the subsidiary is reported and disclosed in the controlling company's income
statement. SFAS 160 also establishes guidelines for accounting for
changes in ownership percentages and for deconsolidation. SFAS 160 is
effective for financial statements for fiscal years beginning on or after
December 1, 2008, and interim periods within those years. As of
May 31, 2008, we did not hold any noncontrolling interests in
subsidiaries.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS 161”),
which expands the disclosure requirements about an entity’s derivative
instruments and hedging activities. SFAS 161 requires that objectives
for using derivative instruments and related hedged activities be disclosed in
terms of the underlying risk that the entity is intending to manage and in terms
of accounting designation. The fair values of derivative instruments
and related hedged activities and their gains are to be disclosed in tabular
format showing both the derivative positions existing at period end and the
effect of using derivatives during the reporting period. Any
credit-risk-related contingent features are to be disclosed and are to include
information on the potential effect on an entity’s liquidity from using
derivatives. Finally, SFAS 161 requires cross-referencing within the
notes to enable users of financial statements to better locate information about
derivative instruments. These expanded disclosure requirements are
required for every annual and interim reporting period for which a balance sheet
and statement of earnings are presented. SFAS 161 is effective for
fiscal years beginning after November 15, 2008, and interim periods within those
fiscal years, with early application encouraged. We will be required
to adopt SFAS 161 as of March 1, 2009.
In April
2008, the FASB issued FASB Staff Position Financial Accounting Standard 142-3,
“Determination of the Useful Life of Intangible Assets” (“FSP FAS
142-3”). FSP FAS 142-3 amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset under SFAS No. 142, “Goodwill and Other
Intangible Assets” (“SFAS 142”). In developing assumptions about
renewal or extension, FSP FAS 142-3 requires an entity to consider its own
historical experience (or, if no experience, market participant assumptions)
adjusted for the entity-specific factors in paragraph 11 of SFAS
142. FSP FAS 142-3 expands the disclosure requirements of SFAS 142
and is effective for financial statements issued for fiscal years beginning
after December 15, 2008, with early adoption prohibited. The guidance
for determining the useful life of a recognized intangible asset shall be
applied prospectively to intangible assets acquired after the effective
date. The disclosure requirements shall be applied prospectively to
all intangible assets recognized as of, and subsequent to, the effective
date. We believe the adoption of FSP FAS 142-3 will have no impact on
our results of operations, financial condition or cash flows.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources
of accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles
(“GAAP”) in the United States (“the GAAP hierarchy”). SFAS 162 makes
the GAAP hierarchy explicitly and directly applicable to preparers of financial
statements, a step that recognizes preparers’ responsibilities for selecting the
accounting principles for their financial statements, and sets the stage for
making the framework of FASB Concept Statements fully
authoritative. The effective date for SFAS 162 is 60 days following
the SEC’s approval of the Public Company Accounting Oversight Board’s related
amendments to remove the GAAP hierarchy from auditing standards, where it has
resided for some time. The adoption of SFAS 162 will have no impact
on our results of operations, financial condition or cash flows.
In July
2008, we completed a $525 million public securitization of auto loan receivables
and we retained subordinated bonds of $46.0 million.
In July
2008, we also renewed our warehouse facility with a total facility limit of $1.1
billion.
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 our Annual Report on Form 10-K
for the fiscal year ended February 29, 2008, 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 to the current presentation.
BUSINESS
OVERVIEW
General
CarMax is
the nation’s largest retailer of used vehicles. We pioneered the used
car superstore concept, opening our first store in 1993. Our strategy
is to better serve the auto retailing market by addressing the major sources of
customer dissatisfaction with traditional auto retailers and to maximize
operating efficiencies through the use of standardized operating procedures and
store formats enhanced by sophisticated, proprietary management information
systems. As of May 31, 2008, we operated 95 used car superstores in
44 markets, comprised of 32 mid-sized markets, 11 large markets and 1 small
market. We define mid-sized markets as those with television viewing
populations generally between 600,000 and 2.5 million people. We also
operated six new car franchises, all of which were integrated or co-located with
our used car superstores. In fiscal 2008, we sold 377,244 used cars,
representing 96% of the total 392,729 vehicles we sold at retail.
We
believe the CarMax consumer offer is distinctive within the automobile retailing
marketplace. Our offer provides customers the opportunity to shop for
vehicles the same way they shop for items at other “big box”
retailers. Our consumer offer is structured around our four customer
benefits: low, no-haggle prices; a broad selection; high quality vehicles; and a
customer-friendly sales process. Our website, carmax.com, is a
valuable tool for communicating the CarMax consumer offer, a sophisticated
search engine and an efficient channel for customers who prefer to conduct their
shopping online. We generate revenues, income and cash flows
primarily by retailing used vehicles and associated items including vehicle
financing, extended service plans (“ESPs”) and vehicle repair
service.
We also
generate revenues, income and cash flows from the sale of vehicles purchased
through our appraisal process that do not meet our retail
standards. These vehicles are sold through on-site wholesale
auctions. Wholesale auctions are generally held on a weekly or
bi-weekly basis, and as of May 31, 2008, we conducted auctions at 49
used car superstores. During fiscal 2008, we sold 222,406 wholesale
vehicles. On average, the vehicles we wholesale are approximately 10
years old and have more than 100,000 miles. Participation in our
wholesale auctions is restricted to licensed automobile dealers, the majority of
whom are independent dealers and licensed wholesalers.
CarMax
provides financing to qualified customers through CarMax Auto Finance (“CAF”),
our finance operation, and a number of other third-party financing
providers. We collect fixed, prenegotiated fees from the majority of
the third-party providers, and we periodically test additional
providers. CarMax has no recourse liability for the financing
provided by these third parties.
We sell
ESPs on behalf of unrelated third parties who are the primary
obligors. We have no contractual liability to the customer under
these third-party service plans. Extended service plan revenue
represents commissions from the unrelated third parties.
We are
still at a relatively early stage in the national rollout of our retail concept,
and as of May 31, 2008, we had used car superstores located in markets that
comprised approximately 45% of the U.S. population. While the impact
of the current economic environment could cause us to adjust our plans on a
temporary basis, in the long term, we plan to open used car superstores at a
rate of approximately 15% of our used car superstore base each year, and expect
comparable store used unit sales increases to average in the range of 4% to
8%. This range reflects 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 the underlying industry sales
growth. We estimate that our stores generally reach basic maturity
sales levels in their fifth year of operation.
We
believe the primary driver for future earnings growth will be vehicle unit sales
growth, both from new stores and from stores included in our comparable store
base. We target a dollar range of gross profit per used unit
sold. The gross profit dollar target for an individual vehicle is
based on a variety of factors, including its anticipated probability of sale and
its mileage relative to its age; however, it is not based on the vehicle’s
selling price.
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 2009 First Quarter
Highlights
§
|
We
believe the slowdown in the economy, the dramatic rise in gasoline and
food costs and the related impact on consumer spending adversely affected
industry-wide sales in the automotive retail market in the first
quarter.
|
§
|
Net
sales and operating revenues increased 3% to $2.21 billion from $2.15
billion in the first quarter of fiscal 2008, while net earnings decreased
55% to $29.6 million, or $0.13 per share, from $65.4 million, or $0.30 per
share.
|
§
|
Total
used vehicle unit sales increased 10%, reflecting the combination of the
growth in our store base and a 1% increase in comparable store used unit
sales. Wholesale vehicle unit sales decreased 2%, reflecting a
decrease in both our appraisal traffic and our appraisal buy rate (defined
as appraisal purchases as a percent of vehicles appraised). New
vehicle unit sales declined 26%, reflecting a combination of the softer
new car industry trends and the sale of one of our new car franchises in
the second quarter of fiscal 2008.
|
§
|
We
opened six used car superstores in the first quarter, entering three new
markets with four superstores and expanding our presence in two existing
markets.
|
§
|
Our
total gross profit per retail unit decreased $237 to $2,564 from $2,801 in
the prior year’s first quarter. The majority of the decline
resulted from a $192 decrease in gross profit per used
vehicle. Our used vehicle gross profit per unit was pressured
by a combination of factors, including the slowing sales environment, the
decline in our appraisal buy rate and the rapid decline in wholesale
market values for SUVs and trucks that led us to take supplemental pricing
markdowns on these vehicles.
|
§
|
CAF
income decreased to $9.8 million from $37.1 million in the first quarter
of fiscal 2008, reflecting the continuing effects of the disruption in
global credit markets and the more challenging economic
environment. CAF income for the first quarter of fiscal 2009
was reduced by $20.0 million for adjustments primarily related to
increases in funding costs for loans originated during prior fiscal years,
$14 million of which was
anticipated.
|
§
|
Selling,
general and administrative expenses as a percent of net sales and
operating revenues (the “SG&A ratio”) increased to 11.0% from 10.0% in
the first quarter of fiscal 2008. The majority of this increase
was expected, and it largely resulted from the combination of the modest
level of comparable store used unit sales growth, our continued commitment
to our store growth plan and the decline in the used vehicle average
selling price. In addition, in the first quarter of fiscal 2009
we accrued costs related to litigation that reduced net earnings by $0.02
per share.
|
§
|
Net
cash provided by operations increased to $79.4 million compared with $75.4
million in the first quarter of fiscal 2008, primarily reflecting the
benefit of a decrease in inventories in fiscal 2009 partially offset by
the decline in 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 29, 2008. These policies relate to
securitization transactions, revenue recognition, income taxes and defined
benefit retirement plan obligations.
RESULTS
OF OPERATIONS
NET
SALES AND OPERATING REVENUES
|
|
Three
Months Ended May 31
|
|
(In
millions)
|
|
2008
|
|
|
%
|
|
|
2007
|
|
|
%
|
|
Used
vehicle sales
|
|
$ |
1,816.8 |
|
|
|
82.3 |
|
|
$ |
1,708.4 |
|
|
|
79.6 |
|
New
vehicle sales
|
|
|
82.1 |
|
|
|
3.7 |
|
|
|
112.6 |
|
|
|
5.2 |
|
Wholesale
vehicle sales
|
|
|
242.3 |
|
|
|
11.0 |
|
|
|
261.2 |
|
|
|
12.2 |
|
Other
sales and revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extended
service plan revenues
|
|
|
36.5 |
|
|
|
1.7 |
|
|
|
33.9 |
|
|
|
1.6 |
|
Service
department sales
|
|
|
24.5 |
|
|
|
1.1 |
|
|
|
24.1 |
|
|
|
1.1 |
|
Third-party
finance fees, net
|
|
|
6.5 |
|
|
|
0.3 |
|
|
|
7.0 |
|
|
|
0.3 |
|
Total
other sales and revenues
|
|
|
67.5 |
|
|
|
3.1 |
|
|
|
65.0 |
|
|
|
3.0 |
|
Total
net sales and operating revenues
|
|
$ |
2,208.8 |
|
|
|
100.0 |
|
|
$ |
2,147.1 |
|
|
|
100.0 |
|
RETAIL
VEHICLE SALES CHANGES
|
|
Three
Months Ended May 31
|
|
|
|
2008
|
|
|
2007
|
|
Vehicle
units:
|
|
|
|
|
|
|
Used
vehicles
|
|
|
10 |
% |
|
|
15 |
% |
New
vehicles
|
|
|
(26 |
)% |
|
|
(5 |
)% |
Total
|
|
|
9 |
% |
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
Vehicle
dollars:
|
|
|
|
|
|
|
|
|
Used
vehicles
|
|
|
6 |
% |
|
|
17 |
% |
New
vehicles
|
|
|
(27 |
)% |
|
|
(5 |
)% |
Total
|
|
|
4 |
% |
|
|
15 |
% |
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 May 31
|
|
|
|
2008
|
|
|
2007
|
|
Vehicle
units:
|
|
|
|
|
|
|
Used
vehicles
|
|
|
1 |
% |
|
|
6 |
% |
New
vehicles
|
|
|
(18 |
)% |
|
|
(5 |
)% |
Total
|
|
|
0 |
% |
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
Vehicle
dollars:
|
|
|
|
|
|
|
|
|
Used
vehicles
|
|
|
(3 |
)% |
|
|
8 |
% |
New
vehicles
|
|
|
(20 |
)% |
|
|
(5 |
)% |
Total
|
|
|
(4 |
)% |
|
|
7 |
% |
CHANGE
IN USED CAR SUPERSTORE BASE
|
|
Three
Months Ended May 31
|
|
|
|
2008
|
|
|
2007
|
|
Used
car superstores, beginning of
year
|
|
|
89 |
|
|
|
77 |
|
Superstore
openings:
|
|
|
|
|
|
|
|
|
Production
superstores
|
|
|
3 |
|
|
|
1 |
|
Non-production
superstores
|
|
|
3 |
|
|
|
2 |
|
Total
superstore
openings
|
|
|
6 |
|
|
|
3 |
|
Used
car superstores, end of
period
|
|
|
95 |
|
|
|
80 |
|
Used
Vehicle Sales. Our 6% increase
in used vehicle revenues in the first quarter of fiscal 2009 resulted from a 10%
increase in unit sales partially offset by a 4% decrease in average retail
selling price. The unit sales growth reflected sales from newer
superstores not yet in the comparable store base, together with a 1% increase in
comparable store used units. For the first time in more than two
years, we experienced a modest decline in customer traffic in our
stores. Additionally, credit availability from our third-party
nonprime lenders declined slightly during the quarter. However, solid
execution by our store teams resulted in a small improvement in our conversion
rate, and this, together with the benefit of an extra Saturday in the quarter,
contributed to the 1% increase in comparable store used unit
sales. Despite the slower-than-expected sales, our data indicates
that we continued to gain market share in the late-model used vehicle
market. The decline in the average retail selling price primarily
reflected declining market values for SUVs and trucks, as well as mix shifts
away from less fuel-efficient vehicles to more fuel-efficient
vehicles.
New
Vehicle Sales. The 27% decline
in new vehicle revenues in the first quarter of fiscal 2009 was due to a 26%
decrease in unit sales and a 2% decrease in average retail selling
price. New vehicle unit sales reflected the soft new car industry
sales trends and the sale of our Orlando Chrysler Jeep Dodge franchise in the
second quarter of fiscal 2008.
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 7% decrease in wholesale
vehicle revenues in the first quarter of fiscal 2009 resulted from a 2% decrease
in wholesale unit sales combined with a 5% decline in average wholesale selling
price. The decline in the unit sales reflected a decrease in both our
appraisal traffic and our appraisal buy rate. We believe the
significant depreciation in the wholesale market values for SUVs, trucks and
other less fuel-efficient vehicles contributed to the decrease in the buy
rate. The decline in average wholesale selling prices reflects the
trends in the general wholesale market for the types of vehicles we sell,
although prices may also be affected by changes in the average age, miles, make,
model or condition of vehicles to be wholesaled.
Other
Sales and Revenues. Other sales and
revenues include commissions on the sale of ESPs, service department sales and
net third-party finance fees. In the first quarter of fiscal 2009,
other sales and revenues increased 4%. Third-party finance fees
declined 7%, primarily reflecting a slight increase in the percentage of our
sales financed by the third-party subprime provider. The fixed fees
paid by our third-party financing providers will vary by provider, reflecting
their differing levels of credit risk exposure. We record the
discount at which the subprime provider purchases loans as an offset to finance
fee revenues received from the other providers.
Seasonality. Our business is
seasonal. Typically, our superstores experience their strongest
traffic and sales in the spring and summer quarters. Sales are
typically slowest in the fall quarter, when used vehicles generally experience
proportionately more of their annual depreciation. We believe this is
partly the result of a decline in customer traffic, as well as discounts on
model year closeouts that can pressure pricing for late-model used
vehicles. Customer traffic also tends to slow in the fall as the
weather changes 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 could have an effect on the overall seasonal
pattern of our results.
Supplemental Sales
Information.
UNIT
SALES
|
|
Three
Months Ended May 31
|
|
|
|
2008
|
|
|
2007
|
|
Used
vehicles
|
|
|
106,747 |
|
|
|
96,766 |
|
New
vehicles
|
|
|
3,515 |
|
|
|
4,720 |
|
Wholesale
vehicles
|
|
|
56,329 |
|
|
|
57,714 |
|
AVERAGE
SELLING PRICES
|
|
Three
Months Ended May 31
|
|
|
|
2008
|
|
|
2007
|
|
Used
vehicles
|
|
$ |
16,852 |
|
|
$ |
17,480 |
|
New
vehicles
|
|
$ |
23,211 |
|
|
$ |
23,717 |
|
Wholesale
vehicles
|
|
$ |
4,184 |
|
|
$ |
4,413 |
|
RETAIL
VEHICLE SALES MIX
|
|
Three
Months Ended May 31
|
|
|
|
2008
|
|
|
2007
|
|
Vehicle
units:
|
|
|
|
|
|
|
Used
vehicles
|
|
|
97 |
% |
|
|
95 |
% |
New
vehicles
|
|
|
3 |
|
|
|
5 |
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Vehicle
dollars:
|
|
|
|
|
|
|
|
|
Used
vehicles
|
|
|
96 |
% |
|
|
94 |
% |
New
vehicles
|
|
|
4 |
|
|
|
6 |
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
RETAIL
STORES
|
|
Estimate
Feb.
28, 2009
|
|
|
May
31, 2008
|
|
|
Feb.
29, 2008
|
|
|
May
31, 2007
|
|
Production
|
|
|
64 |
|
|
|
60 |
|
|
|
57 |
|
|
|
54 |
|
Non-production
superstores
|
|
|
39 |
|
|
|
35 |
|
|
|
32 |
|
|
|
26 |
|
Total
used car superstores
|
|
|
103 |
|
|
|
95 |
|
|
|
89 |
|
|
|
80 |
|
Co-located
new car stores
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
4 |
|
Total
|
|
|
106 |
|
|
|
98 |
|
|
|
92 |
|
|
|
84 |
|
We opened
six superstores during the first quarter of fiscal 2009. We entered
the Phoenix, Arizona, market with a both a production and a non-production
superstore, the Charleston, South Carolina, market with a non-production
superstore and the Huntsville, Alabama, market with a production
superstore. We also expanded our presence in the San Antonio, Texas,
market with a non-production superstore and the Sacramento, California, market
with a production superstore.
We also
expanded our car-buying center test with an opening in Dallas,
Texas. This represented our fourth car buying center at which we
conduct appraisals and purchase, but do not sell, vehicles.
As of May
31, 2008, 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.
GROSS
PROFIT
|
|
Three
Months Ended May 31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
$
per unit(1)
|
|
|
|
% |
(2) |
|
$
per unit(1)
|
|
|
|
% |
(2) |
Used
vehicle gross
profit
|
|
$ |
1,742 |
|
|
|
10.2 |
|
|
$ |
1,934 |
|
|
|
11.0 |
|
New
vehicle gross
profit
|
|
$ |
860 |
|
|
|
3.7 |
|
|
$ |
1,008 |
|
|
|
4.2 |
|
Wholesale
vehicle gross
profit
|
|
$ |
784 |
|
|
|
18.2 |
|
|
$ |
800 |
|
|
|
17.7 |
|
Other
gross
profit
|
|
$ |
449 |
|
|
|
73.4 |
|
|
$ |
455 |
|
|
|
71.0 |
|
Total
gross
profit
|
|
$ |
2,564 |
|
|
|
12.8 |
|
|
$ |
2,801 |
|
|
|
13.2 |
|
(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. First quarter
fiscal 2009 used vehicle gross profit decreased $192 per unit compared with the
prior year’s first quarter. Several factors contributed to this
decrease. The decline in appraisal traffic and the appraisal buy rate
adversely affected our gross profit per unit. As a result of the
decline in the buy rate, the percentage of our retail vehicles that were
acquired through the appraisal lane was slightly below 50% of our retail unit
sales compared with the prior year when this percentage was above
50%. As a result, more vehicles had to be sourced at auction, and
vehicles purchased at auction typically generate less profit per unit compared
with vehicles purchased directly from consumers. During the quarter,
wholesale industry prices for mid-sized and large SUVs and trucks declined
nearly 25%, which is approximately four times the normal depreciation expected
over this period and well in excess of the depreciation normally expected over a
full year. This rapid decline also resulted in significant margin pressure on
this segment of our inventory, and it led us to take supplemental pricing
markdowns for these vehicles, which further pressured margins. Our
used vehicle gross profit per unit was also pressured by the slowing sales
environment. When consumer traffic and sales decline, we generally
take more pricing markdowns, which further reduces our gross profit per
unit.
New
Vehicle Gross Profit. First quarter
fiscal 2009 new vehicle gross profit declined $148 per unit compared with the
first quarter of last year. The decline in overall consumer demand
for new cars pressured profits for many new car retailers, including
CarMax.
Wholesale
Vehicle Gross Profit. First quarter
fiscal 2009 wholesale vehicle gross profit decreased $16 per unit compared with
the first quarter of fiscal 2008, primarily reflecting the decline in wholesale
industry prices for many classes of vehicles. The decline in profit
per unit for our wholesale business was substantially less than the decline in
our retail used vehicle business, however, due to the rapid pace at which we
turn this inventory, with more than half of our wholesale auctions being held on
a weekly basis. In addition, we continued to experience strong dealer-to-car
ratios at our auctions, with the normal price competition among bidders
partially offsetting the wholesale gross profit decline.
Other
Gross Profit. We have no cost
of sales related to either ESP revenues or third-party finance fees, as these
represent commissions paid to us by the third-party providers. Our first quarter
fiscal 2009 other gross profit declined $6 per unit compared with the first
quarter of fiscal 2008. The change in other gross profit per unit
reflected a decline in third-party finance fees, partially offset by an increase
in service department margins.
Impact of
Inflation. Inflation has not
been a significant contributor to results. Profitability is affected
by our ability to achieve targeted unit sales and gross profit dollars per
vehicle rather than on average retail prices. However, increases in
average vehicle selling prices will benefit the SG&A ratio and CAF income to
the extent the average amount financed also increases.
CarMax
Auto Finance Income. CAF provides
financing for our used and new car sales. Because the purchase of a
vehicle 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
auto loans, both for CAF and for the third-party financing
providers. CAF provides us the opportunity to capture additional
profits and cash flows from auto loan receivables while managing our reliance on
third-party financing sources.
COMPONENTS
OF CAF INCOME
|
|
Three
Months Ended May 31
|
|
(In
millions)
|
|
2008
|
|
|
%
|
|
|
2007
|
|
|
%
|
|
Total
(loss) gain(1)
|
|
$ |
(2.9 |
) |
|
|
(0.5 |
) |
|
$ |
27.8 |
|
|
|
4.3 |
|
Other
CAF income:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing
fee
income
|
|
|
10.2 |
|
|
|
1.0 |
|
|
|
8.9 |
|
|
|
1.0 |
|
Interest
income
|
|
|
11.1 |
|
|
|
1.1 |
|
|
|
7.8 |
|
|
|
0.9 |
|
Total
other CAF
income
|
|
|
21.3 |
|
|
|
2.2 |
|
|
|
16.7 |
|
|
|
2.0 |
|
Direct
CAF expenses:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAF
payroll and fringe benefit expense
|
|
|
4.4 |
|
|
|
0.5 |
|
|
|
3.6 |
|
|
|
0.4 |
|
Other
direct CAF
expenses
|
|
|
4.2 |
|
|
|
0.4 |
|
|
|
3.8 |
|
|
|
0.5 |
|
Total
direct CAF
expenses
|
|
|
8.6 |
|
|
|
0.9 |
|
|
|
7.4 |
|
|
|
0.9 |
|
CarMax
Auto Finance income(3)
|
|
$ |
9.8 |
|
|
|
0.4 |
|
|
$ |
37.1 |
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
sold
|
|
$ |
626.5 |
|
|
|
|
|
|
$ |
647.0 |
|
|
|
|
|
Average
managed
receivables
|
|
$ |
3,940.9 |
|
|
|
|
|
|
$ |
3,411.4 |
|
|
|
|
|
Ending
managed
receivables
|
|
$ |
3,977.9 |
|
|
|
|
|
|
$ |
3,475.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net sales and operating revenues
|
|
$ |
2,208.8 |
|
|
|
|
|
|
$ |
2,147.1 |
|
|
|
|
|
Percent
columns indicate:
(1)
Percent of loans sold.
(2)
Annualized 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 benefits or costs that could be
attributed to CAF. Examples of indirect costs not included are retail
store expenses and corporate expenses such as human resources, administrative
services, marketing, information systems, accounting, legal, treasury and
executive payroll.
CAF
originates auto loans to qualified customers at competitive market rates of
interest. The majority of CAF income is typically 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. Over the long term, and in a normalized environment, we
expect the gain on loans originated and sold as a percent of loans originated
and sold (the “gain percentage”) to be in the range of
3.5% to 4.5%. However, the gain percentage has been
substantially below the low end of this range in recent quarters, primarily as a
result of the disruption in the global credit markets and the more challenging
economic environment, which have increased CAF funding costs and caused us to
increase the discount rate and loss rate assumptions that affect CAF
income.
(LOSS)
GAIN ON SALE AND LOANS SOLD
|
|
Three
Months Ended May 31
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
Gain
on sales of loans originated and
sold
|
|
$ |
17.1 |
|
|
$ |
27.4 |
|
Other
(losses)
gains
|
|
|
(20.0 |
) |
|
|
0.4 |
|
Total
(loss)
gain
|
|
$ |
(2.9 |
) |
|
$ |
27.8 |
|
|
|
|
|
|
|
|
|
|
Loans
originated and
sold
|
|
$ |
626.5 |
|
|
$ |
647.0 |
|
Receivables
repurchased from public securitizations and resold
|
|
|
- |
|
|
|
- |
|
Total
loans
sold
|
|
$ |
626.5 |
|
|
$ |
647.0 |
|
|
|
|
|
|
|
|
|
|
Gain
percentage on loans originated and
sold
|
|
|
2.7 |
% |
|
|
4.2 |
% |
Total
(loss) gain as a percentage of total loans sold
|
|
|
(0.5 |
)% |
|
|
4.3 |
% |
The gain
on sales of loans originated and sold includes both the gain income recorded at
the time of securitization and the effect of any subsequent changes in valuation
assumptions or funding costs that are incurred in the same fiscal year that the
loans were originated. Other losses or gains include the effects of
changes in valuation assumptions or funding costs related to loans originated
and sold during previous fiscal years. In addition, other losses or
gains could include the effects of new securitizations, changes in the valuation
of retained subordinated bonds and the resale of receivables in existing
securitizations, as applicable.
Our
public securitizations typically contain an option to repurchase the securitized
receivables when the outstanding balance in the pool of auto loan receivables
falls below 10% of the original pool balance. We did not exercise
this option on any securitizations in either the first quarter of fiscal 2009 or
fiscal 2008. In future periods, the effects of refinancing,
repurchase or resale activity could be favorable or unfavorable, depending on
the securitization structure and the market conditions at the transaction
date.
In the
first quarter of fiscal 2009, CAF income declined to $9.8 million from $37.1
million in the prior year’s first quarter, reflecting the continuing effects of
the disruption in the global credit markets and the more challenging economic
environment. The gain percentage decreased to 2.7% from 4.2% in the
prior year period. This decrease resulted from a combination of
factors, including substantially higher funding costs in the warehouse facility,
which we have not offset through higher consumer rates in the current
environment; the increase in the discount rate assumption used to calculate the
gain on the sale of loans to 17% from 12% in the first quarter of last year; and
a higher loss assumption on current quarter originations compared with the
assumption used in the prior year’s quarter.
As of May
31, 2008, we were in the process of renewing our warehouse facility agreement,
which renews annually. Due to conditions in the credit markets, the
funding cost in the facility will increase upon renewal, and it will align more
closely with the current funding cost in the public and private securitization
market. We have reflected these higher funding costs in the gain on
sale recognized on all loans originated and sold in the first quarter of fiscal
2009. The higher warehouse facility funding costs are expected to
reduce the adjustments that may otherwise be necessary at the time the loans are
refinanced in a public or private securitization, generally one or two quarters
later. We had originally expected some of these higher costs to be
incurred subsequent to the first quarter when the public securitizations were
completed and the warehouse facility was renewed. In addition, when
the warehouse facility renews in future years, the cost and structure of the
facility could change. These changes could have a significant impact on our
funding costs.
The total
loss for the first quarter of fiscal 2009 included $20.0 million, or $0.06 per
share, for adjustments primarily related to loans originated in prior fiscal
years, $14 million of which was anticipated. The amount included the
impact of the increase in the funding costs for $750 million of loans that were
refinanced from our warehouse facility in a private securitization completed in
May 2008. It also includes the applicable incremental warehouse
facility funding costs applied to the remaining $95 million of loans that were
originated in previous fiscal years and that were still in the warehouse
facility as of May 31, 2008.
The
increases in servicing fee income and direct CAF expenses in the first quarter
of fiscal 2009 were proportionate to the growth in managed
receivables. The interest income component of other CAF income
increased to an annualized 1.1% of average managed receivables in the first
quarter of fiscal 2009 from 0.9% in the prior year quarter. In the fourth
quarter of fiscal 2008, we increased the discount rate used to value the
retained interest and calculate the gain on loans sold to 17% from
12%. This increase reduces the gain recognized at the time the loans
are sold, but increases the interest income recognized in subsequent
periods. In addition, interest income included the interest earned on
the retained subordinated bonds. Prior to January 2008, we had not retained any
subordinated bonds.
PAST
DUE ACCOUNT INFORMATION
|
|
As
of May 31
|
|
|
As
of February 29 or 28
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Loans
securitized
|
|
$ |
3,893.8 |
|
|
$ |
3,399.6 |
|
|
$ |
3,764.5 |
|
|
$ |
3,242.1 |
|
Loans
held for sale or investment
|
|
|
84.1 |
|
|
|
76.3 |
|
|
|
74.0 |
|
|
|
68.9 |
|
Ending
managed
receivables
|
|
$ |
3,977.9 |
|
|
$ |
3,475.9 |
|
|
$ |
3,838.5 |
|
|
$ |
3,311.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
31+ days past
due
|
|
$ |
95.8 |
|
|
$ |
68.4 |
|
|
$ |
86.1 |
|
|
$ |
56.9 |
|
Past
due accounts as a percentage of ending
managed receivables
|
|
|
2.41 |
% |
|
|
1.97 |
% |
|
|
2.24 |
% |
|
|
1.72 |
% |
CREDIT
LOSS INFORMATION
|
|
Three
Months Ended May 31
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
Net
credit losses on managed
receivables
|
|
$ |
10.3 |
|
|
$ |
5.5 |
|
Average
managed
receivables
|
|
$ |
3,940.9 |
|
|
$ |
3,411.4 |
|
Annualized
net credit losses as a percentage of average
managed receivables
|
|
|
1.04 |
% |
|
|
0.64 |
% |
Recovery
rate
|
|
|
46.9 |
% |
|
|
52.8 |
% |
We are at
risk for the performance of the managed securitized receivables to the extent of
our retained interest in the receivables. If the managed receivables
do not perform in accordance with the assumptions used in determining the fair
value of the retained interest, earnings could be affected.
In the
first quarter of fiscal 2009, we experienced increases in both past due
accounts as a percentage of ending managed receivables and annualized net credit
losses as a percentage of average managed receivables compared with the first
quarter of fiscal 2008. We believe these increases were the result of
a combination of factors, including the prior expansion of our credit offers and
the less favorable general economic and industry trends for losses and
delinquencies.
We
continually strive to refine CAF’s origination strategy in order to optimize
profitability and sales while controlling risk. Over the long term,
we originate pools of loans targeted to have cumulative net loss rates in the
range of 2.0% to 2.5%. Receivables originated in calendar years 2003,
2004 and early 2005 have experienced loss rates well below both CAF’s historical
averages and these targeted loss rates. We believe this favorability
was due, in part, to the credit scorecard we 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 periods thereafter have been experiencing higher delinquency and loss
rates compared with the receivables originated in these earlier
years. While the delinquency and projected loss rates on the more
recent originations were higher than our initial expectations, we believe this
was primarily related to the worsening economic
climate. Consequently, in fiscal 2008, we increased our cumulative
net loss assumptions on several more recent securitizations, and we have
continued to incorporate similar economic stress into the projections for our
most recent originations.
The
recovery rate represents the average percentage of the outstanding principal
balance we receive when a vehicle is repossessed and liquidated at wholesale
auction. Historically, the annual recovery rate has ranged from a low
of 42% to a high of 51%, and it is primarily affected by changes in the
wholesale market pricing environment.
Selling,
General and Administrative Expenses. The SG&A
ratio increased to 11.0% in the first quarter of fiscal 2009 compared with 10.0%
in the first quarter of the prior year. The majority of this increase
was expected, and it largely resulted from the combination of the modest level
of comparable store used unit sales growth, our continued commitment to our
store growth plan and the decline in the used vehicles average selling
price. In addition, in the first quarter of fiscal 2009 we accrued
costs related to litigation that reduced net earnings by $0.02 per
share.
Income
Taxes. The effective
income tax rate was 38.1% in the first quarter of fiscal 2009 and 38.2% in the
first quarter of fiscal 2008.
OPERATIONS
OUTLOOK
Store
Openings and Capital Expenditures. During the fiscal year
ending February 28, 2009, we plan to expand our used car superstore base by
approximately 16%, opening an estimated 14 used car superstores, including 7
production and 7 non-production stores. We opened six superstores in
the first quarter of fiscal 2009, and we plan to open eight superstores during
the balance of the fiscal year.
REMAINING
FY09 PLANNED SUPERSTORE OPENINGS
Location
|
Television
Market
|
Market
Status
|
Production
Superstores
|
Non-Production
Superstores
|
Colorado
Springs, Colorado(1)
|
Colorado
Springs
|
New
|
1
|
-
|
Costa
Mesa, California(1)
|
Los
Angeles
|
Existing
|
-
|
1
|
Tulsa,
Oklahoma(1)
|
Tulsa
|
New
|
1
|
-
|
Hickory,
North Carolina
|
Charlotte
|
Existing
|
-
|
1
|
Augusta,
Georgia
|
Augusta
|
New
|
-
|
1
|
Dayton,
Ohio
|
Dayton
|
New
|
1
|
-
|
Cincinnati,
Ohio
|
Cincinnati
|
New
|
1
|
-
|
Potomac
Mills, Virginia
|
D.C.
/ Baltimore
|
Existing
|
-
|
1
|
Total
remaining FY09 planned superstore openings
|
4
|
4
|
(1) Opened
in June or July 2008.
We
currently expect to open one superstore in the third quarter and the remaining
four superstores in the fourth quarter of fiscal 2009. However,
normal construction, permitting or other scheduling delays could shift opening
dates of any stores into a later period.
In June
2008, we opened our fifth car-buying center, in the Baltimore, Maryland,
market. We will continue to evaluate the performance of these five
test centers before deciding whether to open additional centers in future
years. These test stores are part of our long-term program to
increase both appraisal traffic and retail vehicle sourcing self-sufficiency,
which is the number of vehicles sold at retail that we purchased from
consumers.
We
currently estimate gross capital expenditures will total approximately $350
million in fiscal 2009. Planned expenditures primarily relate to new
store construction and land purchases associated with future year store
openings, as well as reconditioning capacity expansions. Compared
with the $253 million spent in fiscal 2008, the fiscal 2009 capital spending
estimate reflects an increase in land purchases to support future year store
openings and the increase in the number of stores planned to be
opened.
Fiscal
2009
Comparable Store Sales and Earnings Per Share Expectations. Our first quarter
sales were modestly below expectations and earnings were
disappointing. Sales slowed through the quarter, and traffic and
sales have weakened further since Memorial Day weekend. If the
current sales trends persist, results for the full year could be significantly
below the low end of our original earnings guidance range of $0.78 per share to
$0.94 per share. As a result of the combination of the uncertain
economic conditions, rising fuel and food costs and weak consumer sentiment,
exacerbated by the rapid depreciation in SUVs and trucks, we have temporarily
suspended guidance on comparable store sales and earnings for fiscal
2009. We hope to provide updated guidance later in the year, when
there is a more stable outlook for the economy and we have better visibility on
trends.
FINANCIAL
CONDITION
Liquidity and Capital
Resources.
Operating
Activities. Net cash from
operating activities increased to $79.4 million in the first quarter of fiscal
2009 from $75.4 million in the first quarter of fiscal 2008, primarily
reflecting the benefit of a decrease in inventories in fiscal 2009 partially
offset by the decline in net earnings. Inventory declined by $41.8
million in the first quarter of fiscal 2009 compared with an increase of $27.4
million in the prior-year period. The decline in fiscal 2009
reflected the combination of our reductions in retail used vehicle inventories
to better reflect current customer demand and sales levels, as well as the
decrease in vehicle acquisition costs for several vehicle categories, including
SUVs and trucks.
The
aggregate principal amount of outstanding auto loan receivables funded through
securitizations, which are discussed in Notes 3 and 4 to our consolidated
financial statements, totaled $3.89 billion as of May 31, 2008, and
$3.40 billion as of May 31, 2007. During the first
quarter of fiscal 2009, we completed a private securitization of auto loan
receivables, funding a total of $750 million of auto loan
receivables. We retained $24.4 million face value of subordinated
bonds in this securitization.
As
of May 31, 2008, the warehouse facility limit was $1.0 billion
and unused warehouse capacity totaled $358.0 million. The warehouse
facility was renewed in July 2008 with a total facility limit of $1.1
billion. We anticipate that we will be able to enter into new, or
renew or expand existing, securitizations or other funding arrangements to meet
CAF’s future funding needs.
Investing
Activities. Net cash used in
investing activities was $76.4 million in the first quarter of fiscal 2009,
compared with $60.9 million in the prior year's quarter, consisting almost
entirely of capital expenditures, which primarily include 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. As of May 31,
2008, we owned 38 superstores currently in operation, as well as our home office
in Richmond, Virginia. In addition, five superstores were accounted
for as capital leases.
Financing
Activities. Net cash used in
financing activities was $4.1 million in the first quarter of fiscal 2009
compared with $11.9 million in the first quarter of fiscal 2008. In
the first quarter of fiscal 2009, we used cash generated from operations to
reduce debt by $12.4 million compared with a $17.1 million reduction in the
first quarter of fiscal 2008.
We have a
$500 million revolving credit facility, which is available until December
2011. Borrowings under this credit facility are available for working
capital and general corporate purposes, and are secured by our vehicle
inventory, which was $934.0 million as of May 31, 2008. As of May 31,
2008, $287.9 million was outstanding under the credit facility, with the
remainder fully available to us. The outstanding balance included
$8.4 million classified as short-term debt, $79.5 million classified as current
portion of long-term debt and $200 million classified as long-term
debt. We classified $79.5 million of the outstanding balance as of
May 31, 2008, 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 and proceeds from securitization transactions
or other funding arrangements, sale-leaseback transactions and borrowings under
existing or expanded credit facilities will be sufficient to fund capital
expenditures and working capital for the foreseeable future.
Fair
Value Measurements. On March 1, 2008,
we adopted Statement of Financial Accounting Standards No. 157, “Fair Value
Measurements” ("SFAS
157"). SFAS 157 defines fair value and is applied in any situation
where an asset or liability is measured at fair value under existing U.S.
generally accepted accounting principles. In accordance with SFAS
157, we reported money market securities, retained interest in securitized
receivables and financial derivatives at fair value. As these financial assets
were already reported at fair value, the implementation of SFAS 157 did not have
a material impact on our results of operations, liquidity or financial
condition. See Note 6 for more information on the adoption and
application of this standard.
Retained
interest in securitized receivables was valued at $268.6 million as of May 31,
2008 and $270.8 million as of February 29, 2008. The retained
interest is comprised of interest-only strip receivables; various reserve
accounts and required excess receivables totaling $202.4 million and $227.7
million as of May 31, 2008, and February 29, 2008, respectively; and retained
subordinated bonds totaling $66.2 million and $43.1 million as of May 31, 2008,
and February 29, 2008, respectively.
As
described in Note 4, we use discounted cash flow models to measure the fair
value of retained interest, excluding retained subordinated bonds. In
addition to funding costs and prepayment rates, the estimates of future cash
flows are based on certain key assumptions, such as loss rates and discount
rates appropriate for the type of asset and risk, both of which are significant
unobservable inputs. Changes in these inputs could have a material
impact on our financial condition or results of operations, as they have had in
the past. However, there were no material changes experienced during the current
quarter.
In
measuring the fair value of the retained subordinated bonds, we use a widely
accepted third-party bond pricing model. Our key assumption is determined based
on current market spread quotes from third-party investment banks and is
currently a significant unobservable input. Changes in this input could have a
material impact on our financial condition or results of
operations.
As the
key assumptions used in measuring the fair value of the retained interest
(including the retained subordinated bonds) are significant unobservable inputs,
retained interest is classified as a Level 3 asset in accordance with the SFAS
157 hierarchy. Retained interest represents 89.0% of the total assets measured
at fair value, as disclosed in Note 6.
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 general U.S. or regional U.S. economic
conditions.
|
§
|
Changes
in the availability or cost of capital and working capital financing,
including the availability and cost of long-term financing to support our
geographic expansion and the availability and cost of financing auto loans
receivable.
|
§
|
Changes
in the competitive landscape within our
industry.
|
§
|
Significant
changes in retail prices for used and new
vehicles.
|
§
|
A
reduction in the availability or access to sources of
inventory.
|
§
|
Factors
related to the regulatory environment in which we
operate.
|
§
|
The
loss of key employees from our store, region and corporate management
teams.
|
§
|
The
failure of key information systems.
|
§
|
The
effect of new accounting requirements or changes to U.S. generally
accepted accounting principles.
|
§
|
Security
breaches or other events that result in the misappropriation, loss or
other unauthorized disclosure of confidential customer
information.
|
§
|
The
effect of various litigation
matters.
|
§
|
Our
inability to acquire or lease suitable real estate at favorable
terms.
|
§
|
The
occurrence of severe weather
events.
|
§
|
Factors
related to seasonal fluctuations in our
business.
|
§
|
Factors
related to the geographic concentration of our
superstores.
|
§
|
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 35 of this report, our Annual Report on Form 10-K for the
fiscal year ended February 29, 2008, 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
Auto Loan
Receivables. As
of May 31, 2008, and February 29, 2008, all loans in our
portfolio of auto loan receivables were fixed-rate installment
loans. Financing for these auto loan receivables was achieved through
asset securitization programs that, in turn, 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. Disruptions in the credit markets could impact the
effectiveness of our hedging strategies. Receivables held for investment or sale
are financed with working capital. Generally, changes in interest
rates associated with underlying swaps will not have a material impact on
earnings; however, they could have a material impact on cash and cash
flows.
Credit
risk is the exposure to nonperformance of another party to an
agreement. We mitigate credit risk by dealing with highly rated bank
counterparties. The market and credit risks associated with financial
derivatives are similar to those relating to other types of financial
instruments. Notes 5 and 6 provide additional information on
financial derivatives.
COMPOSITION
OF AUTO LOAN RECEIVABLES
(In
millions)
|
|
May
31, 2008
|
|
|
February
29, 2008
|
|
Principal
amount of:
|
|
|
|
|
|
|
Fixed-rate
securitizations
|
|
$ |
2,894.9 |
|
|
$ |
2,533.4 |
|
Floating-rate
securitizations synthetically altered
to fixed(1)
|
|
|
998.6 |
|
|
|
1,230.6 |
|
Floating-rate
securitizations
|
|
|
0.3 |
|
|
|
0.5 |
|
Loans
held for investment (2)
|
|
|
74.1 |
|
|
|
69.0 |
|
Loans
held for sale (3)
|
|
|
10.0 |
|
|
|
5.0 |
|
Total
|
|
$ |
3,977.9 |
|
|
$ |
3,838.5 |
|
(1)
Includes $356.9 million of variable-rate securities issued in connection
with the 2007-3 and 2008-1 public securitizations that were synthetically
altered to fixed at the bankruptcy-remote special purpose
entity.
(2) The
majority is held by a bankruptcy-remote special purpose
entity.
(3)
Held by a bankruptcy-remote special purpose entity.
|
|
Interest
Rate Exposure. We also have
interest rate risk from changing interest rates related to our outstanding
debt. Substantially all of our debt is floating-rate debt based on
LIBOR. A 100-basis point increase in market interest rates would have
decreased our first quarter fiscal 2009 net earnings per share by less than
$0.01.
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 May 31, 2008, 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
five 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. We
are currently in settlement discussions regarding this matter.
We are
involved in various other legal proceedings in the normal course of
business. Based upon our evaluation of information currently available, we
believe that the ultimate resolution of any such proceedings will not have a
material adverse effect, either individually or in the aggregate, on our
financial condition or results of operations.
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 29, 2008,
should be considered. These risks could materially and adversely affect our
business, financial condition and results of operations. 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
|
(a)
|
The
annual meeting of the company’s shareholders was held June 24,
2008.
|
(b)
|
At
the annual meeting, the shareholders elected Thomas J. Folliard, Shira D.
Goodman, W. Robert Grafton and Edgar H. Grubb to the company’s board of
directors, each for a three-year term expiring at the 2011 Annual Meeting
of Shareholders. In addition, the shareholders elected Ronald
E. Blaylock to our board of directors for a two-year term expiring at the
2010 Annual Meeting of Shareholders. The board chose to
nominate Mr. Blaylock for a two-year term in order to maintain the balance
of the number of directors in each class. The directors were
elected pursuant to the following
vote:
|
Directors
|
Votes
For
|
Votes
Withheld
|
|
|
|
Ronald
E. Blaylock
|
199,359,930
|
622,576
|
|
|
|
Thomas
J. Folliard
|
199,506,027
|
476,479
|
|
|
|
Shira
D. Goodman
|
199,316,754
|
665,752
|
|
|
|
W.
Robert Grafton
|
199,495,284
|
487,222
|
|
|
|
Edgar
H. Grubb
|
199,483,314
|
499,192
|
|
|
|
The
following directors had terms of office that did not expire at the 2008 annual
meeting:
Keith D. Browning
James F. Clingman, Jr.
Jeffrey E. Garten
Hugh G. Robinson
Thomas G. Stemberg
Vivian M.
Stephenson
Beth A.
Stewart
William
R. Tiefel
William
S. Kellogg retired as a member of the board of directors, effective June 24,
2008.
(c)
|
At
the annual meeting, the shareholders also voted upon the
following:
|
i.
|
The
shareholders ratified the selection of KPMG LLP as our independent
registered public accounting firm for fiscal year 2009 by a vote of
199,519,892 shares for, 250,133 shares against and 212,481 shares
abstaining.
|
ii.
|
The
shareholders approved amendments to the CarMax, Inc. Amended
and Restated 2002 Non-Employee Directors Stock Incentive Plan, by a vote
of 168,223,641 shares for, 7,400,862 shares against and 452,331 shares
abstaining. There were 23,905,672 broker non-votes on this
matter.
|
|
10.1
|
CarMax,
Inc. Non-Employee Directors Stock Incentive Plan, as amended and restated
June 24, 2008, filed herewith.
|
|
10.2
|
CarMax,
Inc. Benefit Restoration Plan, as amended and restated January 1, 2008,
filed herewith.
|
|
10.3
|
Form
of Directors Stock Option Grant Agreement between CarMax, Inc. and certain
non-employee directors of the CarMax, Inc. board of directors, filed
herewith.
|
|
31.1
|
Certification
of the Chief Executive Officer Pursuant to Rule 13a-14(a), filed
herewith.
|
|
31.2
|
Certification
of the Chief Financial Officer Pursuant to Rule 13a-14(a), filed
herewith.
|
|
32.1
|
Certification
of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, filed
herewith.
|
|
32.2
|
Certification
of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, filed
herewith.
|
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
|
July 10,
2008
EXHIBIT
INDEX
|
10.1
|
CarMax,
Inc. Non-Employee Directors Stock Incentive Plan, as amended and restated
June 24, 2008, filed herewith.
|
|
10.2
|
CarMax,
Inc. Benefit Restoration Plan, as amended and restated January 1, 2008,
filed herewith.
|
|
10.3
|
Form
of Directors Stock Option Grant Agreement between CarMax, Inc. and certain
non-employee directors of the CarMax, Inc. board of directors,
filed
herewith.
|
|
31.1
|
Certification
of the Chief Executive Officer Pursuant to Rule 13a-14(a), filed
herewith.
|
|
31.2
|
Certification
of the Chief Financial Officer Pursuant to Rule 13a-14(a), filed
herewith.
|
|
32.1
|
Certification
of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, filed
herewith.
|
|
32.2
|
Certification
of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, filed
herewith.
|
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