tenq.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
[
X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the Quarterly Period Ended November 30, 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 December 31,
2008
|
Common
Stock, par value $0.50
|
|
220,399,823
|
|
|
|
A Table
of Contents is included on Page 2 and a separate Exhibit Index is included on
Page 42.
CARMAX, INC. AND
SUBSIDIARIES
TABLE OF
CONTENTS
|
Page
No.
|
PART
I.
|
FINANCIAL INFORMATION
|
|
|
|
|
|
|
Item
1. Financial Statements:
|
|
|
|
Consolidated
Statements of Operations - Three
Months and Nine Months Ended November 30, 2008 and 2007
|
3
|
|
|
Consolidated
Balance Sheets - November
30, 2008, and February 29, 2008
|
4
|
|
|
Consolidated
Statements of Cash Flows - Nine
Months Ended November 30, 2008 and 2007
|
5
|
|
|
Notes
to Consolidated Financial Statements
|
6
|
|
|
|
|
|
Item
2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations
|
21
|
|
|
|
|
Item
3. Quantitative and Qualitative Disclosures About
Market Risk
|
37
|
|
|
|
|
Item
4. Controls and Procedures
|
38
|
|
|
|
PART
II.
|
OTHER INFORMATION
|
|
|
|
|
|
Item
1. Legal Proceedings
|
39
|
|
|
|
|
Item
1A. Risk Factors
|
39
|
|
|
|
|
Item
6. Exhibits
|
40
|
|
|
|
|
|
|
SIGNATURES
|
41
|
|
|
|
EXHIBIT
INDEX
|
42
|
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
CARMAX, INC. AND
SUBSIDIARIES
Consolidated Statements of
Operations
(Unaudited)
(In
thousands except per share data)
|
|
Three
Months Ended November 30
|
|
|
Nine
Months Ended November 30
|
|
|
|
2008
|
|
|
|
% |
(1) |
|
2007
|
|
|
|
% |
(1) |
|
2008
|
|
|
|
% |
(1) |
|
2007
|
|
|
|
% |
(1) |
Sales
and operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used
vehicle
sales
|
|
$ |
1,168,804 |
|
|
|
80.3 |
|
|
$ |
1,514,302 |
|
|
|
80.3 |
|
|
$ |
4,461,969 |
|
|
|
81.1 |
|
|
$ |
4,909,835 |
|
|
|
79.8 |
|
New
vehicle sales
|
|
|
57,508 |
|
|
|
4.0 |
|
|
|
76,999 |
|
|
|
4.1 |
|
|
|
217,396 |
|
|
|
4.0 |
|
|
|
294,393 |
|
|
|
4.8 |
|
Wholesale
vehicle
sales
|
|
|
176,956 |
|
|
|
12.2 |
|
|
|
234,739 |
|
|
|
12.5 |
|
|
|
642,552 |
|
|
|
11.7 |
|
|
|
761,173 |
|
|
|
12.4 |
|
Other
sales and
revenues
|
|
|
52,364 |
|
|
|
3.6 |
|
|
|
59,260 |
|
|
|
3.1 |
|
|
|
181,532 |
|
|
|
3.3 |
|
|
|
189,563 |
|
|
|
3.1 |
|
Net
sales and operating revenues
|
|
|
1,455,632 |
|
|
|
100.0 |
|
|
|
1,885,300 |
|
|
|
100.0 |
|
|
|
5,503,449 |
|
|
|
100.0 |
|
|
|
6,154,964 |
|
|
|
100.0 |
|
Cost
of
sales
|
|
|
1,256,396 |
|
|
|
86.3 |
|
|
|
1,642,417 |
|
|
|
87.1 |
|
|
|
4,765,586 |
|
|
|
86.6 |
|
|
|
5,339,666 |
|
|
|
86.8 |
|
Gross
profit
|
|
|
199,236 |
|
|
|
13.7 |
|
|
|
242,883 |
|
|
|
12.9 |
|
|
|
737,863 |
|
|
|
13.4 |
|
|
|
815,298 |
|
|
|
13.2 |
|
CarMax
Auto Finance (loss) income
|
|
|
(15,360 |
) |
|
|
(1.1 |
) |
|
|
16,347 |
|
|
|
0.9 |
|
|
|
(12,682 |
) |
|
|
(0.2 |
) |
|
|
86,827 |
|
|
|
1.4 |
|
Selling,
general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses
|
|
|
217,482 |
|
|
|
14.9 |
|
|
|
210,508 |
|
|
|
11.2 |
|
|
|
685,614 |
|
|
|
12.5 |
|
|
|
638,518 |
|
|
|
10.4 |
|
Gain
on franchise
disposition
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
― |
|
|
|
740 |
|
|
|
― |
|
Interest
expense
|
|
|
1,525 |
|
|
|
0.1 |
|
|
|
44 |
|
|
|
― |
|
|
|
5,060 |
|
|
|
0.1 |
|
|
|
3,010 |
|
|
|
― |
|
Interest
income
|
|
|
735 |
|
|
|
0.1 |
|
|
|
285 |
|
|
|
― |
|
|
|
1,353 |
|
|
|
― |
|
|
|
908 |
|
|
|
― |
|
(Loss)
earnings before income taxes
|
|
|
(34,396 |
) |
|
|
(2.4 |
) |
|
|
48,963 |
|
|
|
2.6 |
|
|
|
35,860 |
|
|
|
0.7 |
|
|
|
262,245 |
|
|
|
4.3 |
|
Income
tax (benefit) provision
|
|
|
(12,522 |
) |
|
|
(0.9 |
) |
|
|
19,117 |
|
|
|
1.0 |
|
|
|
14,170 |
|
|
|
0.3 |
|
|
|
102,049 |
|
|
|
1.7 |
|
Net
(loss)
earnings
|
|
$ |
(21,874 |
) |
|
|
(1.5 |
) |
|
$ |
29,846 |
|
|
|
1.6 |
|
|
$ |
21,690 |
|
|
|
0.4 |
|
|
$ |
160,196 |
|
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
217,712 |
|
|
|
|
|
|
|
216,301 |
|
|
|
|
|
|
|
217,468 |
|
|
|
|
|
|
|
215,826 |
|
|
|
|
|
Diluted
|
|
|
217,712 |
|
|
|
|
|
|
|
220,558 |
|
|
|
|
|
|
|
220,692 |
|
|
|
|
|
|
|
220,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.10 |
) |
|
|
|
|
|
$ |
0.14 |
|
|
|
|
|
|
$ |
0.10 |
|
|
|
|
|
|
$ |
0.74 |
|
|
|
|
|
Diluted
|
|
$ |
(0.10 |
) |
|
|
|
|
|
$ |
0.14 |
|
|
|
|
|
|
$ |
0.10 |
|
|
|
|
|
|
$ |
0.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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)
|
|
November
30, 2008
|
|
|
February
29, 2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$ |
138,144 |
|
|
$ |
12,965 |
|
Accounts
receivable,
net
|
|
|
45,816 |
|
|
|
73,228 |
|
Auto
loan receivables held for
sale
|
|
|
20,910 |
|
|
|
4,984 |
|
Retained
interest in securitized
receivables
|
|
|
314,995 |
|
|
|
270,761 |
|
Inventory
|
|
|
601,506 |
|
|
|
975,777 |
|
Prepaid
expenses and other current
assets
|
|
|
8,885 |
|
|
|
19,210 |
|
|
|
|
|
|
|
|
|
|
Total
current
assets
|
|
|
1,130,256 |
|
|
|
1,356,925 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment,
net
|
|
|
948,106 |
|
|
|
862,497 |
|
Deferred
income
taxes
|
|
|
89,315 |
|
|
|
67,066 |
|
Other
assets
|
|
|
50,505 |
|
|
|
46,673 |
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
2,218,182 |
|
|
$ |
2,333,161 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
177,144 |
|
|
$ |
306,013 |
|
Accrued
expenses and other current
liabilities
|
|
|
70,783 |
|
|
|
58,054 |
|
Accrued
income
taxes
|
|
|
17,672 |
|
|
|
7,569 |
|
Deferred
income
taxes
|
|
|
14,926 |
|
|
|
17,710 |
|
Short-term
debt
|
|
|
12,073 |
|
|
|
21,017 |
|
Current
portion of long-term
debt
|
|
|
86,895 |
|
|
|
79,661 |
|
|
|
|
|
|
|
|
|
|
Total
current
liabilities
|
|
|
379,493 |
|
|
|
490,024 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt, excluding current
portion
|
|
|
176,683 |
|
|
|
227,153 |
|
Deferred
revenue and other
liabilities
|
|
|
98,303 |
|
|
|
127,058 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
654,479 |
|
|
|
844,235 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingent
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock, $0.50 par value; 350,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
220,411,219
and 218,616,069 shares issued and outstanding
|
|
|
|
|
|
|
|
|
as
of November 30, 2008, and February 29, 2008, respectively
|
|
|
110,206 |
|
|
|
109,308 |
|
Capital
in excess of par
value
|
|
|
677,564 |
|
|
|
641,766 |
|
Accumulated
other comprehensive
loss
|
|
|
(337 |
) |
|
|
(16,728 |
) |
Retained
earnings
|
|
|
776,270 |
|
|
|
754,580 |
|
|
|
|
|
|
|
|
|
|
TOTAL
SHAREHOLDERS’
EQUITY
|
|
|
1,563,703 |
|
|
|
1,488,926 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$ |
2,218,182 |
|
|
$ |
2,333,161 |
|
See
accompanying notes to consolidated financial statements.
|
|
CARMAX, INC. AND
SUBSIDIARIES
Consolidated Statements of
Cash Flows
(Unaudited)
(In
thousands)
|
|
Nine
Months Ended November 30
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Operating Activities:
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
21,690 |
|
|
$ |
160,196 |
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and
amortization
|
|
|
41,379 |
|
|
|
34,168 |
|
Share-based
compensation
expense
|
|
|
27,038 |
|
|
|
25,856 |
|
Loss
on disposition of
assets
|
|
|
8,263 |
|
|
|
35 |
|
Deferred
income tax
benefit
|
|
|
(34,604 |
) |
|
|
(3,332 |
) |
Net
decrease (increase) in:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
27,412 |
|
|
|
18,644 |
|
Auto
loan receivables held for sale, net
|
|
|
(15,926 |
) |
|
|
1,462 |
|
Retained
interest in securitized receivables
|
|
|
(44,234 |
) |
|
|
(31,360 |
) |
Inventory
|
|
|
374,271 |
|
|
|
(56,112 |
) |
Prepaid
expenses and other current assets
|
|
|
10,317 |
|
|
|
(5,430 |
) |
Other
assets
|
|
|
177 |
|
|
|
1,030 |
|
Net
(decrease) increase in:
|
|
|
|
|
|
|
|
|
Accounts
payable, accrued expenses and other current liabilities and accrued income
taxes
|
|
|
(104,495 |
) |
|
|
(11,881 |
) |
Deferred
revenue and other liabilities
|
|
|
(4,660 |
) |
|
|
25,641 |
|
Net
cash provided by operating
activities
|
|
|
306,628 |
|
|
|
158,917 |
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(163,964 |
) |
|
|
(192,440 |
) |
Proceeds
from sales of
assets
|
|
|
28,355 |
|
|
|
1,457 |
|
(Purchases)
sales of money market securities, net
|
|
|
(4,009 |
) |
|
|
5,000 |
|
Purchases
of investments
available-for-sale
|
|
|
– |
|
|
|
(10,000 |
) |
Net
cash used in investing
activities
|
|
|
(139,618 |
) |
|
|
(195,983 |
) |
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Decrease
in short-term debt,
net
|
|
|
(8,944 |
) |
|
|
(153 |
) |
Issuances
of long-term
debt
|
|
|
487,800 |
|
|
|
692,200 |
|
Payments
on long-term
debt
|
|
|
(531,036 |
) |
|
|
(685,011 |
) |
Equity
issuances,
net
|
|
|
9,962 |
|
|
|
13,157 |
|
Excess
tax benefits from share-based payment arrangements
|
|
|
387 |
|
|
|
5,798 |
|
Net
cash (used in) provided by financing activities
|
|
|
(41,831 |
) |
|
|
25,991 |
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
125,179 |
|
|
|
(11,075 |
) |
Cash
and cash equivalents at beginning of
year
|
|
|
12,965 |
|
|
|
19,455 |
|
Cash
and cash equivalents at end of
period
|
|
$ |
138,144 |
|
|
$ |
8,380 |
|
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 at select locations. 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 $125.3 million as of November
30, 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
(Loss) Income
|
|
|
Three
Months Ended
November
30
|
|
|
Nine
Months Ended
November
30
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Gain
on sales of loans originated and sold (1)
|
|
$ |
11.3 |
|
|
$ |
20.9 |
|
|
$ |
32.5 |
|
|
$ |
57.8 |
|
Other
(losses) gains (1)
|
|
|
(39.8 |
) |
|
|
(14.8 |
) |
|
|
(82.6 |
) |
|
|
1.0 |
|
Total
(loss)
gain
|
|
|
(28.5 |
) |
|
|
6.1 |
|
|
|
(50.1 |
) |
|
|
58.8 |
|
Other
CAF income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing
fee
income
|
|
|
10.4 |
|
|
|
9.5 |
|
|
|
31.1 |
|
|
|
27.6 |
|
Interest
income
|
|
|
12.6 |
|
|
|
9.1 |
|
|
|
34.8 |
|
|
|
24.7 |
|
Total
other CAF
income
|
|
|
23.0 |
|
|
|
18.7 |
|
|
|
65.9 |
|
|
|
52.4 |
|
Direct
CAF expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAF
payroll and fringe benefit expense
|
|
|
4.8 |
|
|
|
4.1 |
|
|
|
14.0 |
|
|
|
11.5 |
|
Other
direct CAF expenses
|
|
|
5.1 |
|
|
|
4.3 |
|
|
|
14.5 |
|
|
|
12.8 |
|
Total
direct CAF
expenses
|
|
|
9.9 |
|
|
|
8.4 |
|
|
|
28.4 |
|
|
|
24.4 |
|
CarMax
Auto Finance (loss) income
|
|
$ |
(15.4 |
) |
|
$ |
16.3 |
|
|
$ |
(12.7 |
) |
|
$ |
86.8 |
|
(1)To
the extent we recognize valuation or other adjustments related to loans
originated in previous quarters of the same fiscal year, the sum of
amounts reported for the individual quarters may not equal the
year-to-date total.
|
|
CAF
provides financing for qualified customers at competitive market rates of
interest. Throughout each month, we sell substantially all of the
loans originated by CAF in securitization transactions as discussed in Note
4. The majority of CAF income has typically been generated by the
spread between the interest rates charged to customers and the related cost of
funds. A gain, recorded at the time of securitization, results from
recording a receivable approximately equal to the present value of the expected
residual cash flows generated by the securitized receivables. The
cash flows are calculated taking into account expected prepayments, losses and
funding costs.
The gain
on sales of loans originated and sold includes both the gain income recorded at
the time of securitization and the effect of any subsequent changes in valuation
assumptions or funding costs that are incurred in the same fiscal period that
the loans were originated. Other losses or gains include the effects
of changes in valuation assumptions or funding costs related to loans originated
and sold during previous fiscal periods. In addition, other losses or
gains could include the effects of new 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.
Historically,
we have used term 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 transaction structure and market
conditions, refinancing receivables in a term securitization could have a
significant impact on our results of operations. The impact of
refinancing activity will depend upon the securitization structure and market
conditions at the refinancing date.
The
special purpose entity and investors have no recourse to our
assets. Our credit 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
November
30
|
|
|
Nine
Months Ended
November
30
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
loans
originated
|
|
$ |
396.8 |
|
|
$ |
575.9 |
|
|
$ |
1,576.3 |
|
|
$ |
1,839.0 |
|
Total
loans
sold
|
|
$ |
407.0 |
|
|
$ |
575.6 |
|
|
$ |
1,608.8 |
|
|
$ |
1,891.2 |
|
Total
(loss)
gain
|
|
$ |
(28.5 |
) |
|
$ |
6.1 |
|
|
$ |
(50.1 |
) |
|
$ |
58.8 |
|
Total
(loss) gain as a percentage of total loans sold
|
|
|
(7.0 |
)% |
|
|
1.1 |
% |
|
|
(3.1 |
)% |
|
|
3.1 |
% |
Retained
Interest. We retain an interest in the auto loan receivables
that we securitize. The retained interest includes the present value
of the expected residual cash flows generated by the securitized receivables, or
“interest-only strip receivables,” various reserve accounts, required excess
receivables and retained subordinated bonds, as described below. As
of November 30, 2008, on a combined basis, the reserve accounts and required
excess receivables were 3.9% 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 $315.0 million as of November 30, 2008, and
$270.8 million as of February 29, 2008. Additional information on
fair value measurements is included in Note 6. The receivables
underlying the retained interest had a weighted average life of 1.5 years as of
November 30, 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 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 term securitizations, the amount required to be on
deposit in the reserve account must equal or exceed a specified floor
amount. The reserve account remains funded until the investors are
paid in full, at which time the remaining balance is released through the
special purpose entity to the company. The amount on deposit in
reserve accounts was $41.0 million as of November 30, 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 $117.1 million as of November 30, 2008, and $63.0 million as of
February 29, 2008.
Retained subordinated
bonds. In
fiscal 2009 and 2008, we retained subordinated bonds issued by securitization
trusts. 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 an average of three non-binding, current market spread quotes
from third-party investment banks. By applying these average spreads to current
bond benchmarks, as determined through the use of a widely accepted third-party
bond pricing model, we have measured a current fair value. The value
of retained subordinated bonds was $86.6 million as of November 30, 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
November 30, 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
|
|
|
1.37%
- 1.50 |
% |
|
$ |
8.2 |
|
|
$ |
15.3 |
|
Cumulative
loss
rate
|
|
|
1.39%
- 3.90 |
% |
|
$ |
10.8 |
|
|
$ |
21.6 |
|
Annual
discount
rate
|
|
|
19.00 |
% |
|
$ |
5.3 |
|
|
$ |
10.4 |
|
Warehouse
facility costs (1)
|
|
|
2.05 |
% |
|
$ |
2.9 |
|
|
$ |
5.8 |
|
(1)Expressed
as a spread above appropriate benchmark rates. Applies only to
retained interest in receivables securitized through the warehouse
facility. As of November 30, 2008, there were receivables of $907.0
million 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 November 30
|
|
|
As
of February 29 or 28
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Accounts
31+ days past
due
|
|
$ |
136.1 |
|
|
$ |
93.0 |
|
|
$ |
86.1 |
|
|
$ |
56.9 |
|
Ending
managed
receivables
|
|
$ |
4,027.3 |
|
|
$ |
3,702.6 |
|
|
$ |
3,838.5 |
|
|
$ |
3,311.0 |
|
Past
due accounts as a percentage of ending managed receivables
|
|
|
3.38 |
% |
|
|
2.51 |
% |
|
|
2.24 |
% |
|
|
1.72 |
% |
CREDIT
LOSS INFORMATION
|
|
Three
Months Ended
November
30
|
|
|
Nine
Months Ended
November
30
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
credit losses on managed receivables
|
|
$ |
21.6 |
|
|
$ |
10.3 |
|
|
$ |
48.5 |
|
|
$ |
25.1 |
|
Average
managed receivables
|
|
$ |
4,076.3 |
|
|
$ |
3,683.9 |
|
|
$ |
4,019.0 |
|
|
$ |
3,548.6 |
|
Annualized
net credit losses as a percentage of average managed
receivables
|
|
|
2.11 |
% |
|
|
1.12 |
% |
|
|
1.61 |
% |
|
|
0.94 |
% |
Recovery
rate
|
|
|
42.4 |
% |
|
|
50.0 |
% |
|
|
44.4 |
% |
|
|
51.3 |
% |
SELECTED
CASH FLOWS FROM SECURITIZED RECEIVABLES
|
|
Three
Months Ended
November
30
|
|
|
Nine
Months Ended
November
30
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Proceeds
from new securitizations
|
|
$ |
307.0 |
|
|
$ |
469.0 |
|
|
$ |
1,314.8 |
|
|
$ |
1,500.5 |
|
Proceeds
from collections
|
|
$ |
176.7 |
|
|
$ |
247.7 |
|
|
$ |
664.9 |
|
|
$ |
840.8 |
|
Servicing
fees received
|
|
$ |
10.5 |
|
|
$ |
9.5 |
|
|
$ |
30.9 |
|
|
$ |
27.3 |
|
Other
cash flows received from the retained interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-only
strip receivables
|
|
$ |
16.3 |
|
|
$ |
25.2 |
|
|
$ |
72.7 |
|
|
$ |
72.6 |
|
Reserve
account releases
|
|
$ |
0.1 |
|
|
$ |
0.3 |
|
|
$ |
3.2 |
|
|
$ |
6.1 |
|
Proceeds from new
securitizations. Proceeds from new securitizations include
proceeds from receivables that are newly securitized in or refinanced through
the warehouse facility during the indicated period. Balances
previously outstanding in term securitizations that were refinanced through the
warehouse facility totaled $48.4 million in the first nine months of fiscal 2009
and $50.7 million in the first nine months of 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 the 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 could 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 November 30, 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 third quarter of fiscal 2009, we entered into 14 interest rate swaps with
initial notional amounts totaling $348.5 million and terms of 41
months. The notional amounts of outstanding swaps totaled $1,033.9
million as of November 30, 2008, and $898.7 million as of February 29,
2008. The fair value of swaps included in accounts payable totaled a
liability of $23.4 million as of November 30, 2008, and $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 nonperformance 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 include a combination of market inputs and our own assumptions as
described in Note 4. As the valuation models include significant
unobservable inputs, we classified the retained interest as Level
3.
For the
retained subordinated bonds, we base our valuation on observable market prices
for similar assets when available. Otherwise, our valuations are
based on input from independent third parties and internal valuation models, as
described in Note 4. As the key assumption used in the valuation is
currently based on unobservable inputs, we classified the retained subordinated
bonds as Level 3.
Financial
derivatives. Financial derivatives are included in either
prepaid expenses and other current assets or accounts payable. As part of our
risk management strategy, we utilize 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 instruments. All of our
derivative exposures are with highly rated bank counterparties.
We
measure derivative fair values assuming that the unit of account is an
individual derivative instrument and that derivatives are sold or transferred on
a stand-alone basis. We estimate the fair value of our derivatives
using quotes determined by the 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 nonperformance risk. We monitor counterparty and our own
nonperformance risk and, in the event that we determine that a party is unlikely
to perform under terms of the contract, we would adjust the derivative fair
value to reflect the nonperformance risk.
ITEMS
MEASURED AT FAIR VALUE ON A RECURRING BASIS
|
|
As
of November 30, 2008
|
|
(In
millions)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market securities
|
|
$ |
153.8 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
153.8 |
|
Retained
interest in securitized
receivables
|
|
|
– |
|
|
|
– |
|
|
|
315.0 |
|
|
|
315.0 |
|
Total
assets at fair value
|
|
$ |
153.8 |
|
|
$ |
– |
|
|
$ |
315.0 |
|
|
$ |
468.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of total assets at fair value
|
|
|
32.8 |
% |
|
|
– |
% |
|
|
67.2 |
% |
|
|
100.0 |
% |
Percent
of total assets
|
|
|
6.9 |
% |
|
|
– |
% |
|
|
14.2 |
% |
|
|
21.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
derivatives
|
|
$ |
– |
|
|
$ |
23.4 |
|
|
$ |
– |
|
|
$ |
23.4 |
|
Total
liabilities at fair value
|
|
$ |
– |
|
|
$ |
23.4 |
|
|
$ |
– |
|
|
$ |
23.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of total liabilities
|
|
|
– |
% |
|
|
3.6 |
% |
|
|
– |
% |
|
|
3.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (1)
|
|
|
(54.1 |
) |
Purchases,
sales, issuances and
settlements
|
|
|
98.3 |
|
Balance
as of November 30,
2008
|
|
$ |
315.0 |
|
|
|
|
|
|
Change
in unrealized losses on assets still held (1)
|
|
$ |
(41.2 |
) |
(1)Reported
in CarMax Auto Finance (loss) income on the consolidated statements of
operations.
|
|
We had
$27.8 million of gross unrecognized tax benefits as of November 30, 2008,
and $32.7 million as of February 29, 2008. During the first
nine months of fiscal 2009, we settled federal and state liabilities of $7.8
million related to the Internal Revenue Service audit of fiscal years 2003 and
2004. For the nine-month period ended November 30, 2008, there were
no other significant changes to the unrecognized tax benefits as reported for
the year ended February 29, 2008, 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 November 30
|
|
|
|
Pension
Plan
|
|
|
Restoration
Plan
|
|
|
Total
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Service
cost
|
|
$ |
2,368 |
|
|
$ |
3,918 |
|
|
$ |
203 |
|
|
$ |
222 |
|
|
$ |
2,571 |
|
|
$ |
4,140 |
|
Interest
cost
|
|
|
1,526 |
|
|
|
1,499 |
|
|
|
177 |
|
|
|
147 |
|
|
|
1,703 |
|
|
|
1,646 |
|
Expected
return on plan assets
|
|
|
(1,408 |
) |
|
|
(999 |
) |
|
|
– |
|
|
|
– |
|
|
|
(1,408 |
) |
|
|
(999 |
) |
Amortization
of prior service cost
|
|
|
5 |
|
|
|
9 |
|
|
|
14 |
|
|
|
78 |
|
|
|
19 |
|
|
|
87 |
|
Recognized
actuarial (gain) loss
|
|
|
(463 |
) |
|
|
743 |
|
|
|
49 |
|
|
|
37 |
|
|
|
(414 |
) |
|
|
780 |
|
Pension
expense
|
|
|
2,028 |
|
|
|
5,170 |
|
|
|
443 |
|
|
|
484 |
|
|
|
2,471 |
|
|
|
5,654 |
|
Curtailment
(gain) loss
|
|
|
(8,229 |
) |
|
|
– |
|
|
|
800 |
|
|
|
– |
|
|
|
(7,429 |
) |
|
|
– |
|
Net
pension (benefit) expense
|
|
$ |
(6,201 |
) |
|
$ |
5,170 |
|
|
$ |
1,243 |
|
|
$ |
484 |
|
|
$ |
(4,958 |
) |
|
$ |
5,654 |
|
|
|
Nine
Months Ended November 30
|
|
|
|
Pension
Plan
|
|
|
Restoration
Plan
|
|
|
Total
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Service
cost
|
|
$ |
9,252 |
|
|
$ |
11,754 |
|
|
$ |
631 |
|
|
$ |
516 |
|
|
$ |
9,883 |
|
|
$ |
12,270 |
|
Interest
cost
|
|
|
5,056 |
|
|
|
4,497 |
|
|
|
593 |
|
|
|
351 |
|
|
|
5,649 |
|
|
|
4,848 |
|
Expected
return on plan assets
|
|
|
(4,098 |
) |
|
|
(2,997 |
) |
|
|
– |
|
|
|
– |
|
|
|
(4,098 |
) |
|
|
(2,997 |
) |
Amortization
of prior service cost
|
|
|
23 |
|
|
|
27 |
|
|
|
74 |
|
|
|
90 |
|
|
|
97 |
|
|
|
117 |
|
Recognized
actuarial (gain) loss
|
|
|
(175 |
) |
|
|
2,229 |
|
|
|
247 |
|
|
|
129 |
|
|
|
72 |
|
|
|
2,358 |
|
Pension
expense
|
|
|
10,058 |
|
|
|
15,510 |
|
|
|
1,545 |
|
|
|
1,086 |
|
|
|
11,603 |
|
|
|
16,596 |
|
Curtailment
(gain) loss
|
|
|
(8,229 |
) |
|
|
– |
|
|
|
800 |
|
|
|
– |
|
|
|
(7,429 |
) |
|
|
– |
|
Net
pension expense
|
|
$ |
1,829 |
|
|
$ |
15,510 |
|
|
$ |
2,345 |
|
|
$ |
1,086 |
|
|
$ |
4,174 |
|
|
$ |
16,596 |
|
We made
contributions to the pension plan totaling $15.6 million during the first
nine months of fiscal 2009. We do not anticipate making a
contribution to the pension plan in the fourth quarter of fiscal
2009.
On
October 21, 2008, the board of directors approved amendments to freeze the
pension plan and the restoration plan effective December 31, 2008. No
additional benefits will accrue under these plans after that date. On January 1,
2009, we will implement significant enhancements to our 401(k) plan, including
both an increased matching component and a company-funded contribution made
regardless of associate participation, and a new non-qualified retirement plan
for certain senior executives who are affected by Internal Revenue Code
limitations on benefits provided under the 401(k) plan.
Our
revolving credit facility expires in December 2011 and is secured by vehicle
inventory. Borrowings under this credit facility are subject to
limitation based on a specified percentage of qualifying inventory, and they are
available for working capital and general corporate purposes. As of
November 30, 2008, $248.4 million was outstanding under the credit facility and
$225.4 million of the remaining borrowing limit was available to
us. The outstanding balance included $12.1 million
classified
as short-term debt, $86.3 million classified as current portion of long-term
debt and $150.0 million classified as long-term debt. We classified
$86.3 million of the outstanding balance as of November 30, 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 November 30, 2008, consisted of $0.6 million
classified as current portion of long-term debt and $26.7 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 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
November
30
|
|
|
Nine
Months Ended
November
30
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Cost
of sales
|
|
$ |
582 |
|
|
$ |
500 |
|
|
$ |
1,585 |
|
|
$ |
1,425 |
|
CarMax
Auto Finance income
|
|
|
355 |
|
|
|
299 |
|
|
|
784 |
|
|
|
896 |
|
Selling,
general and administrative expenses
|
|
|
7,227 |
|
|
|
7,565 |
|
|
|
25,494 |
|
|
|
24,441 |
|
Share-based
compensation expense, before income taxes
|
|
$ |
8,164 |
|
|
$ |
8,364 |
|
|
$ |
27,863 |
|
|
$ |
26,762 |
|
We
measure share-based compensation expense 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 $0.8 million in
the first nine months of fiscal 2009 and $0.9 million in the first nine months
of 2008 are included in share-based compensation expense. There were
no capitalized share-based compensation costs as of November 30, 2008
and 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
|
|
|
2,220 |
|
|
$ |
19.56 |
|
|
|
|
|
|
|
Options
exercised
|
|
|
(788 |
) |
|
$ |
12.67 |
|
|
|
|
|
|
|
Options
forfeited or expired
|
|
|
(146 |
) |
|
$ |
16.79 |
|
|
|
|
|
|
|
Outstanding
as of November 30, 2008
|
|
|
14,934 |
|
|
$ |
15.38 |
|
|
|
5.2 |
|
|
$ |
1,017 |
|
Exercisable
as of November 30, 2008
|
|
|
9,509 |
|
|
$ |
13.14 |
|
|
|
4.8 |
|
|
$ |
1,017 |
|
For the
nine months ended November 30, 2008 and 2007, we granted nonqualified options to
purchase 2,219,857 and 1,775,478 shares of common stock,
respectively. The total cash received as a result of stock option
exercises was $10.0 million in the first nine months of fiscal 2009 and $13.2
million in the first nine months 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 $5.6
million for the first nine months of fiscal 2009 and $22.0 million for the first
nine months of fiscal 2008. We realized related tax benefits of $2.2
million in the first nine months of fiscal 2009 and $8.7 million in the first
nine months of fiscal 2008.
OUTSTANDING
STOCK OPTIONS
As
of November 30, 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
|
|
|
|
2,197 |
|
|
|
4.2 |
|
|
$ |
7.16 |
|
|
|
2,197 |
|
|
$ |
7.16 |
|
$ |
10.74
to $13.42
|
|
|
|
4,228 |
|
|
|
5.1 |
|
|
$ |
13.21 |
|
|
|
3,272 |
|
|
$ |
13.21 |
|
$ |
14.13
to $15.72
|
|
|
|
2,847 |
|
|
|
5.3 |
|
|
$ |
14.71 |
|
|
|
2,729 |
|
|
$ |
14.70 |
|
$ |
16.33
to $22.29
|
|
|
|
3,980 |
|
|
|
5.5 |
|
|
$ |
18.61 |
|
|
|
884 |
|
|
$ |
17.14 |
|
$ |
24.99
to $25.79
|
|
|
|
1,682 |
|
|
|
5.4 |
|
|
$ |
25.04 |
|
|
|
427 |
|
|
$ |
25.05 |
|
Total
|
|
|
|
14,934 |
|
|
|
5.2 |
|
|
$ |
15.38 |
|
|
|
9,509 |
|
|
$ |
13.14 |
|
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
nine-month periods ended November 30, 2008 and 2007, was $7.16 and $8.58 per
share, respectively. The unrecognized compensation costs related to
nonvested options totaled $23.1 million as of
November 30, 2008. These costs are expected to be
recognized over a weighted average period of 2.2 years.
ASSUMPTIONS
USED TO ESTIMATE OPTION VALUES
|
|
Nine
Months Ended November 30
|
|
|
|
2008
|
|
|
2007
|
|
Dividend
yield
|
|
|
0.0 |
% |
|
|
0.0 |
% |
Expected
volatility factor (1)
|
|
|
34.8%
- 60.9 |
% |
|
|
28.0%
- 54.0 |
% |
Weighted
average expected volatility
|
|
|
44.1 |
% |
|
|
38.8 |
% |
Risk-free
interest rate (2)
|
|
|
1.5%
- 3.7 |
% |
|
|
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
|
|
|
(117 |
) |
|
$ |
20.87 |
|
Outstanding
as of November 30, 2008
|
|
|
2,683 |
|
|
$ |
20.55 |
|
For the
nine months ended November 30, 2008 and 2007, we granted 1,078,580 and 903,815
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 $24.0 million as of November 30, 2008. These costs are
expected to be recognized over a weighted average period of 1.4
years.
11.
|
Net (Loss) Earnings
per Share
|
BASIC
AND DILUTIVE NET (LOSS) EARNINGS PER SHARE RECONCILIATIONS
|
|
Three
Months
Ended
November 30
|
|
|
Nine
Months
Ended
November 30
|
|
(In thousands except per share
data)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
(loss) earnings applicable to common shareholders
|
|
$ |
(21,874 |
) |
|
$ |
29,846 |
|
|
$ |
21,690 |
|
|
$ |
160,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
217,712 |
|
|
|
216,301 |
|
|
|
217,468 |
|
|
|
215,826 |
|
Dilutive
potential common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
– |
|
|
|
3,667 |
|
|
|
2,210 |
|
|
|
4,081 |
|
Restricted
stock
|
|
|
– |
|
|
|
590 |
|
|
|
1,014 |
|
|
|
513 |
|
Weighted
average common shares and dilutive potential common shares
|
|
|
217,712 |
|
|
|
220,558 |
|
|
|
220,692 |
|
|
|
220,421 |
|
Basic
net (loss) earnings per share
|
|
$ |
(0.10 |
) |
|
$ |
0.14 |
|
|
$ |
0.10 |
|
|
$ |
0.74 |
|
Diluted
net (loss) earnings per share
|
|
$ |
(0.10 |
) |
|
$ |
0.14 |
|
|
$ |
0.10 |
|
|
$ |
0.73 |
|
Options
to purchase 14,934,460 shares of common stock were outstanding and not included
in the calculation of diluted net (loss) earnings per share for the quarter
ended November 30, 2008, because their inclusion would be
antidilutive. Options to purchase 1,782,493 shares of common stock
were outstanding and not included in the calculation for the quarter ended
November 30, 2007.
12.
|
Accumulated Other
Comprehensive Loss
|
(In
thousands, net of income taxes)
|
|
Unrecognized
Actuarial Losses
|
|
|
Unrecognized
Prior
Service
Cost
|
|
|
Total
Accumulated
Other
Comprehensive Loss
|
|
Balance
as of February 29,
2008
|
|
$ |
15,926 |
|
|
$ |
802 |
|
|
$ |
16,728 |
|
Amounts
arising during the period
|
|
|
4,512 |
|
|
|
– |
|
|
|
4,512 |
|
Amortization
expense
|
|
|
(68 |
) |
|
|
(65 |
) |
|
|
(133 |
) |
Curtailment
of retirement
plans
|
|
|
(20,033 |
) |
|
|
(737 |
) |
|
|
(20,770 |
) |
Balance
as of November 30, 2008
|
|
$ |
337 |
|
|
$ |
– |
|
|
$ |
337 |
|
The
cumulative balances are net of deferred tax of $0.2 million as of November 30,
2008, and $9.8 million as of February 29, 2008.
13.
|
Contingent
Liabilities
|
On April
2, 2008, Mr. John Fowler filed a putative class action lawsuit against CarMax
Auto Superstores California, LLC and CarMax Auto Superstores West Coast, Inc. in
the Superior Court of California, County of Los
Angeles. Subsequently, two other lawsuits, Leena Areso et al.
v. CarMax Auto Superstores California, LLC and Justin Weaver v. CarMax Auto
Superstores California, LLC, were consolidated as part of the Fowler case. The
allegations in the consolidated case involve: (1) failure to provide meal and
rest breaks or compensation in lieu thereof; (2) failure to pay wages of
terminated or resigned employees related to meal and rest breaks and overtime;
(3) failure to pay overtime; (4) failure to comply with itemized employee wage
statement provisions; and (5) unfair competition. The putative class
consists of sales consultants, sales managers, and other hourly employees who
worked for the company in California from April 2, 2004, to the
present. The lawsuit seeks compensatory and special damages, wages,
interest, civil and statutory penalties, restitution, injunctive relief and the
recovery of attorneys’ fees. We are unable to make a reasonable estimate of
the amount or range of loss that could result from an unfavorable outcome in
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
|
In March
2008, the Financial Accounting Standards Board (“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 operations are presented. SFAS 161 is effective for
any reporting period (annual or quarterly interim) beginning after
November 15, 2008, with early application encouraged. We
will be adopting SFAS 161 effective as of the start of the fourth quarter of
fiscal 2009.
In
October 2008, the FASB issued FASB Staff Position Financial Accounting Standard
157-3, “Determining the Fair Value of a Financial Asset When the Market for That
Asset is Not Active,” (“FSP FAS 157-3”), which clarifies application of SFAS 157
in a market that is not active. FSP FAS 157-3 was effective upon
issuance, including prior periods for which financial statements have not been
issued. The adoption of FSP FAS 157-3 had no impact on our results of
operations, financial condition or cash flows.
In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by
Public Entities (Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities.” This disclosure-only FSP improves the
transparency of transfers of financial assets and an enterprise’s involvement
with variable interest entities, including qualifying special-purpose
entities. This FSP is effective for the first reporting period
(interim or annual) ending after December 15, 2008, with earlier application
encouraged. We will be adopting this FSP effective as of the start of
the fourth quarter of fiscal 2009. We do not expect the adoption of the FSP will
have any impact on our results of operations, financial condition or cash
flows.
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
December 2007, the FASB 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
November 30, 2008, we did not hold any noncontrolling interests in
subsidiaries.
In April
2008, the FASB issued FSP FAS 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 material 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 June
2008, the FASB issued FASB Staff Position Emerging Issues Task Force
No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP
EITF 03-6-1 addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting, and therefore need
to be included in the earnings allocation in computing earnings per share under
the two-class method as described in SFAS No. 128, “Earnings per
Share.” Under the guidance of FSP EITF 03-6-1, unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of earnings per share pursuant to the
two-class method. Our restricted stock awards are considered “participating
securities” because they contain nonforfeitable rights to dividends. FSP
EITF 03-6-1 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and all prior-period earnings per share
data presented shall be adjusted retrospectively. Early application is not
permitted. We are currently evaluating the impact of FSP EITF 03-6-1 on our
consolidated financial statements and will adopt FSP EITF 03-6-1 effective March
1, 2009.
In
September 2008, the FASB issued exposure drafts that 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 would be effective
March 1, 2010, on a prospective basis.
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 November 30, 2008, we operated 99 used car superstores
in 46 markets, comprised of 34 mid-sized markets, 11 large markets and 1 small
market. We define mid-sized markets as those with television viewing
populations generally between 600,000 and 2.5 million people. We also
operated six new car franchises, 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 November 30, 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 retail customers through CarMax Auto Finance
(“CAF”), our finance operation, and a number of 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 November 30, 2008, we had used car superstores located in
markets that comprised approximately 45% of the U.S.
population. Prior to August 2008, we had planned to open used car
superstores at a rate of approximately 15% of our used car superstore base each
year. In August 2008, we announced that we would temporarily slow our
store growth as a result of the weak economic and sales
environment. During the third fiscal quarter conditions further
deteriorated, and as a consequence, we decided to temporarily suspend our store
growth. The suspension of store growth will both reduce our capital
needs and aid profitability in the near term.
Over the
long term, we believe the primary driver for 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.
Fiscal 2009 Third Quarter
Highlights
§
|
We
believe the weakness in the economy and the stresses on consumer spending
continued to adversely affect industry-wide sales in the automotive retail
market in the third quarter.
|
§
|
Net
sales and operating revenues decreased 23% to $1.46 billion from $1.89
billion in the third quarter of fiscal 2008. We reported a net
loss of $21.9 million, or $0.10 per share, compared with net earnings of
$29.8 million, or $0.14 per share, in the prior year
period.
|
§
|
Total
used vehicle unit sales decreased 17%, reflecting the combination of a 24%
decrease in comparable store used unit sales partially offset by growth in
our store base. Wholesale vehicle unit sales decreased 15%,
reflecting a decrease in both our appraisal traffic and our appraisal buy
rate (defined as the number of appraisal purchases as a percent of
vehicles appraised). New vehicle unit sales declined 26%,
primarily reflecting the extremely soft new car industry
trends.
|
§
|
We
opened one used car superstore in the third quarter, expanding our
presence in an existing market.
|
§
|
Our
total gross profit decreased by $43.6 million, or 18%, to $199.2 million,
primarily because of the significant decline in used and wholesale unit
sales. Despite the difficult sales environment, our total gross
profit dollars per retail unit was relatively resilient, decreasing only
$24 to $2,699 per unit from $2,723 per unit in the prior year’s third
quarter. We believe our ability to maintain a generally
consistent level of gross profit per unit, despite the challenging sales
environment and the unprecedented decline in wholesale market prices, was
due in large part to the effectiveness of our proprietary inventory
management systems and processes and our success in dramatically reducing
inventories to align them with
sales.
|
§
|
CAF
reported a pretax loss of $15.4 million compared with income of $16.3
million in the third quarter of fiscal 2008. In both periods,
CAF results were reduced by adjustments related to loans originated in
previous fiscal periods. The adjustments for the third quarter
of fiscal 2009 totaled $39.8 million compared with $14.8 million in the
prior year quarter. In addition, CAF’s gain on loans originated
and sold decreased to $11.3 million from $20.9 million in the third
quarter of fiscal 2008. This decline was due to the combination
of a decline in CAF’s loan origination volume, higher loss and discount
rate assumptions and increased credit enhancement requirements in the
warehouse facility in fiscal 2009.
|
§
|
Selling,
general and administrative expenses as a percent of net sales and
operating revenues (the “SG&A ratio”) increased to 14.9% from 11.2% in
the third quarter of fiscal 2008. The increase in the SG&A
ratio was the result of the significant declines in comparable store used
unit sales and average selling price, partially offset by a reduction in
variable costs. The fiscal 2009 third-quarter expenses also
included a number of non-recurring items, which in the aggregate reduced
results by $0.01 per share.
|
§
|
For
the first nine months of the fiscal year, net cash provided by operations
increased to $306.6 million compared with $158.9 million in fiscal 2008,
primarily reflecting a large reduction in used vehicle inventories in
fiscal 2009, partially offset by the decrease 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
November
30
|
|
|
Nine
Months Ended
November
30
|
|
(In
millions)
|
|
2008
|
|
|
%
|
|
|
2007
|
|
|
%
|
|
|
2008
|
|
|
%
|
|
|
2007
|
|
|
%
|
|
Used
vehicle sales
|
|
$ |
1,168.8 |
|
|
|
80.3 |
|
|
$ |
1,514.3 |
|
|
|
80.3 |
|
|
$ |
4,462.0 |
|
|
|
81.1 |
|
|
$ |
4,909.8 |
|
|
|
79.8 |
|
New
vehicle sales
|
|
|
57.5 |
|
|
|
4.0 |
|
|
|
77.0 |
|
|
|
4.1 |
|
|
|
217.4 |
|
|
|
4.0 |
|
|
|
294.4 |
|
|
|
4.8 |
|
Wholesale
vehicle sales
|
|
|
177.0 |
|
|
|
12.2 |
|
|
|
234.7 |
|
|
|
12.5 |
|
|
|
642.6 |
|
|
|
11.7 |
|
|
|
761.2 |
|
|
|
12.4 |
|
Other
sales and revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extended
service plan revenues
|
|
|
25.2 |
|
|
|
1.7 |
|
|
|
30.1 |
|
|
|
1.6 |
|
|
|
93.5 |
|
|
|
1.7 |
|
|
|
97.2 |
|
|
|
1.6 |
|
Service
department sales
|
|
|
24.7 |
|
|
|
1.7 |
|
|
|
23.2 |
|
|
|
1.2 |
|
|
|
75.7 |
|
|
|
1.4 |
|
|
|
72.6 |
|
|
|
1.2 |
|
Third-party
finance fees, net
|
|
|
2.5 |
|
|
|
0.2 |
|
|
|
5.9 |
|
|
|
0.3 |
|
|
|
12.3 |
|
|
|
0.2 |
|
|
|
19.7 |
|
|
|
0.3 |
|
Total
other sales and revenues
|
|
|
52.4 |
|
|
|
3.6 |
|
|
|
59.3 |
|
|
|
3.1 |
|
|
|
181.5 |
|
|
|
3.3 |
|
|
|
189.6 |
|
|
|
3.1 |
|
Total
net sales and operating revenues
|
|
$ |
1,455.6 |
|
|
|
100.0 |
|
|
$ |
1,885.3 |
|
|
|
100.0 |
|
|
$ |
5,503.4 |
|
|
|
100.0 |
|
|
$ |
6,155.0 |
|
|
|
100.0 |
|
RETAIL
VEHICLE SALES CHANGES
|
|
Three
Months
Ended
November 30
|
|
|
Nine
Months
Ended
November 30
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Vehicle
units:
|
|
|
|
|
|
|
|
|
|
|
|
|
Used
vehicles
|
|
|
(17 |
)% |
|
|
9 |
% |
|
|
(4 |
)% |
|
|
11 |
% |
New
vehicles
|
|
|
(26 |
)% |
|
|
(29 |
)% |
|
|
(25 |
)% |
|
|
(16 |
)% |
Total
|
|
|
(17 |
)% |
|
|
7 |
% |
|
|
(5 |
)% |
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle
dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used
vehicles
|
|
|
(23 |
)% |
|
|
10 |
% |
|
|
(9 |
)% |
|
|
12 |
% |
New
vehicles
|
|
|
(25 |
)% |
|
|
(30 |
)% |
|
|
(26 |
)% |
|
|
(16 |
)% |
Total
|
|
|
(23 |
)% |
|
|
7 |
% |
|
|
(10 |
)% |
|
|
10 |
% |
Comparable
store used unit sales growth is one of the key drivers of our
profitability. A store is included in comparable store retail sales
in the store’s fourteenth full month of operation.
COMPARABLE
STORE RETAIL VEHICLE SALES CHANGES
|
|
Three
Months
Ended
November 30
|
|
|
Nine
Months
Ended
November 30
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Vehicle
units:
|
|
|
|
|
|
|
|
|
|
|
|
|
Used
vehicles
|
|
|
(24 |
)% |
|
|
0 |
% |
|
|
(13 |
)% |
|
|
3 |
% |
New
vehicles
|
|
|
(26 |
)% |
|
|
(20 |
)% |
|
|
(21 |
)% |
|
|
(12 |
)% |
Total
|
|
|
(25 |
)% |
|
|
(1 |
)% |
|
|
(13 |
)% |
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle
dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used
vehicles
|
|
|
(30 |
)% |
|
|
0 |
% |
|
|
(18 |
)% |
|
|
4 |
% |
New
vehicles
|
|
|
(25 |
)% |
|
|
(21 |
)% |
|
|
(22 |
)% |
|
|
(12 |
)% |
Total
|
|
|
(30 |
)% |
|
|
(1 |
)% |
|
|
(18 |
)% |
|
|
3 |
% |
CHANGE
IN USED CAR SUPERSTORE BASE
|
|
Three
Months
Ended
November 30
|
|
|
Nine
Months
Ended
November 30
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Used
car superstores, beginning of period
|
|
|
98 |
|
|
|
81 |
|
|
|
89 |
|
|
|
77 |
|
Superstore
openings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
superstores
|
|
|
― |
|
|
|
1 |
|
|
|
4 |
|
|
|
2 |
|
Non-production
superstores
|
|
|
1 |
|
|
|
4 |
|
|
|
6 |
|
|
|
7 |
|
Total
superstore openings
|
|
|
1 |
|
|
|
5 |
|
|
|
10 |
|
|
|
9 |
|
Used
car superstores, end of period
|
|
|
99 |
|
|
|
86 |
|
|
|
99 |
|
|
|
86 |
|
Used
Vehicle Sales. Our 23% decrease
in used vehicle revenues in the third quarter of fiscal 2009 resulted from the
combination of a 17% decrease in unit sales and a 7% decrease in average retail
selling price. The decline in unit sales reflected a 24% decrease in
comparable store used units, partially offset by sales from newer superstores
not yet in the comparable store base. Starting in late May 2008,
customer traffic in our stores declined sharply, and the decrease in traffic for
the third quarter was slightly greater than the 24% decrease in comparable store
used unit sales. Despite the more difficult business environment, the
solid execution by our store teams allowed us to improve our conversion rate
compared with the prior year’s third quarter. Our data for the
three-month period ended October 31, 2008, indicated that we modestly gained
market share in the late-model used vehicle market. The decrease in
the average retail selling price was primarily caused by a significant
industry-wide drop in used car prices, which reduced our inventory acquisition
costs.
Our 9%
decrease in used vehicle revenues in the first nine months of fiscal 2009
resulted from the combination of a 4% decline in unit sales and a 6% decrease in
average retail selling price. The unit sales decline reflected a 13%
decrease in comparable store used units partially offset by sales from newer
superstores not yet in the comparable store base. The decline in
comparable store used units was primarily the result of the fall off of customer
traffic starting in late May 2008, and the decline in average retail selling
price reflected our reduced vehicle acquisition costs.
New
Vehicle Sales. Compared with the
corresponding prior year periods, new vehicle revenues decreased 25% in the
third quarter and 26% in the first nine months of fiscal 2009. The
declines were substantially the result of decreases in unit sales, which fell
26% in the third quarter and 25% in the first nine months of the
year. New vehicle unit sales reflected the extremely soft new car
industry sales trends.
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 25% decrease in wholesale
vehicle revenues in the third quarter of fiscal 2009 resulted from a 15%
decrease in wholesale unit sales
combined
with a 12% 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. Industry wholesale prices for virtually all
vehicle classes fell at an unprecedented rate during the third quarter,
reflecting the weak demand environment. The vehicle depreciation rate
was approximately three times the historical rate for this period. We
believe the significant drop in wholesale market values, combined with the
overall slowdown in customer traffic, drove the declines in our appraisal
traffic and buy rate. The decline in average wholesale selling price
reflected the trends in the general wholesale market for the types of vehicles
we sell.
The 16%
decrease in wholesale vehicle revenues in the first nine months of fiscal 2009
resulted from a 9% decrease in wholesale unit sales combined with an 8% decline
in average wholesale selling price. The factors that contributed to
these declines in the third quarter were also the cause of the declines for the
first nine months of the year.
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 third quarter of fiscal 2009,
other sales and revenues decreased 12%. ESP sales declined 16%,
similar to the decline in total used unit sales. Service department
sales increased 6%. Our service operations technicians conduct both
vehicle reconditioning and retail auto service, and the decline in used vehicle
sales and inventories and the associated reduction in reconditioning volume
enabled the increase in service department sales. Third-party finance
fees decreased 58% due to a combination of factors including the reduction in
vehicle unit sales, a shift in mix among providers and a change in discount
arrangements with certain of the providers that occurred in the second quarter
of the current fiscal year. Collectively, the third-party providers
financed a larger percentage of our retail unit sales in the third quarter
compared with the prior year, as we chose to route more credit applications to
these providers. Doing so allowed us to slow the use of capacity in
our warehouse facility, while maximizing credit availability for our customers
and optimizing sales. The fixed fees paid by our third-party
financing providers vary by provider, reflecting their differing levels of
credit risk exposure. Providers who purchase the highest risk loans
purchase these loans at a discount, which is reflected as an offset to the
finance fee revenues received from the other third-party providers.
For the
first nine months of the year, other sales and revenues decreased
4%. ESP sales decreased 4%, in line with the decrease in total used
unit sales. Service department sales increased
4%. Third-party finance fees decreased 37% as many of the factors
that affected the third quarter also affected the net fees received in the first
nine months.
Seasonality. Historically, our
business has been seasonal. Typically, our superstores experience
their strongest traffic and sales in the spring and summer
quarters. Sales are typically slowest in the fall quarter, when used
vehicles generally experience proportionately more of their annual
depreciation. We believe this is partly the result of a decline in
customer traffic, as well as discounts on model year closeouts that can pressure
pricing for late-model used vehicles. Customer traffic also tends to
slow in the fall as the weather changes and as customers shift their spending
priorities toward holiday-related expenditures. In fiscal 2009, the
traditional seasonal sales patterns were masked by the weakness in the economy
and the stresses on consumer spending, which adversely affected industry-wide
auto sales.
Supplemental Sales
Information.
UNIT
SALES
|
|
Three
Months
Ended
November 30
|
|
|
Nine
Months
Ended
November 30
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Used
vehicles
|
|
|
71,426 |
|
|
|
85,973 |
|
|
|
267,837 |
|
|
|
278,841 |
|
New
vehicles
|
|
|
2,397 |
|
|
|
3,224 |
|
|
|
9,212 |
|
|
|
12,309 |
|
Wholesale
vehicles
|
|
|
45,139 |
|
|
|
52,960 |
|
|
|
156,592 |
|
|
|
171,150 |
|
AVERAGE
SELLING PRICES
|
|
Three
Months
Ended
November 30
|
|
|
Nine
Months
Ended
November 30
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Used
vehicles
|
|
$ |
16,146 |
|
|
$ |
17,433 |
|
|
$ |
16,472 |
|
|
$ |
17,434 |
|
New
vehicles
|
|
$ |
23,845 |
|
|
$ |
23,751 |
|
|
$ |
23,456 |
|
|
$ |
23,778 |
|
Wholesale
vehicles
|
|
$ |
3,805 |
|
|
$ |
4,322 |
|
|
$ |
3,987 |
|
|
$ |
4,337 |
|
RETAIL
VEHICLE SALES MIX
|
|
Three
Months
Ended
November 30
|
|
|
Nine
Months
Ended
November 30
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Vehicle
units:
|
|
|
|
|
|
|
|
|
|
|
|
|
Used
vehicles
|
|
|
97 |
% |
|
|
96 |
% |
|
|
97 |
% |
|
|
96 |
% |
New
vehicles
|
|
|
3 |
|
|
|
4 |
|
|
|
3 |
|
|
|
4 |
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle
dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used
vehicles
|
|
|
95 |
% |
|
|
95 |
% |
|
|
95 |
% |
|
|
94 |
% |
New
vehicles
|
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
|
|
6 |
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
RETAIL
STORES
|
|
Estimate
Feb.
28, 2009(1)
|
|
|
Nov.
30, 2008(1)
|
|
|
Feb.
29, 2008
|
|
|
Nov.
30, 2007
|
|
Production(2)
|
|
|
59 |
|
|
|
59 |
|
|
|
56 |
|
|
|
54 |
|
Non-production
superstores(2)
|
|
|
41 |
|
|
|
40 |
|
|
|
33 |
|
|
|
32 |
|
Total
used car superstores
|
|
|
100 |
|
|
|
99 |
|
|
|
89 |
|
|
|
86 |
|
Co-located
new car stores
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
Total
|
|
|
103 |
|
|
|
102 |
|
|
|
92 |
|
|
|
89 |
|
(1)Effective
October 1, 2008, we converted the superstore in Tucson, Arizona, from a
production to a non-production store.
(2)The
Clearwater, Florida, superstore has been reclassified from a production to
a non-production superstore.
|
|
We opened
one superstore during the third quarter of fiscal 2009, expanding our presence
in the Charlotte market with a non-production superstore in Hickory, North
Carolina.
During
the first nine months of the year, we opened ten superstores. In
addition to the store opened in the third quarter, we entered Phoenix, Arizona,
with both a production and a non-production superstore, Charleston, South
Carolina, with a non-production superstore; Huntsville, Alabama, with a
production superstore; Colorado Springs, Colorado, with a production superstore;
and Tulsa, Oklahoma, with a non-production superstore. We also
expanded our presence in San Antonio, Texas, and Los Angeles, California, with
non-production superstores and Sacramento, California, with a production
superstore.
During
the first nine months of fiscal 2009, we also expanded our car-buying center
test with openings in Dallas, Texas, and Baltimore, Maryland. We now
have a total of five car-buying centers at which we conduct appraisals and
purchase, but do not sell, vehicles. 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.
As of
November 30, 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. During the second quarter of fiscal 2008, we
sold a Chrysler-Jeep-Dodge franchise.
GROSS
PROFIT
|
|
Three
Months Ended
November
30
|
|
|
Nine
Months Ended
November
30
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
$
per unit (1)
|
|
|
|
% |
(2) |
|
$
per unit (1)
|
|
|
|
% |
(2) |
|
$
per unit (1)
|
|
|
|
% |
(2) |
|
$
per unit (1)
|
|
|
|
% |
(2) |
Used
vehicle gross profit
|
|
$ |
1,854 |
|
|
|
11.3 |
|
|
$ |
1,886 |
|
|
|
10.7 |
|
|
$ |
1,815 |
|
|
|
10.9 |
|
|
$ |
1,936 |
|
|
|
11.0 |
|
New
vehicle gross profit
|
|
$ |
684 |
|
|
|
2.9 |
|
|
$ |
1,043 |
|
|
|
4.4 |
|
|
$ |
832 |
|
|
|
3.5 |
|
|
$ |
1,040 |
|
|
|
4.3 |
|
Wholesale
vehicle gross profit
|
|
$ |
794 |
|
|
|
20.2 |
|
|
$ |
774 |
|
|
|
17.5 |
|
|
$ |
827 |
|
|
|
20.2 |
|
|
$ |
790 |
|
|
|
17.8 |
|
Other
gross profit
|
|
$ |
397 |
|
|
|
56.0 |
|
|
$ |
408 |
|
|
|
61.4 |
|
|
$ |
414 |
|
|
|
63.2 |
|
|
$ |
438 |
|
|
|
67.2 |
|
Total
gross profit
|
|
$ |
2,699 |
|
|
|
13.7 |
|
|
$ |
2,723 |
|
|
|
12.9 |
|
|
$ |
2,663 |
|
|
|
13.4 |
|
|
$ |
2,800 |
|
|
|
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.
|
|
In the
third quarter, total gross profit declined by $43.6 million to $199.2 million
versus $242.9 million in the prior year primarily because of the significant
decreases in used and wholesale unit sales. For the first nine months
of the year, total gross profit declined by $77.4 million to $737.9 million from
$815.3 million in the prior year due to the combination of the decrease in unit
sales and a reduction in total gross profit per unit of $137 to $2,663 per unit
from $2,800 per unit.
Used
Vehicle Gross Profit. Third quarter
fiscal 2009 used vehicle gross profit decreased by $29.7 million to $132.4
million from $162.2 million in the prior year’s third
quarter. Despite the difficult sales environment, gross profit per
unit was relatively resilient, decreasing by only $32 to $1,854 per unit
compared with $1,886 per unit for the prior year period. We believe
that our ability to maintain a generally consistent level of gross profit per
unit, despite the challenging sales environment and the unprecedented decline in
wholesale market prices, was due in large part to the effectiveness of our
proprietary inventory management systems and processes. In response
to the sharp decline in traffic and sales that began in late May 2008, we
rapidly reduced our used car inventories during the following months, which
brought them back in line with current sales rates and minimized required
pricing markdowns. Compared with inventory levels at stores open as
of November 30, 2007, we reduced our used vehicle inventory by more than 18,500
units, or approximately $340 million, as of November 30, 2008. During
the third quarter of fiscal 2009, we reduced comparable store used vehicle
inventories by approximately 8,300 units, or nearly $140 million.
For the
first nine months of fiscal 2009, used vehicle gross profit decreased by $53.7
million to $486.1 million from $539.8 million in the prior year
period. On a per unit basis, gross profit declined $121 to $1,815 per
unit compared with $1,936 per unit in the first nine months of fiscal
2008. We experienced lower appraisal traffic and a lower buy rate in
the first nine months of fiscal 2009, which required us to source a larger
percentage of our used vehicles at auction, which adversely affected our gross
profit per unit. Vehicles purchased at auction typically generate
less profit per unit compared with vehicles purchased directly from
consumers. Additionally, wholesale industry prices for mid-sized and
large SUVs and trucks declined sharply in the spring and early summer, and this
rapid decline in valuation resulted in margin pressure which included
supplemental markdowns on this segment of our inventory in the first half of the
fiscal year.
New
Vehicle Gross Profit. Compared with the
corresponding prior year periods, new vehicle gross profit per unit decreased
$359 in the third quarter and $208 in the first nine months of fiscal
2009. The decline in overall consumer demand for new cars pressured
profits for many new car retailers, including CarMax. However, the
decline in new vehicle per-unit profitability had a relatively modest effect on
our total gross profits due to the small percentage of new vehicles in our total
sales mix.
Wholesale
Vehicle Gross Profit. Compared with the
corresponding prior year periods, wholesale vehicle gross profit per unit
increased $20 in the third quarter and $37 in the first nine months of fiscal
2009. Throughout the first nine months of fiscal 2009, we continued
to experience a strong dealer-to-car ratio at our auctions, with the normal
price competition among bidders contributing to the strong wholesale gross
profit performance. Our wholesale vehicles are predominantly
comprised of older, higher mileage vehicles, and we believe the demand for these
types of vehicles remains strong from dealers who specialize in selling to
credit-challenged customers. In addition, the frequency of our
wholesale auctions and our wholesale inventory turns minimize our depreciation
risk on these vehicles.
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. Compared with the
corresponding prior year periods, other gross profit per unit declined $11 in
the third quarter and $24 in the first nine months of fiscal
2009. For both periods, the decrease in other gross profit per unit
primarily reflected the decline in third-party finance fees.
Impact of
Inflation. Historically,
inflation has not been a significant contributor to
results. Profitability is primarily affected by our ability to
achieve targeted unit sales and gross profit dollars per vehicle rather than on
average retail prices. However, increases in average vehicle selling
prices will benefit CAF income, to the extent the average amount financed also
increases, and they will also benefit the SG&A ratio.
In the
first nine months of fiscal 2009, the weakness in the economy and the stresses
on consumer spending contributed to the industry-wide slowdown in the sale of
new and used vehicles and to the unprecedented decline in wholesale market
prices for most vehicle classes. These lower wholesale values reduced
our vehicle acquisition costs and contributed to the decline in our used and
wholesale vehicle average selling price.
CarMax
Auto Finance (Loss) 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. Historically, CAF has provided us the opportunity to
capture additional profits and cash flows from auto loan receivables while
managing our reliance on third-party financing sources.
COMPONENTS
OF CAF (LOSS) INCOME
|
|
Three
Months Ended
November
30
|
|
|
Nine
Months Ended
November
30
|
|
(In
millions)
|
|
2008
|
|
|
%
|
|
|
2007
|
|
|
%
|
|
|
2008
|
|
|
%
|
|
|
2007
|
|
|
%
|
|
Total
(loss) gain (1)
|
|
$ |
(28.5 |
) |
|
|
(7.0 |
) |
|
$ |
6.1 |
|
|
|
1.1 |
|
|
$ |
(50.1 |
) |
|
|
(3.1 |
) |
|
$ |
58.8 |
|
|
|
3.1 |
|
Other
CAF income: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing
fee income
|
|
|
10.4 |
|
|
|
1.0 |
|
|
|
9.5 |
|
|
|
1.0 |
|
|
|
31.1 |
|
|
|
1.0 |
|
|
|
27.6 |
|
|
|
1.0 |
|
Interest
income
|
|
|
12.6 |
|
|
|
1.2 |
|
|
|
9.1 |
|
|
|
1.0 |
|
|
|
34.8 |
|
|
|
1.2 |
|
|
|
24.7 |
|
|
|
0.9 |
|
Total
other CAF income
|
|
|
23.0 |
|
|
|
2.3 |
|
|
|
18.7 |
|
|
|
2.0 |
|
|
|
65.9 |
|
|
|
2.2 |
|
|
|
52.4 |
|
|
|
2.0 |
|
Direct
CAF expenses: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAF
payroll and fringe benefit expense
|
|
|
4.8 |
|
|
|
0.5 |
|
|
|
4.1 |
|
|
|
0.4 |
|
|
|
14.0 |
|
|
|
0.5 |
|
|
|
11.5 |
|
|
|
0.4 |
|
Other
direct CAF expenses
|
|
|
5.1 |
|
|
|
0.5 |
|
|
|
4.3 |
|
|
|
0.5 |
|
|
|
14.5 |
|
|
|
0.5 |
|
|
|
12.8 |
|
|
|
0.5 |
|
Total
direct CAF expenses
|
|
|
9.9 |
|
|
|
1.0 |
|
|
|
8.4 |
|
|
|
0.9 |
|
|
|
28.4 |
|
|
|
0.9 |
|
|
|
24.4 |
|
|
|
0.9 |
|
CAF
(loss) income (3)
|
|
$ |
(15.4 |
) |
|
|
(1.1 |
) |
|
$ |
16.3 |
|
|
|
0.9 |
|
|
$ |
(12.7 |
) |
|
|
(0.2 |
) |
|
$ |
86.8 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans sold
|
|
$ |
407.0 |
|
|
|
|
|
|
$ |
575.6 |
|
|
|
|
|
|
$ |
1,608.8 |
|
|
|
|
|
|
$ |
1,891.2 |
|
|
|
|
|
Average
managed receivables
|
|
$ |
4,076.3 |
|
|
|
|
|
|
$ |
3,683.9 |
|
|
|
|
|
|
$ |
4,019.0 |
|
|
|
|
|
|
$ |
3,548.6 |
|
|
|
|
|
Ending
managed receivables
|
|
$ |
4,027.3 |
|
|
|
|
|
|
$ |
3,702.6 |
|
|
|
|
|
|
$ |
4,027.3 |
|
|
|
|
|
|
$ |
3,702.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net sales and operating revenues
|
|
$ |
1,455.6 |
|
|
|
|
|
|
$ |
1,885.3 |
|
|
|
|
|
|
$ |
5,503.4 |
|
|
|
|
|
|
$ |
6,155.0 |
|
|
|
|
|
Percent
columns indicate:
(1)
Percent of total loans sold.
(2)
Annualized percent of average managed receivables.
(3)
Percent of total net sales and operating revenues.
|
|
CAF
income or loss 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 has typically been generated by
the spread between the interest rates charged to customers and the related cost
of funds. Substantially all of the loans originated by CAF are sold
in securitization transactions. A gain, recorded at the time of
securitization, results from recording a receivable approximately equal to the
present value of the expected residual cash flows generated by the securitized
receivables. Historically, the gain on loans originated and sold as a percent of
loans originated and sold (the “gain percentage”) has generally been in the
range of 3.5% to 4.5%. However, the gain percentage 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
the gain recognized on the sale of loans.
(LOSS)
GAIN AND LOANS SOLD
|
|
Three
Months Ended
November
30
|
|
|
Nine
Months Ended
November
30
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Gain
on sales of loans originated and sold (1)
|
|
$ |
11.3 |
|
|
$ |
20.9 |
|
|
$ |
32.5 |
|
|
$ |
57.8 |
|
Other
(losses) gains (1)
|
|
|
(39.8 |
) |
|
|
(14.8 |
) |
|
|
(82.6 |
) |
|
|
1.0 |
|
Total
(loss) gain
|
|
$ |
(28.5 |
) |
|
$ |
6.1 |
|
|
$ |
(50.1 |
) |
|
$ |
58.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
originated and sold
|
|
$ |
407.0 |
|
|
$ |
575.6 |
|
|
$ |
1,560.4 |
|
|
$ |
1,840.5 |
|
Receivables
repurchased from term securitizations and
resold
|
|
|
– |
|
|
|
– |
|
|
|
48.4 |
|
|
|
50.7 |
|
Total
loans sold
|
|
$ |
407.0 |
|
|
$ |
575.6 |
|
|
$ |
1,608.8 |
|
|
$ |
1,891.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
percentage on loans originated and sold
|
|
|
2.8 |
% |
|
|
3.6 |
% |
|
|
2.1 |
% |
|
|
3.1 |
% |
Total
(loss) gain as a percentage of total loans sold
|
|
|
(7.0 |
)% |
|
|
1.1 |
% |
|
|
(3.1 |
)% |
|
|
3.1 |
% |
(1)To
the extent we recognize valuation or other adjustments related to loans
originated in previous quarters of the same fiscal year, the sum of
amounts reported for the individual quarters may not equal the
year-to-date total.
|
|
The gain
on sales of loans originated and sold includes both the gain income recorded at
the time of securitization and the effect of any subsequent changes in valuation
assumptions or funding costs that are incurred in the same fiscal period that
the loans were originated. Other losses or gains include the effects
of changes in valuation assumptions or funding costs related to loans originated
and sold during previous fiscal periods. In addition, other losses or
gains could include the effects of new securitizations, changes in the valuation
of retained subordinated bonds and the resale of receivables in existing
securitizations, as applicable.
In the
third quarter of fiscal 2009, CAF reported a pretax loss of $15.4 million
compared with income of $16.3 million in the prior year’s third
quarter. In both periods, CAF results were reduced by adjustments
related to loans originated in previous fiscal periods. In the third
quarter of fiscal 2009, the adjustments totaled $39.8 million and they
included:
·
|
A
$23.8 million mark-to-market write-down in the carrying value of
subordinated bonds that we hold. These bonds, which have a face
value of $115 million, were part of three term securitizations completed
earlier in calendar year 2008. The size of the write-down
reflected the illiquidity in the credit markets, particularly for
subordinated asset-backed bonds. This non-cash charge primarily
affects the timing of the recognition of CAF earnings. If
current conditions continue, this adjustment should result in positive
contributions to CAF earnings in future
periods.
|
·
|
$16.0
million for increases in loss rate assumptions, partially offset by
favorability in prepayment speeds. We increased the upper end
of our cumulative loss rate assumption range to 3.9% from
3.5%.
|
The
adjustments in the third quarter of fiscal 2008 totaled $14.8 million, and they
primarily resulted from increases in funding costs for loans originated in prior
periods.
For the
third quarter, CAF’s gain on loans originated and sold declined to $11.3 million
compared with $20.9 million in fiscal 2008. This decrease was the
result of both a reduction in CAF originations and a decrease in the gain
percentage. In fiscal 2009, CAF’s loan origination volume was
adversely affected by the decreases in our used unit sales and average selling
price, as well as a decrease in the percentage of sales financed by
CAF. Given the limited activity in the public asset-backed
securitization market we elected to slow the use of capacity in our warehouse
facility during the second half of the quarter. We accomplished this
by allowing our third-party finance providers to increase their share of
originations. The gain percentage decreased to 2.8% in the third
quarter of fiscal 2009 from 3.6% in the corresponding prior year period
primarily due to the use of higher loss and discount rate assumptions and higher
credit enhancement levels in the current year.
For the
first nine months of the year, CAF reported a pretax loss of $12.7 million in
fiscal 2009 compared with income of $86.8 million in fiscal 2008. In
both periods, CAF results were affected by adjustments related to loans
originated in previous fiscal years. In fiscal 2009, the adjustments
reduced CAF earnings by $82.6 million and they included:
·
|
A
$31.2 million mark-to-market write-down in the carrying value of the
subordinated bonds.
|
·
|
$27.3
million for increases in loss rate assumptions, partially offset by
favorability in prepayment speeds.
|
·
|
$20.1
million for increases in funding costs related to loans that were
originated in prior fiscal years.
|
·
|
$3.8
million for increasing the discount rate assumption from 17% to
19%.
|
For the
first nine months of fiscal 2008, the adjustments increased CAF earnings by $1.0
million and they primarily related to reductions in funding costs related to
loans originated in prior fiscal years.
For the
nine-month period, CAF’s gain on loans originated and sold declined to $32.5
million in fiscal 2009 compared with $57.8 million in fiscal
2008. The gain percentage for the first nine months of the year
decreased to 2.1% in fiscal 2009 from 3.1% in fiscal 2008. Many of
the factors that contributed to the decline in CAF’s gain on loans originated
and sold and the decline in the gain percentage in the third quarter of fiscal
2009 were also factors contributing to the declines in these metrics in the
first nine months of the year.
Our term
securitizations typically contain an option to repurchase the securitized
receivables when the outstanding balance in the pool of auto loan receivables
falls below 10% of the original pool balance. In the second quarter
of fiscal 2009, we exercised this repurchase option and $48.4 million of
previously securitized receivables were resold into the warehouse
facility. In the second quarter of fiscal 2008, we exercised this
repurchase option and $50.7 million of previously securitized receivables were
resold into the warehouse facility. Neither of these transactions had
a material effect on total gain income. In future periods, the
effects of refinancing, repurchase or resale activity could be favorable or
unfavorable, depending on the securitization structure and the market conditions
at the transaction date.
The
increases in servicing fee income and direct CAF expenses in the third quarter
and first nine months of fiscal 2009 were proportionate to the growth in managed
receivables. The interest income component of other CAF income
increased to an annualized 1.2% of average managed receivables in the third
quarter of fiscal 2009 from 1.0% in the prior year quarter, primarily due to the
increase in the discount rate assumption used to value the retained interest to
19% from 12%. The use of a higher discount rate reduces the gain
recognized at the time the loans are sold, but increases the interest income
recognized in subsequent periods. Additionally, in fiscal 2009
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
November
30
|
|
|
As
of
February
29 or 28
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Loans
securitized
|
|
$ |
3,885.6 |
|
|
$ |
3,631.2 |
|
|
$ |
3,764.5 |
|
|
$ |
3,242.1 |
|
Loans
held for sale or investment
|
|
|
141.6 |
|
|
|
71.4 |
|
|
|
74.0 |
|
|
|
68.9 |
|
Ending
managed receivables
|
|
$ |
4,027.3 |
|
|
$ |
3,702.6 |
|
|
$ |
3,838.5 |
|
|
$ |
3,311.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
31+ days past due
|
|
$ |
136.1 |
|
|
$ |
93.0 |
|
|
$ |
86.1 |
|
|
$ |
56.9 |
|
Past
due accounts as a percentage of ending managed
receivables
|
|
|
3.38 |
% |
|
|
2.51 |
% |
|
|
2.24 |
% |
|
|
1.72 |
% |
CREDIT
LOSS INFORMATION
|
|
Three
Months Ended
November
30
|
|
|
Nine
Months Ended
November
30
|
|
(In
millions)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
credit losses on managed receivables
|
|
$ |
21.6 |
|
|
$ |
10.3 |
|
|
$ |
48.5 |
|
|
$ |
25.1 |
|
Average
managed receivables
|
|
$ |
4,076.3 |
|
|
$ |
3,683.9 |
|
|
$ |
4,019.0 |
|
|
$ |
3,548.6 |
|
Annualized
net credit losses as a percentage of average
managed receivables
|
|
|
2.11 |
% |
|
|
1.12 |
% |
|
|
1.61 |
% |
|
|
0.94 |
% |
Recovery
rate
|
|
|
42.4 |
% |
|
|
50.0 |
% |
|
|
44.4 |
% |
|
|
51.3 |
% |
We are at
risk for the performance of the managed securitized receivables to the extent of
our retained interest in the receivables. If the managed receivables
do not perform in accordance with the assumptions used in determining the fair
value of the retained interest, earnings could be affected. Our
retained interest in securitized receivables was $315.0 million as of November
30, 2008, compared with $270.8 million as of February 29, 2008, and $233.7
million as of November 30, 2007. Compared with both prior periods,
our retained interest increased primarily as a result of our holding the
retained subordinated bonds and an increase in the required excess receivables,
partially offset by a decrease in the interest-only strip
receivables. We retained subordinated bonds in the term
securitizations completed in January, May and July 2008.
Compared
with the corresponding prior year periods, 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 in the third
quarter and in the first nine months of fiscal 2009. We believe these
increases were primarily the result of 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 managing risk. Historically, we
originated 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 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 have trended higher than our initial expectations, we
believe this has been primarily a reflection of the worsening economic
climate. Consequently, we have 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. In addition, we have tightened CAF’s lending criteria
for applicants whose credit profile indicates a higher-than-average
risk.
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 14.9% in the third quarter of fiscal 2009 compared with 11.2%
in the third quarter of the prior year. For the nine months ended
November 30, 2008, the SG&A ratio increased to 12.5% compared with 10.4% in
the first nine months of the prior year. The increases in the
SG&A ratio in fiscal 2009 were mainly the result of the declines in
comparable store used unit sales and average selling price. The
increases in the SG&A ratio were partially offset by reductions in variable
costs. In the current market environment, we continue to reduce
variable costs by reducing associate hours and allowing natural attrition to
further reduce store staffing. In addition, we have implemented a
hiring freeze at the home office and are carefully monitoring expenses at
CAF.
SG&A
expenses for the third quarter of fiscal 2009 included a number of non-recurring
items, which in the aggregate reduced results by $0.01 per
share. These items included approximately $7 million of severance
costs related to a reduction in our service operations workforce in October and
$6 million of costs for the termination of store site acquisitions resulting
from our decision to slow our store growth. These costs were
partially offset by a $10 million benefit related to our previously announced
decision to freeze our pension plans as of December 31, 2008.
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 36.4% in the third quarter of fiscal 2009 compared with
39.0% in the third quarter of fiscal 2008. For the first nine months
of the year, the effective tax rate was 39.5% in fiscal 2009 compared with 38.9%
in fiscal 2008. Given the current economic conditions and the related
impact on the ability to project future results, we determined that the use of
the year-to-date effective tax rate versus the estimated annual effective tax
rate as used in prior quarters is a more accurate reflection of the results for
the quarter and year to date. The effective tax rate for the quarter
and the related tax benefit that was realized on the net loss for the third
quarter of fiscal 2009 reflect the impact of this adjustment as well as the
impact of other permanent tax differences for the year.
OPERATIONS
OUTLOOK
Store
Openings and Capital Expenditures. In August 2008, we
announced that we would temporarily slow our store growth as a result of the
weak economic and sales environment. During the third quarter,
conditions further deteriorated and as a consequence we have decided to
temporarily suspend our store growth. We plan to open one
non-production store, which is currently under construction in the Washington,
D.C., market, in either late fiscal 2009 or early fiscal 2010. We
have three other stores that are currently under construction in Augusta,
Georgia; Cincinnati, Ohio; and Dayton, Ohio. These stores will be
completed but they will not be opened until market conditions
improve.
We
currently estimate gross capital expenditures will total between $175 million
and $190 million in fiscal 2009. These expenditures primarily relate
to construction costs for the ten stores that were opened in the first nine
months of the year and the four stores that are still under
construction. We had originally expected gross capital expenditures
would total approximately $350 million in fiscal 2009. The reduction
in planned capital spending reflects our decision to suspend store growth and
the related reduction in land purchases for future store openings.
Fiscal
2009 Comparable
Store Sales and Earnings Per Share Expectations. As a result of
the unprecedented declines in traffic and sales and the continuing volatility in
the asset-backed credit markets, we do not believe we can make a meaningful
projection of fiscal 2009 comparable store sales or
earnings.
Other
Items. As
described in Note 8, effective December 31, 2008, we will freeze the pension
plan and the restoration plan, and no additional benefits will accrue under
these plans after that date. On January 1, 2009, we will implement
significant enhancements to our 401(k) plan, and we will establish a new
non-qualified retirement plan for certain senior executives who are affected by
Internal Revenue Code limitations on benefits provided under the 401(k)
plan. We believe our revised retirement program will be easier to
understand and give associates more control over their retirement savings while
also allowing us to control escalating and unpredictable pension
expenses.
FINANCIAL
CONDITION
Liquidity and Capital
Resources.
Operating
Activities. Net cash from
operating activities increased to $306.6 million in the first nine months of
fiscal 2009 from $158.9 million in the first nine months of fiscal 2008,
primarily reflecting the significant decrease in inventory in fiscal 2009
partially offset by the decline in net earnings. We reduced
inventory
by $374.3
million in the first nine months of fiscal 2009 compared with an increase of
$56.1 million in the prior-year period. In fiscal 2009, we
dramatically reduced our used vehicle inventory levels to bring them in line
with the lower sales rate. The fiscal 2009 inventory reduction also
reflects the decrease in vehicle acquisition costs for most vehicle
categories. The increase in inventories in the first nine months of
fiscal 2008 reflected the combination of the additional inventories needed to
support the expansion of our store base and the expansion of a test in select
stores to determine whether a modest expansion of onsite vehicle inventory,
generally in the range of 50 to 100 cars per store, would have a favorable
effect on sales.
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 November 30, 2008, and $3.63
billion as of November 30, 2007. During the first nine months of
fiscal 2009, we completed two term securitizations of auto loan
receivables. In July 2008, we completed a term securitization of $525
million of auto loan receivables, and in May 2008 we completed a term
securitization of $750 million of auto loan receivables. We retained
a total of $70.3 million face value of subordinated bonds in these two
securitizations.
During
the second quarter of fiscal 2009, we increased the capacity of the warehouse
facility, which expires in July 2009, by $400 million to a total of $1.4
billion. As of November 30, 2008, $907 million of auto loan
receivables were securitized through the warehouse facility and unused warehouse
capacity totaled $493 million. We intend to enter into new, or renew or
expand existing funding arrangements to meet CAF’s future funding
needs. However, based on conditions in the credit markets, the cost
for these arrangements could be materially higher than historical costs and the
timing of these transactions could be dictated by market availability rather
than our requirements. In addition, we are currently evaluating other
alternatives to preserve the sales associated with the CAF origination
channel. Given the limited activity in the public asset-backed
securitization market, during the latter half of the third quarter of fiscal
2009 we elected to slow the use of capacity in our warehouse
facility. We accomplished this by allowing our third-party finance
providers to increase their share of originations.
Investing
Activities. Net cash used in
investing activities was $139.6 million in the first nine months of fiscal 2009,
compared with $196.0 million in the first nine months of the prior
year. Cash used in investing activities consists almost entirely of
capital expenditures, which primarily includes store construction costs and the
cost of land acquired for future year store openings. These
expenditures will vary from quarter to quarter based on the timing of store
openings and land acquisitions. Capital expenditures totaled $164.0
million in the fiscal 2009 period and $192.4 million in the fiscal 2008
period. Our investment in future store sites was lower in fiscal 2009
than in fiscal 2008 as a result of our decision to slow and then to temporarily
suspend store growth.
Historically,
capital expenditures have been funded with internally generated funds, short-
and long-term debt and sale-leaseback transactions. During the third
quarter of fiscal 2009, we entered into sale-leaseback agreements having a total
sales price of $31.3 million for our two used car superstores in Austin,
Texas. We received proceeds of $25.4 million during the third
quarter, and we provided short-term financing for the remaining $5.9 million,
which we expect to receive in fiscal 2010.
As of
November 30, 2008, we owned our home office in Richmond, Virginia, and owned 41
superstores currently in operation, including the superstore subject to the
sale-leaseback agreement that we expect to complete in fiscal
2010. In addition, five superstores were accounted for as capital
leases.
Financing
Activities. In the first
nine months of fiscal 2009, net cash used in financing activities was $41.8
million while in the first nine months of fiscal 2008 net cash provided by
financing activities was $26.0 million. During
the third quarter of fiscal 2009, due to the unprecedented conditions in the
credit markets, we felt that it was prudent to maintain a higher-than-normal
cash balance. Despite the increase in cash and the decline in our
results, during the first nine months of fiscal 2009 we reduced total debt by
$52.2 million. During the first nine months of fiscal 2008, we
increased total debt by $7.0 million.
During
the second quarter of fiscal 2009, we increased the aggregate borrowing limit
under our revolving credit facility by $200 million to a total of $700
million. The credit facility expires in December 2011 and is secured
by our vehicle inventory. Borrowings under this credit facility are
subject to limitation based on a specified percentage of qualifying inventory,
and they are available for working capital and general corporate
purposes. As of November 30, 2008, $248.4 million was outstanding
under the credit facility and $225.4 million of the remaining balance was
available to us. The outstanding balance included $12.1 million
classified as short-term debt, $86.3 million classified as current portion of
long-term debt and $150.0 million classified as long-term debt. We
classified $86.3 million of the outstanding balance as of November 30, 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 $315.0 million as of November
30, 2008 and $270.8 million as of February 29, 2008. Included in the
retained interest were interest-only strip receivables, various reserve accounts
and required excess receivables totaling $228.4 million and $227.7 million as of
November 30, 2008, and February 29, 2008, respectively. In addition,
the retained interest included retained subordinated bonds totaling $86.6
million and $43.1 million as of November 30, 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.
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.
During
the first nine months of fiscal 2009, changes were made to certain key
assumptions used in measuring the fair value of retained
interest. For a discussion of the effects of these changes, see the
“(Loss) Gain and Loans Sold” section of CarMax Auto Finance Income in MD&A
starting on page 30.
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 67.2% 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 consumer credit availability related to our third-party financing
providers.
|
§
|
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.
|
§
|
Adverse
conditions affecting one or more domestic-based automotive
manufacturers.
|
§
|
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 39 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 November 30, 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)
|
|
November
30, 2008
|
|
|
February
29, 2008
|
|
Principal
amount of:
|
|
|
|
|
|
|
Fixed-rate
securitizations
|
|
$ |
2,562.4 |
|
|
$ |
2,533.4 |
|
Floating-rate
securitizations synthetically altered
to fixed (1)
|
|
|
1,323.0 |
|
|
|
1,230.6 |
|
Floating-rate
securitizations
|
|
|
0.3 |
|
|
|
0.5 |
|
Loans
held for investment (2)
|
|
|
120.7 |
|
|
|
69.0 |
|
Loans
held for sale (3)
|
|
|
20.9 |
|
|
|
5.0 |
|
Total
|
|
$ |
4,027.3 |
|
|
$ |
3,838.5 |
|
(1)Includes
$416.3 million of variable-rate securities issued in connection with
certain term securitizations that were synthetically altered to fixed at
the bankruptcy-remote special purpose entity.
(2)The
majority is held by a bankruptcy-remote special purpose
entity.
(3)Held
by a bankruptcy-remote special purpose entity.
|
|
Interest
Rate Exposure. We also have
interest rate risk from changing interest rates related to our outstanding
debt. Substantially all of our debt is floating-rate debt based on
LIBOR. A 100-basis point increase in market interest rates would have
decreased our net earnings per share by less than $0.01 for the three months
ended November 30, 2008 and $0.01 for the nine months ended November 30,
2008.
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 November 30, 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 April
2, 2008, Mr. John Fowler filed a putative class action lawsuit against CarMax
Auto Superstores California, LLC and CarMax Auto Superstores West Coast, Inc. in
the Superior Court of California, County of Los
Angeles. Subsequently, two other lawsuits, Leena Areso et al.
v. CarMax Auto Superstores California, LLC and Justin Weaver v. CarMax Auto
Superstores California, LLC, were consolidated as part of the Fowler case. The
allegations in the consolidated case involve: (1) failure to provide meal and
rest breaks or compensation in lieu thereof; (2) failure to pay wages of
terminated or resigned employees related to meal and rest breaks and overtime;
(3) failure to pay overtime; (4) failure to comply with itemized employee wage
statement provisions; and (5) unfair competition. The putative class
consists of sales consultants, sales managers, and other hourly employees who
worked for the company in California from April 2, 2004 to the
present. The lawsuit seeks compensatory and special damages, wages,
interest, civil and statutory penalties, restitution, injunctive relief and the
recovery of attorneys’ fees.
In
November 2008, the United States District Court of the Eastern District of
Virginia dismissed, without prejudice, the Rangos putative class action
lawsuit in response to the plaintiff’s voluntary motion to dismiss. This lawsuit
was related to alleged violations of federal securities laws.
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,
and in our Form 10-Q for our second fiscal quarter ended August 31, 2008, should
be considered. Additionally, we are subject to the risk set forth
below:
Domestic-based
Automotive Manufacturers. Adverse conditions affecting one or more
domestic-based automotive manufacturers may impact our
profitability. Recently, the financial condition and operating
results of these manufacturers have deteriorated significantly, and it is
possible that one or all of these manufacturers could file for bankruptcy
protection. Certain actions that these manufacturers may take,
including bankruptcy filing, could have a material effect on our business,
results of operations and financial condition.
The risks
included in the Form 10-K, the second quarter Form 10-Q and as set forth above
could materially and adversely affect our business, financial condition, and
results of operations.
Other
than as set forth above and in the second quarter Form 10-Q, there have been no
material changes to the factors discussed in our Form 10-K.
4.2
|
Appointment,
Assignment and Assumption Agreement, dated as of November 28, 2008,
between CarMax, Inc. and American Stock Transfer & Trust Company, LLC,
filed herewith.
|
10.1
|
Form
of Notice of Stock Option Grant between CarMax, Inc. and certain named and
other executive officers, filed herewith.
*
|
10.2
|
Form
of Notice of Restricted Stock Grant between CarMax, Inc. and certain
executive officers, filed herewith.
*
|
10.3
|
Form
Amendment to Employment/Severance Agreement between CarMax, Inc. and
certain named and other executive officers, filed herewith.
*
|
31.1
|
Certification
of the Chief Executive Officer Pursuant to Rule 13a-14(a), filed
herewith.
|
31.2
|
Certification
of the Chief Financial Officer Pursuant to Rule 13a-14(a), filed
herewith.
|
32.1
|
Certification
of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, filed
herewith.
|
32.2
|
Certification
of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, filed
herewith.
|
*
|
Indicates
management contracts, compensatory plans or arrangements of the company
required to be filed as an
exhibit.
|
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
|
January
8, 2009
EXHIBIT
INDEX
4.2
|
Appointment,
Assignment and Assumption Agreement, dated as of November 28, 2008,
between CarMax, Inc. and American Stock Transfer & Trust Company, LLC,
filed herewith.
|
10.1
|
Form
of Notice of Stock Option Grant between CarMax, Inc. and certain named and
other executive officers, filed herewith.
*
|
10.2
|
Form
of Notice of Restricted Stock Grant between CarMax, Inc. and certain
executive officers, filed herewith.
*
|
10.3
|
Form
Amendment to Employment/Severance Agreement between CarMax, Inc. and
certain named and other executive officers, filed herewith.
*
|
31.1
|
Certification
of the Chief Executive Officer Pursuant to Rule 13a-14(a), filed
herewith.
|
31.2
|
Certification
of the Chief Financial Officer Pursuant to Rule 13a-14(a), filed
herewith.
|
32.1
|
Certification
of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, filed
herewith.
|
32.2
|
Certification
of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, filed
herewith.
|
*
|
Indicates
management contracts, compensatory plans or arrangements of the company
required to be filed as an
exhibit.
|
Page 42 of 42