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 May 31, 2009
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer X
|
Accelerated
filer _
|
|
Non-accelerated
filer_
|
Smaller
reporting
company _
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Class
|
|
Outstanding as of June 30,
2009
|
Common
Stock, par value $0.50
|
|
220,294,801
|
|
|
|
A Table
of Contents is included on Page 2 and a separate Exhibit Index is included on
Page 40.
CARMAX, INC. AND
SUBSIDIARIES
TABLE OF
CONTENTS
|
Page
No.
|
PART
I.
|
FINANCIAL INFORMATION
|
|
|
|
|
|
|
Item
1. Financial Statements:
|
|
|
|
|
|
|
|
Consolidated
Statements of Earnings - Three
Months Ended May 31, 2009 and 2008
|
3
|
|
|
|
|
|
|
Consolidated
Balance Sheets - May
31, 2009, and February 28, 2009
|
4
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows - Three
Months Ended May 31, 2009 and 2008
|
5
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
6
|
|
|
|
|
Item
2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations
|
22
|
|
|
|
|
Item
3. Quantitative and Qualitative Disclosures About
Market Risk
|
35
|
|
|
|
|
Item
4. Controls and Procedures
|
36
|
|
|
|
PART
II.
|
OTHER INFORMATION
|
|
|
|
|
|
Item
1. Legal Proceedings
|
37
|
|
|
|
|
Item
1A. Risk Factors
|
37
|
|
|
|
|
Item
4. Submission of Matters to a Vote of Security
Holders
|
37
|
|
|
|
|
Item
6. Exhibits
|
38
|
|
|
|
|
|
|
SIGNATURES
|
39
|
|
|
|
EXHIBIT
INDEX
|
40
|
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
CARMAX, INC. AND
SUBSIDIARIES
Consolidated Statements of
Earnings
(Unaudited)
(In
thousands except per share data)
|
|
Three
Months Ended May 31
|
|
|
|
2009
|
|
|
|
% |
(1) |
|
2008
|
|
|
|
% |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used
vehicle sales
|
|
$ |
1,549,275 |
|
|
|
84.5 |
|
|
$ |
1,816,848 |
|
|
|
82.3 |
|
New
vehicle sales
|
|
|
48,553 |
|
|
|
2.6 |
|
|
|
82,070 |
|
|
|
3.7 |
|
Wholesale
vehicle sales
|
|
|
171,496 |
|
|
|
9.3 |
|
|
|
242,327 |
|
|
|
11.0 |
|
Other
sales and revenues
|
|
|
64,976 |
|
|
|
3.5 |
|
|
|
67,518 |
|
|
|
3.1 |
|
Net
sales and operating revenues
|
|
|
1,834,300 |
|
|
|
100.0 |
|
|
|
2,208,763 |
|
|
|
100.0 |
|
Cost
of sales
|
|
|
1,558,063 |
|
|
|
84.9 |
|
|
|
1,926,049 |
|
|
|
87.2 |
|
Gross
profit
|
|
|
276,237 |
|
|
|
15.1 |
|
|
|
282,714 |
|
|
|
12.8 |
|
CarMax
Auto Finance (loss) income
|
|
|
(21,636 |
) |
|
|
(1.2 |
) |
|
|
9,819 |
|
|
|
0.4 |
|
Selling,
general and administrative expenses
|
|
|
206,225 |
|
|
|
11.2 |
|
|
|
242,984 |
|
|
|
11.0 |
|
Interest
expense
|
|
|
1,066 |
|
|
|
0.1 |
|
|
|
2,058 |
|
|
|
0.1 |
|
Interest
income
|
|
|
183 |
|
|
|
– |
|
|
|
264 |
|
|
|
– |
|
Earnings
before income taxes
|
|
|
47,493 |
|
|
|
2.6 |
|
|
|
47,755 |
|
|
|
2.2 |
|
Income
tax provision
|
|
|
18,745 |
|
|
|
1.0 |
|
|
|
18,197 |
|
|
|
0.8 |
|
Net
earnings
|
|
$ |
28,748 |
|
|
|
1.6 |
|
|
$ |
29,558 |
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common
shares: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
218,004 |
|
|
|
|
|
|
|
217,094 |
|
|
|
|
|
Diluted
|
|
|
218,840 |
|
|
|
|
|
|
|
220,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share:
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.13 |
|
|
|
|
|
|
$ |
0.13 |
|
|
|
|
|
Diluted
|
|
$ |
0.13 |
|
|
|
|
|
|
$ |
0.13 |
|
|
|
|
|
(1)
|
Percents
are calculated as a percentage of net sales and operating revenues and may
not equal totals due to rounding.
|
(2)
|
Reflects
the implementation of FASB Staff Position No. EITF 03-6-1, “Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities.” See Note 11 for additional
information.
|
See accompanying notes to
consolidated financial statements.
CARMAX, INC. AND
SUBSIDIARIES
Consolidated Balance
Sheets
(Unaudited)
(In
thousands except share data)
|
|
May
31, 2009
|
|
|
February
28, 2009
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$ |
133,580 |
|
|
$ |
140,597 |
|
Accounts
receivable,
net
|
|
|
74,692 |
|
|
|
75,876 |
|
Auto
loan receivables held for
sale
|
|
|
22,539 |
|
|
|
9,748 |
|
Retained
interest in securitized
receivables
|
|
|
433,300 |
|
|
|
348,262 |
|
Inventory
|
|
|
781,085 |
|
|
|
703,157 |
|
Prepaid
expenses and other current
assets
|
|
|
8,308 |
|
|
|
10,112 |
|
|
|
|
|
|
|
|
|
|
Total
current
assets
|
|
|
1,453,504 |
|
|
|
1,287,752 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment,
net
|
|
|
922,950 |
|
|
|
938,259 |
|
Deferred
income
taxes
|
|
|
124,819 |
|
|
|
103,163 |
|
Other
assets
|
|
|
49,403 |
|
|
|
50,013 |
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
2,550,676 |
|
|
$ |
2,379,187 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
252,702 |
|
|
$ |
237,312 |
|
Accrued
expenses and other current
liabilities
|
|
|
81,841 |
|
|
|
55,793 |
|
Accrued
income
taxes
|
|
|
55,159 |
|
|
|
26,551 |
|
Deferred
income
taxes
|
|
|
10,830 |
|
|
|
12,129 |
|
Short-term
debt
|
|
|
1,195 |
|
|
|
878 |
|
Current
portion of long-term
debt
|
|
|
238,488 |
|
|
|
158,107 |
|
|
|
|
|
|
|
|
|
|
Total
current
liabilities
|
|
|
640,215 |
|
|
|
490,770 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt, excluding current
portion
|
|
|
177,889 |
|
|
|
178,062 |
|
Deferred
revenue and other
liabilities
|
|
|
106,106 |
|
|
|
117,288 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
924,210 |
|
|
|
786,120 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingent
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock, $0.50 par value; 350,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
220,208,860
and 220,392,014 shares issued and outstanding
|
|
|
|
|
|
|
|
|
as
of May 31, 2009, and February 28, 2009, respectively
|
|
|
110,104 |
|
|
|
110,196 |
|
Capital
in excess of par
value
|
|
|
690,675 |
|
|
|
685,938 |
|
Accumulated
other comprehensive
loss
|
|
|
(16,854 |
) |
|
|
(16,860 |
) |
Retained
earnings
|
|
|
842,541 |
|
|
|
813,793 |
|
|
|
|
|
|
|
|
|
|
TOTAL
SHAREHOLDERS’
EQUITY
|
|
|
1,626,466 |
|
|
|
1,593,067 |
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$ |
2,550,676 |
|
|
$ |
2,379,187 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated
financial statements.
CARMAX, INC. AND
SUBSIDIARIES
Consolidated Statements of
Cash Flows
(Unaudited)
(In
thousands)
|
|
Three
Months Ended May 31
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Operating Activities:
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
28,748 |
|
|
$ |
29,558 |
|
Adjustments
to reconcile net earnings to net cash (used in) provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and
amortization
|
|
|
15,032 |
|
|
|
13,248 |
|
Share-based
compensation
expense
|
|
|
12,493 |
|
|
|
9,921 |
|
Loss
on disposition of
assets
|
|
|
241 |
|
|
|
519 |
|
Deferred
income tax
benefit
|
|
|
(22,949 |
) |
|
|
(14,290 |
) |
Net
decrease (increase) in:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
1,184 |
|
|
|
(2,165 |
) |
Auto
loan receivables held for sale, net
|
|
|
(12,791 |
) |
|
|
(5,025 |
) |
Retained
interest in securitized receivables
|
|
|
(85,038 |
) |
|
|
2,148 |
|
Inventory
|
|
|
(77,928 |
) |
|
|
41,820 |
|
Prepaid
expenses and other current assets
|
|
|
1,804 |
|
|
|
(4,122 |
) |
Other
assets
|
|
|
(471 |
) |
|
|
350 |
|
Net
increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts
payable, accrued expenses and other current liabilities and accrued income
taxes
|
|
|
71,426 |
|
|
|
328 |
|
Deferred
revenue and other liabilities
|
|
|
(11,168 |
) |
|
|
7,066 |
|
Net
cash (used in) provided by operating activities
|
|
|
(79,417 |
) |
|
|
79,356 |
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(5,662 |
) |
|
|
(75,732 |
) |
Proceeds
from sales of
assets
|
|
|
50 |
|
|
|
225 |
|
Sales
(purchases) of money market
securities
|
|
|
185 |
|
|
|
(863 |
) |
Net
cash used in investing
activities
|
|
|
(5,427 |
) |
|
|
(76,370 |
) |
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Increase
(decrease) in short-term debt,
net
|
|
|
317 |
|
|
|
(12,614 |
) |
Issuances
of long-term
debt
|
|
|
256,000 |
|
|
|
193,200 |
|
Payments
on long-term
debt
|
|
|
(175,792 |
) |
|
|
(193,009 |
) |
Equity
issuances,
net
|
|
|
(2,737 |
) |
|
|
8,229 |
|
Excess
tax benefits from share-based payment arrangements
|
|
|
39 |
|
|
|
134 |
|
Net
cash provided by (used in) financing activities
|
|
|
77,827 |
|
|
|
(4,060 |
) |
|
|
|
|
|
|
|
|
|
Decrease
in cash and cash
equivalents
|
|
|
(7,017 |
) |
|
|
(1,074 |
) |
Cash
and cash equivalents at beginning of
year
|
|
|
140,597 |
|
|
|
12,965 |
|
Cash
and cash equivalents at end of
period
|
|
$ |
133,580 |
|
|
$ |
11,891 |
|
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. At select locations we also sell new vehicles under various
franchise agreements. We provide customers with a full range of
related products and services, including the financing of vehicle purchases
through our own finance operation, CarMax Auto Finance (“CAF”), and third-party
lenders; the sale of extended service plans and accessories; the appraisal and
purchase of vehicles directly from consumers; and vehicle repair
service. Vehicles purchased through the appraisal process that do not
meet our retail standards are sold to licensed dealers through on-site wholesale
auctions.
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 may not total due to
rounding.
These
consolidated financial statements have been prepared in conformity with U.S.
generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information
and footnotes required by U.S. generally accepted accounting principles for
complete financial statements. In the opinion of management, such
interim consolidated financial statements reflect all normal recurring
adjustments considered necessary to present fairly the financial position and
the results of operations and cash flows for the interim periods
presented. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full fiscal
year. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and footnotes
included in our Annual Report on Form 10-K for the fiscal year ended
February 28, 2009.
Cash and Cash
Equivalents. Cash equivalents of $62.9 million as of May 31,
2009, and $128.3 million as of February 28, 2009, consisted of highly
liquid investments with original maturities of three months or
less.
3.
|
CarMax Auto Finance
(Loss) Income
|
|
|
Three
Months Ended May 31
|
|
(In
millions)
|
|
2009
|
|
|
%
|
|
|
2008
|
|
|
%
|
|
Gain
on sales of loans originated and sold (1)
|
|
$ |
3.1 |
|
|
|
0.7 |
|
|
$ |
17.1 |
|
|
|
2.7 |
|
Other
losses (1)
|
|
|
(40.4 |
) |
|
|
(8.8 |
) |
|
|
(20.0 |
) |
|
|
(3.2 |
) |
Total
loss (1)
|
|
$ |
(37.3 |
) |
|
|
(8.1 |
) |
|
$ |
(2.9 |
) |
|
|
(0.5 |
) |
Other
CAF income: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing
fee
income
|
|
|
10.4 |
|
|
|
1.0 |
|
|
|
10.2 |
|
|
|
1.0 |
|
Interest
income
|
|
|
16.4 |
|
|
|
1.6 |
|
|
|
11.1 |
|
|
|
1.1 |
|
Total
other CAF
income
|
|
|
26.8 |
|
|
|
2.7 |
|
|
|
21.3 |
|
|
|
2.2 |
|
Direct
CAF expenses: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAF
payroll and fringe benefit expense
|
|
|
5.1 |
|
|
|
0.5 |
|
|
|
4.4 |
|
|
|
0.5 |
|
Other
direct CAF
expenses
|
|
|
6.0 |
|
|
|
0.6 |
|
|
|
4.2 |
|
|
|
0.4 |
|
Total
direct CAF
expenses
|
|
|
11.1 |
|
|
|
1.1 |
|
|
|
8.6 |
|
|
|
0.9 |
|
CarMax
Auto Finance (loss) income (3)
|
|
$ |
(21.6 |
) |
|
|
(1.2 |
) |
|
$ |
9.8 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
sold
|
|
$ |
460.5 |
|
|
|
|
|
|
$ |
626.5 |
|
|
|
|
|
Average
managed
receivables
|
|
$ |
4,024.6 |
|
|
|
|
|
|
$ |
3,940.9 |
|
|
|
|
|
Ending
managed
receivables
|
|
$ |
4,040.9 |
|
|
|
|
|
|
$ |
3,977.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net sales and operating revenues
|
|
$ |
1,834.3 |
|
|
|
|
|
|
$ |
2,208.8 |
|
|
|
|
|
Percent
columns indicate:
(1)
Percent of loans sold.
(2)
Annualized percent of average managed receivables.
(3)
Percent of total net sales and operating revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAF
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 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
could include the effects of new term securitizations, changes in the valuation
of retained subordinated bonds and the repurchase and resale of receivables in
existing term securitizations, as applicable.
CAF
income does not include any allocation of indirect costs or
income. We present this information on a direct basis to avoid making
arbitrary decisions regarding the indirect benefits or costs that could be
attributed to CAF. Examples of indirect costs not included are retail
store expenses and corporate expenses such as human resources, administrative
services, marketing, information systems, accounting, legal, treasury and
executive payroll.
We
maintain a revolving securitization program (“warehouse facility”) that
currently provides financing of up to $1.4 billion to fund substantially all of
the auto loan receivables originated by CAF until they can be funded through a
term securitization or alternative funding arrangement. We sell the
auto loan receivables to a wholly owned, bankruptcy-remote, special purpose
entity that transfers an undivided interest in the receivables to entities
formed by third-party investors (“bank conduits”). The
bank
conduits
issue asset-backed commercial paper supported by the transferred receivables,
and the proceeds from the sale of the commercial paper are used to pay for the
securitized receivables. The return requirements of investors in the
bank conduits could fluctuate significantly depending on market
conditions. The warehouse facility has a 364-day term. At
renewal, the cost, structure and capacity of the facility could
change. These changes could have a significant impact on our funding
costs.
The bank
conduits may be considered variable interest entities, but are not consolidated
because we are not the primary beneficiary and our interest does not constitute
a variable interest in the entities. We hold a variable interest in
specified assets transferred to the entities rather than interests in the
entities themselves.
Historically,
we have used term securitizations to refinance the receivables previously
securitized through the warehouse facility. The purpose of term
securitizations is to provide permanent funding for these
receivables. In these transactions, a pool of auto loan receivables
is sold to a bankruptcy-remote, special purpose entity that, in turn, transfers
the receivables to a special purpose securitization trust. The
securitization trust issues asset-backed securities, secured or otherwise
supported by the transferred receivables, and the proceeds from the sale of the
securities are used to pay for the securitized
receivables. Refinancing receivables in a term securitization could
have a significant impact on our results of operations depending on the
transaction structure and market conditions.
The
warehouse facility and each term securitization are governed by various legal
documents that limit and specify the activities of the special purpose entities
and securitization trusts (collectively, “securitization vehicles”) used to
facilitate the securitizations. The securitization vehicles are
generally allowed to acquire the receivables being sold to them, issue
asset-backed securities to investors to fund the acquisition of the receivables
and enter into derivatives or other yield maintenance contracts to hedge or
mitigate certain risks related to the pool of receivables or asset-backed
securities. Additionally, the securitization vehicles are required to service
the receivables they hold and the securities they have issued. These servicing
functions are performed by CarMax as appointed within the underlying legal
documents. Servicing functions include, but are not limited to, collecting
payments from borrowers, monitoring delinquencies, liquidating assets, investing
funds until distribution, remitting payments to the trustee who in turn remits
payments to the investors, and accounting for and reporting information to
investors.
ENDING
MANAGED RECEIVABLES
|
|
As
of May 31
|
|
|
As
of February 28 or 29
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Warehouse
facility
|
|
$ |
636.0 |
|
|
$ |
642.0 |
|
|
$ |
1,215.0 |
|
|
$ |
854.5 |
|
Term
securitizations
|
|
|
3,255.4 |
|
|
|
3,251.8 |
|
|
|
2,616.9 |
|
|
|
2,910.0 |
|
Loans
held for
investment
|
|
|
127.0 |
|
|
|
74.1 |
|
|
|
145.1 |
|
|
|
69.0 |
|
Loans
held for
sale
|
|
|
22.5 |
|
|
|
10.0 |
|
|
|
9.7 |
|
|
|
5.0 |
|
Total
ending managed
receivables
|
|
$ |
4,040.9 |
|
|
$ |
3,977.9 |
|
|
$ |
3,986.7 |
|
|
$ |
3,838.5 |
|
The
special purpose entities and investors have no recourse to our
assets. Our risk under these arrangements is limited to the retained
interest. We have not provided financial or other support to the
special purpose entities or investors that was not previously contractually
required. There are no additional arrangements, guarantees or other
commitments that could require us to provide financial support or that would
affect the fair value of our retained interest. All transfers of receivables are
accounted for as sales. When the receivables are securitized, we
recognize a gain or loss on the sale of the receivables as described in Note
3.
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 May 31, 2009, on a combined basis, the reserve accounts and required excess
receivables were 4.3% of managed receivables. The
interest-only
strip
receivables, reserve accounts and required excess receivables serve as a credit
enhancement for the benefit of the investors in the securitized
receivables.
The fair
value of the retained interest was $433.3 million as of May 31, 2009, and $348.3
million as of February 28, 2009. Additional information on fair value
measurements is included in Note 6. The receivables underlying the
retained interest had a weighted average life of 1.6 years as of May 31, 2009,
and 1.5 years as of February 28, 2009. The weighted average life in
periods (for example, months or years) of prepayable assets is calculated by
multiplying the principal collections expected in each future period by the
number of periods until that future period, summing those products and dividing
the sum by the initial principal balance.
Interest-only strip
receivables. Interest-only
strip receivables represent the present value of residual cash flows we expect
to receive over the life of the securitized receivables. The value of
these receivables is determined by estimating the future cash flows using our
assumptions of key factors, such as finance charge income, loss rates,
prepayment rates, funding costs and discount rates appropriate for the type of
asset and risk. The value of interest-only strip receivables could be
affected by external factors, such as changes in the behavior patterns of
customers, changes in the strength of the economy and developments in the
interest rate and credit markets; therefore, actual performance could differ
from these assumptions. We evaluate the performance of the
receivables relative to these assumptions on a regular basis. Any
financial impact resulting from a change in performance is recognized in
earnings in the period in which it occurs.
Reserve
accounts. We are required to fund various reserve accounts
established for the benefit of the securitization investors. In the
event that the cash generated by the securitized receivables in a given period
was insufficient to pay the interest, principal and other required payments, the
balances on deposit in the reserve accounts would be used to pay those
amounts. In general, each of our 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
us. In the term securitizations, the amount required to be on deposit
in the reserve account must equal or exceed a specified floor
amount. The reserve account remains funded until the investors are
paid in full, at which time the remaining balance is released through the
special purpose entity to us. The amount on deposit in reserve
accounts was $49.3 million as of May 31, 2009, and $41.4 million as of
February 28, 2009.
Required excess
receivables. The total value of the securitized receivables
must exceed the principal amount owed to the investors by a specified
amount. The required excess receivables balance represents this
specified amount. Any cash flows generated by the required excess
receivables are used, if needed, to make payments to the
investors. Any remaining cash flows from the required excess
receivables are released through the special purpose entity to
us. The unpaid principal balance related to the required excess
receivables was $122.8 million as of May 31, 2009, and $139.1 million as of
February 28, 2009.
Retained subordinated
bonds. Beginning
in January 2008, we have retained subordinated bonds issued by securitization
trusts. We receive periodic interest payments on certain
bonds. The bonds are carried at fair value and changes in fair value
are included in earnings as a component of CAF income. We base our
valuation on observable market prices of the same or similar instruments when
available; however, observable market prices are not 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 fair value of retained subordinated bonds was
$188.2 million as of May 31, 2009, and $87.4 million as of February 28,
2009.
Key Assumptions Used in Measuring the
Fair Value of the Retained Interest and Sensitivity
Analysis. The following table shows the key economic
assumptions used in measuring the fair value of the retained interest as of May
31, 2009, and a sensitivity analysis showing the hypothetical effect on the
retained interest if there were unfavorable variations from the assumptions
used. These sensitivity analyses are hypothetical and should be used
with caution. In this table, the effect of a variation in a
particular assumption on the fair value of the retained interest is calculated
without changing any other assumption; in actual circumstances, changes in one
factor could result in changes in another, which might magnify or counteract the
sensitivities.
KEY
ASSUMPTIONS
(In
millions)
|
|
Assumptions
Used
|
|
|
Impact
on Fair
Value
of 10%
Adverse
Change
|
|
|
Impact
on Fair
Value
of 20%
Adverse
Change
|
|
Prepayment
rate
|
|
|
1.25%
- 1.40 |
% |
|
$ |
7.1 |
|
|
$ |
14.5 |
|
Cumulative
net loss rate
|
|
|
1.65%
- 4.00 |
% |
|
$ |
11.5 |
|
|
$ |
22.9 |
|
Annual
discount
rate
|
|
|
19.00 |
% |
|
$ |
7.3 |
|
|
$ |
14.3 |
|
Warehouse
facility costs (1)
|
|
|
3.40 |
% |
|
$ |
3.5 |
|
|
$ |
7.1 |
|
(1)Expressed
as a spread above appropriate benchmark rates. Applies only to
retained interest in receivables securitized through the warehouse
facility.
As
of May 31, 2009, there were receivables of $636.0 million funded in the
warehouse facility.
|
|
Prepayment
rate. We use the Absolute Prepayment Model or “ABS” to
estimate prepayments. This model assumes a rate of prepayment each
month relative to the original number of receivables in a pool of
receivables. ABS further assumes that all the receivables are the
same size and amortize at the same rate and that each receivable in each month
of its life will either be paid as scheduled or prepaid in full. For
example, in a pool of receivables originally containing 10,000 receivables, a 1%
ABS rate means that 100 receivables prepay each month.
Cumulative net loss
rate. The cumulative net loss rate, or “static pool” net
losses, is calculated by dividing the total projected credit losses of a pool of
receivables, net of recoveries, by the original pool
balance. Projected net credit losses are estimated using the losses
experienced to date, the credit quality of the receivables, economic factors and
the performance history of similar receivables.
Annual discount
rate. The 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 applicable benchmark rates.
Continuing Involvement with
Securitized Receivables. We continue to manage the auto loan
receivables that we securitize. We receive servicing fees of
approximately 1% of the outstanding principal balance of the securitized
receivables. We believe that the servicing fees specified in the
securitization agreements adequately compensate us for servicing the securitized
receivables. No servicing asset or liability has been
recorded. We are at risk for the retained interest in the securitized
receivables and, if the securitized receivables do not perform as originally
projected, the value of the retained interest would be impacted.
PAST
DUE ACCOUNT INFORMATION
|
|
As
of May 31
|
|
|
As
of February 28 or 29
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Accounts
31+ days past
due
|
|
$ |
125.6 |
|
|
$ |
95.8 |
|
|
$ |
118.1 |
|
|
$ |
86.1 |
|
Ending
managed
receivables
|
|
$ |
4,040.9 |
|
|
$ |
3,977.9 |
|
|
$ |
3,986.7 |
|
|
$ |
3,838.5 |
|
Past
due accounts as a percentage of ending managed receivables
|
|
|
3.11 |
% |
|
|
2.41 |
% |
|
|
2.96 |
% |
|
|
2.24 |
% |
CREDIT
LOSS INFORMATION
|
|
Three
Months Ended May 31
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
Net
credit losses on managed
receivables
|
|
$ |
12.7 |
|
|
$ |
10.3 |
|
Average
managed
receivables
|
|
$ |
4,024.6 |
|
|
$ |
3,940.9 |
|
Annualized
net credit losses as a percentage of average managed
receivables
|
|
|
1.26 |
% |
|
|
1.04 |
% |
Average
recovery
rate
|
|
|
48.5 |
% |
|
|
46.9 |
% |
SELECTED
CASH FLOWS FROM SECURITIZED RECEIVABLES
|
|
Three
Months Ended May 31
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
Proceeds
from new
securitizations
|
|
$ |
401.0 |
|
|
$ |
530.0 |
|
Proceeds
from collections
|
|
$ |
202.9 |
|
|
$ |
276.6 |
|
Servicing
fees
received
|
|
$ |
10.2 |
|
|
$ |
10.0 |
|
Other
cash flows received from the retained interest:
|
|
|
|
|
|
|
|
|
Interest-only
strip
receivables
|
|
$ |
35.9 |
|
|
$ |
31.2 |
|
Reserve
account
releases
|
|
$ |
3.0 |
|
|
$ |
0.2 |
|
Interest
on retained subordinated
bonds
|
|
$ |
2.4 |
|
|
$ |
0.9 |
|
Proceeds from new
securitizations. Proceeds from new securitizations include
proceeds from receivables that are newly securitized in or refinanced through
the warehouse facility during the indicated period. There were no
balances previously outstanding in term securitizations that were refinanced
through the warehouse facility in the first quarter of fiscal 2010 or fiscal
2009. Proceeds received when we refinance receivables from the
warehouse facility are excluded from this table as they are not considered new
securitizations.
Proceeds from
collections. Proceeds from collections represent principal
amounts collected on receivables securitized through the warehouse facility that
are used to fund new originations.
Servicing fees
received. Servicing fees received represent cash
fees paid to us to service the securitized receivables.
Other cash flows received
from the retained interest. Other cash flows received from the
retained interest represents cash that we receive from the securitized
receivables other than servicing fees. It includes cash collected on
interest-only strip receivables, amounts released to us from reserve accounts
and interest on retained subordinated bonds.
Financial Covenants and Performance
Triggers. The securitization agreement related to the
warehouse facility includes various financial covenants and performance
triggers. The financial covenants include a maximum total liabilities
to tangible net worth ratio and a minimum fixed charge coverage
ratio. Performance triggers require that the pool of securitized
receivables in the warehouse facility achieve specified thresholds related to
portfolio yield, loss rate and delinquency rate. If these financial
covenants and/or thresholds are not met, we could be unable to continue to
securitize receivables through the warehouse facility. In addition,
the warehouse facility investors would charge us a higher rate of interest and
could have us replaced as servicer. Further, we could be required to
deposit collections on the securitized receivables with the warehouse agent on a
daily basis, deliver executed lockbox agreements to the warehouse facility agent
and obtain a replacement counterparty for the interest rate cap agreement
related to the warehouse facility. As of May 31, 2009, 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 certain 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. Swaps
related to receivables funded in the warehouse facility are unwound when those
receivables are refinanced in a term securitization. During the first
quarter of fiscal 2010, we entered into 20 interest rate swaps with initial
notional amounts totaling $493.2 million and terms of 41 months. The
notional amounts of outstanding swaps totaled $789.8 million as of May 31, 2009,
and $1.36 billion as of February 28, 2009.
FAIR
VALUE OF DERIVATIVE INSTRUMENTS (1)
|
|
|
As
of May 31
|
|
|
As
of February 28 or 29
|
|
(In
thousands)
|
Consolidated
Balance Sheets
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Asset
derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
Retained
interest in securitized receivables
|
|
$ |
55 |
|
|
$ |
2 |
|
|
$ |
33 |
|
|
$ |
— |
|
Interest
rate swaps
|
Accounts
payable
|
|
|
85 |
|
|
|
— |
|
|
|
52 |
|
|
|
— |
|
Interest
rate swaps
|
Other
assets
|
|
|
— |
|
|
|
5,620 |
|
|
|
— |
|
|
|
— |
|
Liability
derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
Accounts
payable
|
|
|
(7,952 |
) |
|
|
— |
|
|
|
(30,590 |
) |
|
|
(15,130 |
) |
Total
|
|
$ |
(7,812 |
) |
|
$ |
5,622 |
|
|
$ |
(30,505 |
) |
|
$ |
(15,130 |
) |
CHANGES
IN FAIR VALUE OF DERIVATIVE INSTRUMENTS (1)
|
|
|
Three
Months Ended May 31
|
|
(In
thousands)
|
Consolidated
Statements of Earnings
|
|
2009
|
|
|
2008
|
|
(Loss)
gain on interest rate swaps
|
CarMax
Auto Finance (loss)
income
|
|
$ |
(3,137 |
) |
|
$ |
14,124 |
|
|
(1)
|
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
|
Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants in
the principal market or, if none exists, the most advantageous market, for the
specific asset or liability at the measurement date (referred to as the “exit
price”). The fair value should be based on assumptions that market
participants would use, including a consideration of nonperformance
risk.
We assess
the inputs used to measure fair value using the three-tier hierarchy 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 May 31, 2009
|
|
(In
millions)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market securities
|
|
$ |
91.2 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
91.2 |
|
Retained
interest in securitized
receivables
|
|
|
– |
|
|
|
– |
|
|
|
433.3 |
|
|
|
433.3 |
|
Total
assets at fair value
|
|
$ |
91.2 |
|
|
$ |
– |
|
|
$ |
433.3 |
|
|
$ |
524.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of total assets at fair value
|
|
|
17.4 |
% |
|
|
– |
% |
|
|
82.6 |
% |
|
|
100.0 |
% |
Percent
of total assets
|
|
|
3.6 |
% |
|
|
– |
% |
|
|
17.0 |
% |
|
|
20.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
derivatives
|
|
$ |
– |
|
|
$ |
7.9 |
|
|
$ |
– |
|
|
$ |
7.9 |
|
Total
liabilities at fair value
|
|
$ |
– |
|
|
$ |
7.9 |
|
|
$ |
– |
|
|
$ |
7.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of total liabilities
|
|
|
– |
% |
|
|
0.9 |
% |
|
|
– |
% |
|
|
0.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGES
IN THE LEVEL 3 ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS
(In
millions)
|
|
Retained
interest in securitized receivables
|
|
Balance
as of February 28,
2009
|
|
$ |
348.3 |
|
Total
realized/unrealized gains (1)
|
|
|
11.7 |
|
Purchases,
sales, issuances and settlements,
net
|
|
|
73.3 |
|
Balance
as of May 31,
2009
|
|
$ |
433.3 |
|
|
|
|
|
|
Change
in unrealized gains on assets still held (1)
|
|
$ |
9.6 |
|
(1)Reported
in CarMax Auto Finance (loss) income on the consolidated statements of
earnings.
|
|
We had
$25.9 million of gross unrecognized tax benefits as of May 31, 2009, and $25.6
million as of February 28, 2009. For the three-month period
ended May 31, 2009, there were no significant changes to the unrecognized tax
benefits as reported for the year ended February 28, 2009, as all activity was
related to positions taken on tax returns filed or intended to be filed in the
current fiscal year.
Effective
December 31, 2008, we froze both our noncontributory defined benefit pension
plan (the “pension plan”) and our unfunded nonqualified plan (the “restoration
plan”). No additional benefits accrue after that date for either
plan. The pension plan covers the majority of full-time
employees. The restoration plan restores retirement benefits for
certain senior executives who are affected by Internal Revenue Code limitations
on benefits provided under the pension plan. We use a fiscal year end
measurement date for both the pension plan and the restoration
plan.
COMPONENTS
OF NET PENSION EXPENSE
|
|
Three
Months Ended May 31
|
|
|
|
Pension
Plan
|
|
|
Restoration
Plan
|
|
|
Total
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Service
cost
|
|
$ |
– |
|
|
$ |
3,653 |
|
|
$ |
– |
|
|
$ |
214 |
|
|
$ |
– |
|
|
$ |
3,867 |
|
Interest
cost
|
|
|
1,432 |
|
|
|
1,766 |
|
|
|
151 |
|
|
|
208 |
|
|
|
1,583 |
|
|
|
1,974 |
|
Expected
return on plan assets
|
|
|
(1,380 |
) |
|
|
(1,175 |
) |
|
|
– |
|
|
|
– |
|
|
|
(1,380 |
) |
|
|
(1,175 |
) |
Amortization
of prior service cost
|
|
|
– |
|
|
|
9 |
|
|
|
– |
|
|
|
30 |
|
|
|
– |
|
|
|
39 |
|
Recognized
actuarial loss
|
|
|
– |
|
|
|
129 |
|
|
|
– |
|
|
|
99 |
|
|
|
– |
|
|
|
228 |
|
Net
pension expense
|
|
$ |
52 |
|
|
$ |
4,382 |
|
|
$ |
151 |
|
|
$ |
551 |
|
|
$ |
203 |
|
|
$ |
4,933 |
|
We made
contributions to the pension plan totaling $11.9 million during the first
three months of fiscal 2010. We anticipate contributing up to
$20.0 million to the pension plan in fiscal 2010.
Our $700
million revolving credit facility (the “credit facility”) expires in December
2011 and is secured by vehicle inventory. Borrowings under this
credit facility are limited to 80% of qualifying inventory, and they are
available for working capital and general corporate purposes. As of
May 31, 2009, $389.1 million was outstanding under the credit facility and
$187.7 million of the remaining borrowing limit was available to
us. The outstanding balance included $1.2 million classified as
short-term debt, $237.9 million classified as current portion of long-term debt
and $150.0 million classified as long-term debt. We classified
$237.9 million as current portion of long-term debt based on our expectation
that this balance will not remain outstanding for more than one
year.
Obligations
under capital leases as of May 31, 2009, consisted of $0.6 million classified as
current portion of long-term debt and $27.9 million classified as long-term
debt.
10.
|
Share-Based
Compensation
|
We
maintain long-term incentive plans for management, key employees and the
nonemployee members of our board of directors. The plans allow for
the grant of equity-based compensation awards, including nonqualified stock
options, incentive stock options, stock appreciation rights, restricted stock
awards, stock- and cash-settled restricted stock units, stock grants or a
combination of awards. To date, we have awarded no incentive stock
options.
Stock
options are awards that allow the recipient to purchase shares of our stock at a
fixed price. Stock options are granted at an exercise price equal to
the fair market value of our stock on the grant date. Substantially
all of the stock options vest annually in equal amounts over periods of three to
four years. These options expire no later than ten years after the
date of the grant. Restricted stock awards and restricted stock units
are subject to specified restrictions and a risk of forfeiture. The
restrictions typically lapse three years from the grant date.
COMPOSITION
OF SHARE-BASED COMPENSATION EXPENSE
|
|
Three
Months Ended May 31
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
Cost
of
sales
|
|
$ |
407 |
|
|
$ |
475 |
|
CarMax
Auto Finance (loss)
income
|
|
|
283 |
|
|
|
158 |
|
Selling,
general and administrative expenses
|
|
|
12,055 |
|
|
|
9,288 |
|
Share-based
compensation expense, before income taxes
|
|
$ |
12,745 |
|
|
$ |
9,921 |
|
We
recognize compensation expense for stock options, restricted stock and
stock-settled restricted stock units on a straight-line basis (net of estimated
forfeitures) over the requisite service period, which is generally the vesting
period of the award. Our employee stock purchase plan is considered a
liability-
classified
compensatory plan; the associated costs of $0.3 million in the first quarter of
fiscal 2010 and fiscal 2009 are included in share-based compensation
expense. Cash-settled restricted stock units granted in April 2009
are also classified as liability awards and the associated costs of $0.9 million
in the first three months of fiscal 2010 are included in share-based
compensation expense. There were no capitalized share-based
compensation costs as of May 31, 2009 and 2008.
STOCK
OPTION ACTIVITY
(Shares
and intrinsic value in thousands)
|
|
Number
of Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
as of March 1, 2009
|
|
|
14,844 |
|
|
$ |
15.40 |
|
|
|
|
|
|
|
Options
granted
|
|
|
2,864 |
|
|
$ |
11.43 |
|
|
|
|
|
|
|
Options
exercised
|
|
|
(153 |
) |
|
$ |
7.23 |
|
|
|
|
|
|
|
Options
forfeited or expired
|
|
|
(933 |
) |
|
$ |
13.48 |
|
|
|
|
|
|
|
Outstanding
as of May 31, 2009
|
|
|
16,622 |
|
|
$ |
14.90 |
|
|
|
5.3 |
|
|
$ |
8,189 |
|
Exercisable
as of May 31, 2009
|
|
|
9,747 |
|
|
$ |
14.25 |
|
|
|
4.8 |
|
|
$ |
8,189 |
|
For the
three months ended May 31, 2009 and 2008, we granted nonqualified options to
purchase 2,864,440 and 2,102,326 shares of common stock,
respectively. The total cash received as a result of stock option
exercises was $1.1 million in the first three months of fiscal 2010 and $8.2
million in the first three months of fiscal 2009. We settle stock
option exercises with authorized but unissued shares of CarMax common
stock. The total intrinsic value of options exercised was $0.7
million for the first three months of fiscal 2010 and $4.9 million for the first
three months of fiscal 2009. We realized related tax benefits of
$0.3 million in the first three months of fiscal 2010 and $1.9 million in the
first three months of fiscal 2009.
OUTSTANDING
STOCK OPTIONS
As
of May 31, 2009
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
(Shares
in thousands)
Range
of Exercise Prices
|
|
|
Number
of Shares
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
Weighted
Average Exercise Price
|
|
|
Number
of Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7.02
to $ 9.30 |
|
|
|
2,014 |
|
|
|
3.8 |
|
|
$ |
7.16 |
|
|
|
2,014 |
|
|
$ |
7.16 |
|
$ |
10.74
to $11.59 |
|
|
|
2,913 |
|
|
|
6.8 |
|
|
$ |
11.42 |
|
|
|
57 |
|
|
$ |
10.76 |
|
$ |
13.19
to $13.19 |
|
|
|
3,225 |
|
|
|
6.0 |
|
|
$ |
13.19 |
|
|
|
2,283 |
|
|
$ |
13.19 |
|
$ |
14.13
to $14.86 |
|
|
|
2,789 |
|
|
|
4.9 |
|
|
$ |
14.70 |
|
|
|
2,689 |
|
|
$ |
14.69 |
|
$ |
15.17
to $17.44 |
|
|
|
1,797 |
|
|
|
3.9 |
|
|
$ |
17.07 |
|
|
|
1,329 |
|
|
$ |
17.09 |
|
$ |
19.36
to $19.82 |
|
|
|
2,197 |
|
|
|
5.8 |
|
|
$ |
19.80 |
|
|
|
551 |
|
|
$ |
19.80 |
|
$ |
22.28
to $25.79 |
|
|
|
1,687 |
|
|
|
4.8 |
|
|
$ |
25.02 |
|
|
|
824 |
|
|
$ |
25.01 |
|
Total
|
|
|
|
16,622 |
|
|
|
5.3 |
|
|
$ |
14.90 |
|
|
|
9,747 |
|
|
$ |
14.25 |
|
For all
stock options granted prior to March 1, 2006, the fair value was estimated as of
the date of grant using a Black-Scholes option-pricing model. For
stock options granted to employees on or after March 1, 2006, the fair value of
each award is estimated as of the date of grant using a binomial valuation
model. In computing the value of the option, the binomial model
considers characteristics of fair-value option pricing that are not available
for consideration under the Black-Scholes model, such as the contractual term of
the option, the probability that the option will be exercised prior to the end
of its contractual life and the probability of termination or retirement of the
option holder. For this reason, we believe that the binomial model
provides a fair value that is more representative of actual experience and
future expected experience than the value calculated using the Black-Scholes
model. For grants to nonemployee directors prior to fiscal 2009, we
used the Black-Scholes model to estimate
the fair
value of stock option awards. Beginning in fiscal 2009, we used the
binomial model. Estimates of fair value are not intended to predict
actual future events or the value ultimately realized by the recipients of
share-based awards.
The
weighted average fair values at the date of grant for options granted during the
three-month periods ended May 31, 2009 and 2008, were $5.26 and $7.25 per share,
respectively. The unrecognized compensation costs related to
nonvested options totaled $28.1 million as of
May 31, 2009. These costs are expected to be recognized
over a weighted average period of 2.5 years.
ASSUMPTIONS
USED TO ESTIMATE OPTION VALUES
|
|
Three
Months Ended May 31
|
|
|
|
2009
|
|
|
2008
|
|
Dividend
yield
|
|
|
0.0 |
% |
|
|
0.0 |
% |
Expected
volatility factor(1)
|
|
|
54.9%
- 71.5 |
% |
|
|
34.8%
- 60.9 |
% |
Weighted
average expected volatility
|
|
|
57.4 |
% |
|
|
44.4 |
% |
Risk-free
interest rate(2)
|
|
|
0.2%
- 2.5 |
% |
|
|
1.5%
- 3.1 |
% |
Expected
term (in years)(3)
|
|
|
5.3
– 5.5 |
|
|
|
4.8
- 5.2 |
|
(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, 2009
|
|
|
2,633 |
|
|
$ |
20.55 |
|
Restricted
stock vested
|
|
|
(812 |
) |
|
$ |
17.21 |
|
Restricted
stock cancelled
|
|
|
(35 |
) |
|
$ |
20.82 |
|
Outstanding
as of May 31, 2009
|
|
|
1,786 |
|
|
$ |
22.07 |
|
For the
three months ended May 31, 2009, no shares of restricted stock were
granted. The fair value of a restricted stock award is determined and
fixed based on the fair market value of our stock on the grant
date. We realized related tax benefits of $3.9 million from the
vesting of restricted stock in the first three months of fiscal 2010. The
unrecognized compensation costs related to nonvested restricted stock awards
totaled $15.5 million as of May 31, 2009. These costs are expected to
be recognized over a weighted average period of 1.4 years.
Stock-Settled Restricted Stock
Units. In April 2009, we granted stock-settled restricted
stock units, which we refer to as market stock units, or MSUs, to eligible key
employees. At the end of the three-year vesting period, each MSU will
be converted into between zero and two shares of CarMax common
stock. The share conversion is dependent on the performance of the
company’s common stock during the last 40 trading days prior to the vesting
date. The expense associated with outstanding MSUs is recorded over
their life. The fixed fair value per share was determined to be
$16.34 at the grant date using a Monte-Carlo simulation and was based on the
expected market price on the vesting date and the expected number of converted
common shares. The compensation expense for the three months ended
May 31, 2009, was $1.1 million. The unrecognized compensation costs
related to these nonvested MSUs totaled $5.1 million as of May 31,
2009. These costs are expected to be recognized over a weighted
average period of 2.8 years.
STOCK-SETTLED
RESTRICTED STOCK UNIT ACTIVITY
(In
thousands)
|
|
Number
of Shares
|
|
|
Weighted
Average Grant Date Fair Value
|
|
Outstanding
as of March 1, 2009
|
|
|
- |
|
|
$ |
- |
|
Stock
units granted
|
|
|
406 |
|
|
$ |
16.34 |
|
Stock
units cancelled
|
|
|
(3 |
) |
|
$ |
16.34 |
|
Outstanding
as of May 31, 2009
|
|
|
403 |
|
|
$ |
16.34 |
|
Cash-Settled Restricted Stock
Units. Additionally in April 2009, we granted cash-settled
restricted stock units to other eligible employees. These restricted
stock units, or RSUs, are classified as liability awards. At the end
of the three-year vesting period, each RSU will entitle its holder to a cash
payment equal to the fair market value of CarMax common stock on the vesting
date. However, the cash payment will be no greater than 200%, or less
than 75%, of the fair market value of CarMax common stock on the RSUs grant
date. The variable expense associated with these outstanding RSUs is
recorded over their life and is calculated based on the company’s closing stock
price at the end of each reporting period. The compensation expense for the
first three months of fiscal year 2010 was $0.9 million. As of
May 31, 2009, we expect the total cash settlement upon vesting to
range between $7.2 million to $19.1 million.
11.
|
Net Earnings per
Share
|
In June
2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) No. EITF 03-6-1, “Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities” (“FSP EITF
03-6-1”), which became effective March 1, 2009, with retrospective application.
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.” Nonvested 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. Nonvested MSUs and RSUs
granted after February 28, 2009, do not receive nonforfeitable dividend
equivalent rights and are therefore not considered participating
securities. The impact of adopting FSP EITF 03-6-1 decreased
previously reported basic earnings per share by $0.01 for the three months ended
May 31, 2008.
BASIC
AND DILUTIVE NET EARNINGS PER SHARE RECONCILIATIONS
|
|
Three
Months Ended May
31
|
|
(In thousands except per share
data)
|
|
2009
|
|
|
2008
|
|
Net
earnings
|
|
$ |
28,748 |
|
|
$ |
29,558 |
|
Less: net
earnings allocable to restricted stock holders
|
|
|
(304 |
) |
|
|
(312 |
) |
Net
earnings applicable to common shareholders
|
|
$ |
28,444 |
|
|
$ |
29,246 |
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
218,004 |
|
|
|
217,094 |
|
Dilutive
potential common shares:
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
835 |
|
|
|
3,390 |
|
Stock-settled
restricted stock units
|
|
|
1 |
|
|
|
- |
|
Weighted
average common shares and dilutive potential common shares
|
|
|
218,840 |
|
|
|
220,484 |
|
Basic
net earnings per share
|
|
$ |
0.13 |
|
|
$ |
0.13 |
|
Diluted
net earnings per share
|
|
$ |
0.13 |
|
|
$ |
0.13 |
|
|
|
Weighted-average
options to purchase 13,439,076 shares of common stock were outstanding and not
included in the calculation of diluted net earnings per share for the quarter
ended May 31, 2009, because their inclusion would be
antidilutive. Weighted-average options to purchase 3,134,935 shares
of common stock were outstanding and not included in the calculation for the
quarter ended May 31, 2008.
12.
|
Accumulated Other
Comprehensive Loss
|
Accumulated
other comprehensive loss relates entirely to unrecognized actuarial losses on
our retirement plans. The total accumulated other comprehensive loss
is $16.9 million as of May 31, 2009, and as of February 28,
2009. The cumulative balance is net of deferred tax of $9.9 million
as of May 31, 2009, and as of February 28, 2009.
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 involved: (1) failure
to provide meal and rest breaks or compensation in lieu thereof; (2) failure to
pay wages of terminated or resigned employees related to meal and rest breaks
and overtime; (3) failure to pay overtime; (4) failure to comply with itemized
employee wage statement provisions; and (5) unfair competition. The
putative class consisted of sales consultants, sales managers, and other hourly
employees who worked for the company in California from April 2, 2004,
to the present. On May 12, 2009, the court dismissed all of
the class claims with respect to the sales manager putative class. On
June 16, 2009, the court dismissed all claims related to the failure to comply
with the itemized employee wage statement provisions. The court also
granted CarMax's motion for summary adjudication with regard to CarMax's alleged
failure to pay overtime to the sales consultant putative class. The
plaintiffs have indicated that they will appeal the court's ruling regarding the
sales consultant overtime claim. In addition to the plaintiffs'
overtime claim, the claims currently remaining in the lawsuit regarding the
sales consultant putative class are: (1) failure to provide meal and rest breaks
or compensation in lieu thereof; (2) failure to pay wages of terminated or
resigned employees related to meal and rest breaks; and (3) unfair
competition. On June 16, 2009, the court entered a stay of
these claims pending the outcome of a California Supreme Court case involving
related legal issues. The lawsuit seeks compensatory and special
damages, wages, interest, civil and statutory penalties, restitution, injunctive
relief and the recovery of attorneys’ fees. We are unable to make a
reasonable estimate of the amount or range of loss that could result from an
unfavorable outcome in these matters.
We are
involved in various other legal proceedings in the normal course of
business. Based upon our evaluation of information currently available, we
believe that the ultimate resolution of any such proceedings will not have a
material adverse effect, either individually or in the aggregate, on our
financial condition or results of operations.
14.
|
Recent Accounting
Pronouncements
|
In
December 2008, the FASB issued FSP No. FAS 132(R)-1, “Employers’ Disclosures
about Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”). FSP
FAS 132(R)-1 requires additional fair value disclosures about employers’ pension
and postretirement benefit plan assets. Specifically, employers will
be required to disclose information about how investment allocation decisions
are made, the fair value of each major category of plan assets and information
about the inputs and valuation techniques used to develop the fair value
measurements of plan assets. This FSP is effective for fiscal years ending after
December 15, 2009. We will include the disclosures required by
FSP FAS
132(R)-1 in our annual consolidated financial statements and notes for the
fiscal year ending February 28, 2010.
In April
2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly” (“FSP FAS
157-4”). FSP FAS 157-4 provides guidance on estimating fair value
when market activity has decreased and on identifying transactions that are not
orderly. Additionally, entities are required to disclose in interim
and annual periods the inputs and valuation techniques used to measure fair
value. This FSP is effective for interim and annual periods ending
after June 15, 2009. As the requirements under this FSP are
consistent with our current practice, we do not believe that the implementation
of this standard will have a significant impact on our consolidated financial
statements.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS
165”). SFAS 165 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before the date
the financial statements are issued or available to be issued. SFAS
165 requires companies to reflect in their financial statements the effects of
subsequent events that provide additional evidence about conditions at the
balance-sheet date. Subsequent events that provide evidence about
conditions that arose after the balance-sheet date should be disclosed if the
financial statements would otherwise be misleading. Disclosures
should include the nature of the event and either an estimate of its financial
effect or a statement that an estimate cannot be made. SFAS 165 is effective for
interim and annual financial periods ending after June 15, 2009, and should be
applied prospectively. As the requirements under SFAS 165 are
consistent with our current practice, we do not believe that the implementation
of this standard will have a significant impact on our consolidated financial
statements.
In
June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of
Financial Assets” (“SFAS 166”). SFAS 166 removes the concept of a
qualifying special-purpose entity (“QSPE”) from SFAS No. 140, “ Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities” (“SFAS 140”) and removes the exception from applying
FASB Interpretation No. 46 (revised December 2003), “Consolidation of
Variable Interest Entities” (“FIN 46R”). This statement also
clarifies the requirements for isolation and limitations on portions of
financial assets that are eligible for sale accounting. This
statement is effective for fiscal years beginning after
November 15, 2009. Accordingly, we will adopt SFAS 166 in
fiscal 2011. We are currently evaluating the impact of adopting this
standard on the consolidated financial statements, but believe the
implementation of this standard will have a significant impact on our
consolidated financial statements.
In
June 2009, the FASB issued SFAS No. 167, “Amendments to FASB
Interpretation No. 46R” (“SFAS 167”). SFAS 167 amends FIN 46R to
require an analysis to determine whether a variable interest gives
a company a controlling financial interest in a variable interest
entity. This statement requires an ongoing reassessment of and
eliminates the quantitative approach previously required for determining whether
a company is the primary beneficiary. This statement is effective for
fiscal years beginning after
November 15, 2009. Accordingly, we will adopt SFAS 167 in
fiscal 2011. We are currently evaluating the impact of adopting this
standard, but believe the implementation of this standard will have a
significant impact on our consolidated financial statements.
In June
2009, the FASB issued SFAS No. 168, “The ‘FASB Accounting Standards
Codification’ and the Hierarchy of Generally Accepted Accounting Principles”
(“SFAS 168”). SFAS 168 establishes the “FASB Accounting Standards
Codification” (“Codification”), which officially launched July 1, 2009, to
become the source of authoritative U.S. generally accepted accounting principles
(“GAAP”) recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritative U.S. GAAP for SEC registrants. The
subsequent issuances of new standards will be in the form of Accounting
Standards Updates that will be included in the
Codification. Generally, the Codification is not expected to change
U.S. GAAP. All other accounting literature
excluded
from the Codification will be considered nonauthoritative. SFAS 168
is effective for financial statements issued for interim and annual periods
ending after September 15, 2009. We will adopt SFAS 168 for our
quarter ending November 30, 2009. We are currently evaluating the
effect on our financial statement disclosures as all future references to
authoritative accounting literature will be references in accordance with the
Codification.
In July
2009, we negotiated a 30-day extension of the warehouse
facility. Note 4 includes additional discussion of the warehouse
facility.
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 28, 2009, as well as our consolidated
financial statements and the accompanying notes included in Item 1 of this Form
10-Q. Note references are to the notes to consolidated financial
statements included in Item 1.
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 may not total due to
rounding.
BUSINESS
OVERVIEW
General
CarMax is
the nation’s largest retailer of used vehicles. We pioneered the used
car superstore concept, opening our first store in 1993. Our strategy
is to better serve the auto retailing market by addressing the major sources of
customer dissatisfaction with traditional auto retailers and to maximize
operating efficiencies through the use of standardized operating procedures and
store formats enhanced by sophisticated, proprietary management information
systems. As of May 31, 2009, we operated 100 used car superstores in
46 markets, comprised of 34 mid-sized markets, 11 large markets and 1 small
market. We define mid-sized markets as those with television viewing
populations generally between 600,000 and 2.5 million people. We also
operated six new car franchises. In fiscal 2009, we sold 345,465 used
cars, representing 97% of the total 356,549 vehicles we sold at
retail.
We
believe the CarMax consumer offer is distinctive within the automobile retailing
marketplace. Our offer provides customers the opportunity to shop for
vehicles the same way they shop for items at other “big box”
retailers. Our consumer offer is structured around our four customer
benefits: low, no-haggle prices; a broad selection; high quality vehicles; and a
customer-friendly sales process. Our website, carmax.com, is a
valuable tool for communicating the CarMax consumer offer, a sophisticated
search engine and an efficient channel for customers who prefer to conduct their
shopping online. We generate revenues, income and cash flows
primarily by retailing used vehicles and associated items including vehicle
financing, extended service plans (“ESPs”) and vehicle repair
service.
We also
generate revenues, income and cash flows from the sale of vehicles purchased
through our appraisal process that do not meet our retail
standards. These vehicles are sold through on-site wholesale
auctions. Wholesale auctions are generally held on a weekly or
bi-weekly basis, and as of May 31, 2009, we conducted auctions at 49
used car superstores. During fiscal 2009, we sold 194,081 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.
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 primarily based on the
vehicle’s selling price. Our ability to quickly adjust appraisal
offers to be consistent with the broader market trade-in trends and our rapid
inventory turns reduce our exposure to the inherent continual fluctuation in
used vehicle values and contribute to our ability to manage gross profit dollars
per unit. We employ a volume-based strategy, and we systematically
mark down individual vehicle prices based on proprietary pricing algorithms in
order to appropriately balance sales trends, inventory turns and gross profit
achievement.
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 store growth as result
of the weak economic and sales environment. In December 2008,
following further deterioration in market conditions we announced a temporary
suspension of store growth. We believe this suspension will reduce
our capital needs and growth-related costs. We expect to resume store growth
when economic and capital market conditions improve and we see a sustained
recovery in traffic and sales trends. We are still at a relatively early stage
in the national rollout of our retail concept, and as of May 31, 2009, we had
used car superstores located in markets that comprised approximately 45% of the
U.S. population.
In the
near term, our principal challenges are related to the recession, which caused a
dramatic decline in industry-wide auto sales, and the disruption of the
asset-backed securitization market, which historically has been used to provide
funding for CAF loan originations.
Fiscal 2010 First Quarter
Highlights
§
|
We
believe the weakness in the economy and the stresses on consumer spending
caused by the recession have continued to adversely affect industry-wide
auto sales in fiscal 2010.
|
§
|
Net
sales and operating revenues decreased 17% to $1.83 billion from $2.21
billion in the first quarter of fiscal 2009, while net earnings decreased
3% to $28.7 million, or $0.13 per share, from $29.6 million, or $0.13 per
share.
|
§
|
Total
used vehicle revenues declined 15% to $1.55 billion from $1.82 billion in
the first quarter of fiscal 2009. Total used vehicle unit sales
decreased 13%, reflecting a 17% decrease in comparable store used unit
sales, partially offset by sales from newer stores not yet included in the
comparable store base. The comparable store sales decline was
primarily the result of reduced customer
traffic.
|
§
|
Total
wholesale vehicle revenues declined 29% to $171.5 million from $242.3
million in the prior year quarter. Wholesale vehicle unit sales
decreased 25%, primarily reflecting the continued depressed levels of
appraisal traffic.
|
§
|
Our
total gross profit declined 2% to $276.2 million from $282.7 million in
the first quarter of fiscal 2009. The effect of the decline in
unit sales was largely offset by an improvement in our total gross profit
dollars per retail unit, which increased $347 per unit to $2,911 from
$2,564 in the corresponding prior year
period.
|
§
|
CAF
reported a loss of $21.6 million compared with income of $9.8 million in
the first quarter of fiscal 2009. Results for both periods were
reduced by adjustments related to loans originated in previous fiscal
periods. These adjustments totaled $40.4 million in the first
quarter of fiscal 2010 and $20.0 million in the prior year
quarter. CAF’s gain on sales of loans originated and sold
declined to $3.1 million compared with $17.1 million in the prior year
quarter, reflecting the higher estimated cost of funding in the warehouse
facility, a decline in loan origination volume and the use of a higher
discount rate assumption.
|
§
|
Selling,
general and administrative (“SG&A”) expenses were reduced to $206.2
million from $243.0 million in the prior year quarter, despite having five
more stores open in fiscal 2010. SG&A as a percent of net
sales and operating revenues (the “SG&A ratio”), increased to 11.2%
from 11.0% in the first quarter of fiscal 2009. In part, the
lower SG&A expense resulted from our reductions in growth-related
costs, advertising and variable selling expenses. In addition,
the current quarter SG&A expenses included the benefit of a favorable
litigation settlement that increased net earnings by $0.02 per share,
while the prior year’s quarter included unrelated accrued litigation costs
that reduced net earnings by $0.02 per
share.
|
§
|
In
the first quarter of fiscal 2010, $79.4 million of cash was used in
operating activities, while in the first quarter of fiscal 2009, $79.4
million of cash was provided by operating activities. The
fiscal 2010 quarter reflected significant cash use for increases in the
retained interest in securitized receivables and inventory, while the
prior year quarter reflected the generation of cash from a reduction in
inventory.
|
CRITICAL
ACCOUNTING POLICIES
For a
discussion of our critical accounting policies, see “Critical Accounting
Policies” in MD&A included in Item 7 of the Annual Report on Form 10-K for
the fiscal year ended February 28, 2009. These policies relate to
securitization transactions, revenue recognition, income taxes and defined
benefit retirement plan obligations.
RESULTS
OF OPERATIONS
NET
SALES AND OPERATING REVENUES
|
|
Three
Months Ended May 31
|
|
(In
millions)
|
|
2009
|
|
|
%
|
|
|
2008
|
|
|
%
|
|
Used
vehicle sales
|
|
$ |
1,549.3 |
|
|
|
84.5 |
|
|
$ |
1,816.8 |
|
|
|
82.3 |
|
New
vehicle sales
|
|
|
48.6 |
|
|
|
2.6 |
|
|
|
82.1 |
|
|
|
3.7 |
|
Wholesale
vehicle sales
|
|
|
171.5 |
|
|
|
9.3 |
|
|
|
242.3 |
|
|
|
11.0 |
|
Other
sales and revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extended
service plan revenues
|
|
|
34.6 |
|
|
|
1.9 |
|
|
|
36.5 |
|
|
|
1.7 |
|
Service
department sales
|
|
|
26.6 |
|
|
|
1.5 |
|
|
|
24.5 |
|
|
|
1.1 |
|
Third-party
finance fees, net
|
|
|
3.8 |
|
|
|
0.2 |
|
|
|
6.5 |
|
|
|
0.3 |
|
Total
other sales and revenues
|
|
|
65.0 |
|
|
|
3.5 |
|
|
|
67.5 |
|
|
|
3.1 |
|
Total
net sales and operating revenues
|
|
$ |
1,834.3 |
|
|
|
100.0 |
|
|
$ |
2,208.8 |
|
|
|
100.0 |
|
RETAIL
VEHICLE SALES CHANGES
|
|
Three
Months Ended May 31
|
|
|
|
2009
|
|
|
2008
|
|
Vehicle
units:
|
|
|
|
|
|
|
Used
vehicles
|
|
|
(13 |
)% |
|
|
10 |
% |
New
vehicles
|
|
|
(42 |
)% |
|
|
(26 |
)% |
Total
|
|
|
(14 |
)% |
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
Vehicle
dollars:
|
|
|
|
|
|
|
|
|
Used
vehicles
|
|
|
(15 |
)% |
|
|
6 |
% |
New
vehicles
|
|
|
(41 |
)% |
|
|
(27 |
)% |
Total
|
|
|
(16 |
)% |
|
|
4 |
% |
Comparable
store used unit sales growth is one of the key drivers of our
profitability. A store is included in comparable store retail sales
in the store’s fourteenth full month of operation.
COMPARABLE
STORE RETAIL VEHICLE SALES CHANGES
|
|
Three
Months Ended May 31
|
|
|
|
2009
|
|
|
2008
|
|
Vehicle
units:
|
|
|
|
|
|
|
Used
vehicles
|
|
|
(17 |
)% |
|
|
1 |
% |
New
vehicles
|
|
|
(42 |
)% |
|
|
(18 |
)% |
Total
|
|
|
(18 |
)% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
Vehicle
dollars:
|
|
|
|
|
|
|
|
|
Used
vehicles
|
|
|
(19 |
)% |
|
|
(3 |
)% |
New
vehicles
|
|
|
(41 |
)% |
|
|
(20 |
)% |
Total
|
|
|
(20 |
)% |
|
|
(4 |
)% |
CHANGE
IN USED CAR SUPERSTORE BASE
|
|
Three
Months Ended May 31
|
|
|
|
2009
|
|
|
2008
|
|
Used
car superstores, beginning of
year
|
|
|
100 |
|
|
|
89 |
|
Superstore
openings
|
|
|
– |
|
|
|
6 |
|
Used
car superstores, end of
period
|
|
|
100 |
|
|
|
95 |
|
Used
Vehicle Sales. Our 15% decrease
in used vehicle revenues in the first quarter of fiscal 2010 resulted from a 13%
decrease in unit sales and a 2% decrease in average retail selling
price. The unit sales decline reflected a 17% decrease in comparable
store used unit sales, partially offset by sales from newer stores not yet
included in the comparable store base. The comparable store sales
decline was primarily the result of reduced customer traffic. The
slower traffic was partly offset, however, by solid in-store execution, which
generated a notable increase in our sales conversion rate compared with the
prior year. The higher conversion rate occurred even as we decided to
continue our strategy, begun in the fall of 2008, to slow the rate of CAF loan
originations. We believe the reduction in the percentage of sales
financed by CAF contributed modestly to the decline in comparable store unit
sales. The decline in the average retail selling price reflected the
combined effects of changes in vehicle acquisition costs and vehicle
mix.
New
Vehicle Sales. The 41% decline
in new vehicle revenues in the first quarter of fiscal 2010 was due to a 42%
decrease in unit sales net of a 2% increase in average retail selling
price. 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 29% decrease in wholesale
vehicle revenues in the first quarter of fiscal 2010 resulted from a 25%
decrease in wholesale unit sales combined with a 6% decline in average wholesale
selling price. The decline in the unit sales primarily reflected a
decrease in our appraisal traffic, partly offset by a slight improvement in our
appraisal buy rate. We believe the recent upward trend in industry
wholesale prices and the resulting increase in our appraisal offers had a
favorable effect on the buy rate. The decline in average wholesale
selling price reflected the trends in the general wholesale market for the types
of vehicles we sell, as well as changes in vehicle mix and the average age,
mileage and condition of the vehicles wholesaled.
Other
Sales and Revenues. Other sales and
revenues include commissions on the sale of ESPs, service department sales and
net third-party finance fees. In the first quarter of fiscal 2010,
other sales and revenues declined 4% from the prior year’s first
quarter. ESP revenues decreased 5%. Compared with the 13%
decrease in total used unit sales in the first quarter, ESP revenues benefited
from a slow down in the rate of ESP cancellations, which we believe was the
result of the decline in auto industry sales and trade-ins. In
addition, fiscal 2010 ESP revenues benefited from modifications in pricing made
during the second half of fiscal 2009. Service department sales
increased 9%, reflecting higher service-related customer
traffic. Third-party finance fees declined 42%, primarily reflecting
a mix shift among providers, as well as the lower retail unit
sales. The fixed fees paid by our third-party finance
providers
vary by
provider, reflecting their differing levels of credit risk
exposure. Providers who purchase the highest risk loans purchase
those loans at a discount, which is reflected as an offset to finance fee
revenues received from the other third-party providers.
Seasonality. Historically, our
business has been seasonal. Typically, our superstores experience
their strongest traffic and sales in the spring and summer
quarters. Sales are typically slowest in the fall quarter, when used
vehicles generally experience proportionately more of their annual
depreciation. We believe this is partly the result of a decline in
customer traffic, as well as discounts on model year closeouts that can pressure
pricing for late-model used vehicles. Customer traffic generally
tends to slow in the fall as the weather changes and as customers shift their
spending priorities toward holiday-related expenditures. During the
current recession, the traditional seasonal sales patterns have been masked by
the weakness in the economy and the stresses on consumer spending, which have
adversely affected industry-wide auto sales.
Supplemental Sales
Information.
UNIT
SALES
|
|
Three
Months Ended May 31
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
Used
vehicles
|
|
|
92,863 |
|
|
|
106,747 |
|
|
|
(13 |
)% |
New
vehicles
|
|
|
2,031 |
|
|
|
3,515 |
|
|
|
(42 |
)% |
Wholesale
vehicles
|
|
|
42,226 |
|
|
|
56,329 |
|
|
|
(25 |
)% |
AVERAGE
SELLING PRICES
|
|
Three
Months Ended May 31
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
Used
vehicles
|
|
$ |
16,489 |
|
|
$ |
16,852 |
|
|
|
(2 |
)% |
New
vehicles
|
|
$ |
23,773 |
|
|
$ |
23,211 |
|
|
|
2 |
% |
Wholesale
vehicles
|
|
$ |
3,936 |
|
|
$ |
4,184 |
|
|
|
(6 |
)% |
RETAIL
VEHICLE SALES MIX
|
|
Three
Months Ended May 31
|
|
|
|
2009
|
|
|
2008
|
|
Vehicle
units:
|
|
|
|
|
|
|
Used
vehicles
|
|
|
98 |
% |
|
|
97 |
% |
New
vehicles
|
|
|
2 |
|
|
|
3 |
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
Vehicle
dollars:
|
|
|
|
|
|
|
|
|
Used
vehicles
|
|
|
97 |
% |
|
|
96 |
% |
New
vehicles
|
|
|
3 |
|
|
|
4 |
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
As of May
31, 2009, we had a total of six new car franchises representing the Chevrolet,
Chrysler, Nissan and Toyota brands. In June 2009, we were notified by
General Motors that our Chevrolet franchise in Kenosha, Wisconsin, will be
terminated no later than October 2010. We expect to stop selling new
General Motors vehicles at this site, where we also have a used car superstore
and a Toyota franchise, by this date. We do not expect this action to
have any material effect on sales or earnings.
GROSS
PROFIT
|
|
Three
Months Ended May 31
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
Used
vehicle gross profit
|
|
$ |
185.8 |
|
|
$ |
186.0 |
|
|
|
(0.1 |
)% |
New
vehicle gross profit
|
|
|
1.1 |
|
|
|
3.0 |
|
|
|
(64.2 |
)% |
Wholesale
vehicle gross profit
|
|
|
38.2 |
|
|
|
44.2 |
|
|
|
(13.6 |
)% |
Other
gross profit
|
|
|
51.2 |
|
|
|
49.5 |
|
|
|
3.3 |
% |
Total
gross profit
|
|
$ |
276.2 |
|
|
$ |
282.7 |
|
|
|
(2.3 |
)% |
GROSS
PROFIT PER UNIT
|
|
Three
Months Ended May 31
|
|
|
|
2009
|
|
|
2008
|
|
|
|
$
per unit (1)
|
|
|
|
% |
(2) |
|
$
per unit (1)
|
|
|
|
% |
(2) |
Used
vehicle gross
profit
|
|
$ |
2,001 |
|
|
|
12.0 |
|
|
$ |
1,742 |
|
|
|
10.2 |
|
New
vehicle gross
profit
|
|
$ |
532 |
|
|
|
2.2 |
|
|
$ |
860 |
|
|
|
3.7 |
|
Wholesale
vehicle gross
profit
|
|
$ |
904 |
|
|
|
22.3 |
|
|
$ |
784 |
|
|
|
18.2 |
|
Other
gross
profit
|
|
$ |
539 |
|
|
|
78.8 |
|
|
$ |
449 |
|
|
|
73.4 |
|
Total
gross
profit
|
|
$ |
2,911 |
|
|
|
15.1 |
|
|
$ |
2,564 |
|
|
|
12.8 |
|
(1)
Calculated as category gross profit divided by its respective units sold,
except the other and total categories, which are divided
by total retail units sold.
(2)
Calculated as a percentage of its respective sales or revenue.
Used
Vehicle Gross Profit. Our used vehicle
gross profit of $185.8 million in the first quarter of fiscal 2010 was similar
to the $186.0 million in the prior year’s first quarter, despite the 13% decline
in used unit sales. The used vehicle gross profit per unit increased
$259, or 15%, to $2,001 per unit compared with $1,742 per unit in the first
quarter of fiscal 2009. In part, this improvement reflected the
significantly below-average profitability reported in the prior year period,
when the initial slowdown in customer traffic and the rapid decline in
underlying values of SUVs and trucks put pressure on our used vehicle
margins. Our prior year first quarter gross profit also reflected the
impact of having lower margin vehicles in inventory at the beginning of the
quarter. The improvement also reflected benefits realized from our
initiatives to reduce vehicle reconditioning costs, which we estimate reduced
our cost of sales by approximately $100 per unit compared with the corresponding
prior year period. We believe the fiscal 2010 gross profit per unit
also benefited from a small improvement in inventory turns, achieved despite the
more difficult sales environment.
New
Vehicle Gross Profit. Our new vehicle
gross profit declined to $1.1 million in the first quarter of fiscal 2010
compared with $3.0 million in the prior year’s first quarter. The
reduction reflected both the 42% decline in new unit sales and a $328 decline in
gross profit per unit. These reductions resulted from the sharp
decline in new car industry sales and the resulting increase in competitiveness
in the new car market. We experienced a disproportionate reduction in
profitability at our two Chrysler franchises, which was a function of both the
severe drop in traffic experienced by this manufacturer’s franchises and our
decision to cut selling prices and margins in order to reduce our Chrysler new
car inventory.
Wholesale
Vehicle Gross Profit. Our wholesale
vehicle gross profit decreased by $6.0 million, or 14%, to $38.2 million in the
first quarter of fiscal 2010 from $44.2 million in the prior year
quarter. The reduction was driven by the 25% decline in wholesale
unit sales, partially offset by an increase in wholesale gross profit per unit
of $120, or 15%, to $904 per unit in the first quarter fiscal 2010 from $784 per
unit in the first quarter of fiscal 2009. The wholesale price
appreciation in the current year period, combined with a significantly higher
dealer-to-car ratio, and the resulting price competition among bidders,
contributed to the increase in wholesale gross profit per unit. Our
wholesale vehicles are predominantly comprised of older, higher mileage
vehicles, and we believe the demand for these types of vehicles has remained
strong from dealers who specialize in selling to credit-challenged
customers.
Other
Gross Profit. We have no cost
of sales related to either ESP revenues or third-party finance fees, as these
represent commissions paid to us by the third-party providers. Our
other gross profit increased $1.7 million, or 3%, to $51.2 million in the first
quarter of fiscal 2010 compared with $49.5 million in the prior year
period. The increase reflected higher service department profits
resulting from the increase in service sales, partly offset by the declines in
ESP revenues and third-party finance fees. Other gross profit per
unit increased to $539 from $449 in the prior year first quarter primarily due
to an improvement in service margins. Service margins generally rise
when sales grow at a rate greater than fixed service overhead
costs.
Impact of
Inflation. Historically,
inflation has not been a significant contributor to
results. Profitability is primarily affected by our ability to
achieve targeted unit sales and gross profit dollars per vehicle rather than on
average retail prices. However, increases in average vehicle selling
prices benefit the SG&A ratio and CAF income to the extent the average
amount financed also increases.
CarMax
Auto Finance (Loss) Income. CAF provides
financing for a portion of our used and new car retail sales. Because
the purchase of a vehicle is often reliant on the consumer’s ability to obtain
on-the-spot financing, it is important to our business that financing be
available to creditworthy customers. While financing can also be
obtained from third-party sources, we believe that total reliance on third
parties can create unacceptable volatility and business
risk. Furthermore, we believe that our processes and systems, the
transparency of our pricing and our vehicle quality provide a unique and ideal
environment in which to procure high-quality auto loans, both for CAF and for
the third-party financing providers. Generally, CAF has provided us
the opportunity to capture additional profits and cash flows from auto loan
receivables while managing our reliance on third-party financing
sources.
COMPONENTS
OF CAF (LOSS) INCOME
|
|
Three
Months Ended May 31
|
|
(In
millions)
|
|
2009
|
|
|
%
|
|
|
2008
|
|
|
%
|
|
Total
loss (1)
|
|
$ |
(37.3 |
) |
|
|
(8.1 |
) |
|
$ |
(2.9 |
) |
|
|
(0.5 |
) |
Other
CAF income: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing
fee
income
|
|
|
10.4 |
|
|
|
1.0 |
|
|
|
10.2 |
|
|
|
1.0 |
|
Interest
income
|
|
|
16.4 |
|
|
|
1.6 |
|
|
|
11.1 |
|
|
|
1.1 |
|
Total
other CAF
income
|
|
|
26.8 |
|
|
|
2.7 |
|
|
|
21.3 |
|
|
|
2.2 |
|
Direct
CAF expenses: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAF
payroll and fringe benefit expense
|
|
|
5.1 |
|
|
|
0.5 |
|
|
|
4.4 |
|
|
|
0.5 |
|
Other
direct CAF
expenses
|
|
|
6.0 |
|
|
|
0.6 |
|
|
|
4.2 |
|
|
|
0.4 |
|
Total
direct CAF
expenses
|
|
|
11.1 |
|
|
|
1.1 |
|
|
|
8.6 |
|
|
|
0.9 |
|
CarMax
Auto Finance (loss) income (3)
|
|
$ |
(21.6 |
) |
|
|
(1.2 |
) |
|
$ |
9.8 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
sold
|
|
$ |
460.5 |
|
|
|
|
|
|
$ |
626.5 |
|
|
|
|
|
Average
managed
receivables
|
|
$ |
4,024.6 |
|
|
|
|
|
|
$ |
3,940.9 |
|
|
|
|
|
Ending
managed
receivables
|
|
$ |
4,040.9 |
|
|
|
|
|
|
$ |
3,977.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net sales and operating revenues
|
|
$ |
1,834.3 |
|
|
|
|
|
|
$ |
2,208.8 |
|
|
|
|
|
Percent
columns indicate:
(1)
Percent of loans sold.
(2)
Annualized percent of average managed receivables.
(3)
Percent of total net sales and operating revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAF
income does not include any allocation of indirect costs or
income. We present this information on a direct basis to avoid making
arbitrary decisions regarding the indirect benefits or costs that could be
attributed to CAF. Examples of indirect costs not included are retail
store expenses and corporate expenses such as human resources, administrative
services, marketing, information systems, accounting, legal, treasury and
executive payroll.
CAF
provides financing for qualified customers at competitive market rates of
interest. The majority of CAF income has typically been generated by
the spread between the interest rates charged to customers and the related cost
of funds. Substantially all of the loans originated by CAF are sold
in securitization transactions. A gain, recorded at the time of
securitization, results from recording a receivable approximately equal to the
present value of the expected residual cash flows generated by the securitized
receivables. The gain on sales of loans originated and sold as a
percent of loans originated and sold (the “gain percentage”) has been impacted
by the more challenging economic environment and the disruption in the global
credit markets. These factors caused us to increase the loss and
discount rate assumptions that affect the gain recognized on the sale of loans,
and they also caused an increase in CAF’s funding costs.
GAIN
(LOSS) ON LOANS SOLD
|
|
Three
Months Ended May 31
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
Gain
on sales of loans originated and
sold
|
|
$ |
3.1 |
|
|
$ |
17.1 |
|
Other
losses
|
|
|
(40.4 |
) |
|
|
(20.0 |
) |
Total
loss
|
|
$ |
(37.3 |
) |
|
$ |
(2.9 |
) |
|
|
|
|
|
|
|
|
|
Loans
originated and
sold
|
|
$ |
460.5 |
|
|
$ |
626.5 |
|
Receivables
repurchased from term securitizations and resold
|
|
|
- |
|
|
|
- |
|
Total
loans
sold
|
|
$ |
460.5 |
|
|
$ |
626.5 |
|
|
|
|
|
|
|
|
|
|
Gain
percentage on loans originated and
sold
|
|
|
0.7 |
% |
|
|
2.7 |
% |
Total
loss as a percentage of total loans
sold
|
|
|
(8.1 |
)% |
|
|
(0.5 |
)% |
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 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
could include the effects of new term securitizations, changes in the valuation
of retained subordinated bonds and the repurchase and resale of receivables in
existing term securitizations, as applicable.
Beginning
in January 2008, we have retained some or all of the subordinated bonds
associated with our term securitizations. These bonds were retained
because, at the applicable issue date, the economics of doing so were more
favorable than selling them. The retained subordinated bonds are
included in the retained interest in securitized receivables on our consolidated
balance sheets, and they had a fair value of $188.2 million as of May 31, 2009,
and $87.4 million as of February 28, 2009. During the first quarter
of fiscal 2010, we retained subordinated bonds in connection with the
securitization of $1 billion of auto loans. These bonds were issued
at a discount and had a fair value of $88.8 million as of May 31,
2009. All of the retained subordinated bonds are included in retained
interest in securitized receivables, with changes in their fair values reflected
in CAF (loss) income.
CAF
reported a loss of $21.6 million in the first quarter of fiscal 2010 compared
with income of $9.8 million in the first quarter of the prior
year. In both periods, CAF results were reduced by adjustments
related to loans originated in previous fiscal periods. In the first
quarter of fiscal 2010, these adjustments totaled $40.4 million and they
included:
§
|
A
$57.6 million reduction related to increased funding costs for the $1.22
billion of auto loan receivables that were funded in the warehouse
facility at the end of fiscal 2009. This amount included the
increase in funding costs for the $1 billion of auto loan receivables that
were refinanced in a term securitization in April 2009. It also
included our estimate of the increase in the cost of funding in the
warehouse facility that will occur upon renewal or replacement of the
current warehouse facility, applied to the remaining $215 million of
receivables funded in the warehouse
|
|
facility
as of February 28, 2009, that were not included in the April 2009 term
securitization. At the end of fiscal 2009, we estimated that
the impact of higher funding costs versus those implicit in our warehouse
facility would adversely affect CAF income by between $60 million and $85
million when the $1.22 billion of receivables funded in the warehouse
facility were refinanced in fiscal 2010. As a result of recent
contractions in credit spreads, we now estimate the impact to be slightly
below the low end of this range. |
§
|
$17.2
million of favorable adjustments, including $12.3 million of favorable
mark-to-market adjustments on retained subordinated bonds, decreases in
prepayment speed assumptions and minor revisions to other
assumptions.
|
The
unfavorable adjustments in the first quarter of fiscal 2009 totaled $20.0
million and they related to increased funding costs on the $845 million of loans
that were funded in the warehouse facility at the end of fiscal
2008.
Excluding
these adjustments from both periods, CAF income declined to $18.8 million from
$29.8 million in the first quarter of fiscal 2009. CAF’s gain on
sales of loans originated and sold was $3.1 million in the current year quarter
versus $17.1 million in the prior year quarter, reflecting a higher estimated
cost of funding in the warehouse facility, a decline in loan origination volume,
and the use of a 19% discount rate assumption in the current year quarter versus
17% used in the prior year quarter. The volume of CAF loans
originated and sold fell 27% from the prior year’s level, reflecting both the
decline in used unit sales and our decision to decrease the percentage of sales
financed by CAF. Beginning in May 2009, we implemented additional
tightening of CAF’s lending criteria in response to the higher funding
costs.
Based on
conditions in the credit markets, we anticipate that the warehouse facility
funding costs will increase upon its renewal or replacement. We
reflected these estimated higher warehouse costs in the gain recognized on all
loans originated and sold in the first quarter of fiscal 2010 as well as those
originated in prior periods which remained in the warehouse facility as of
May 31, 2009. When the warehouse facility renews in future
years, the cost and structure of the facility could change. These changes could
have a significant impact on our funding costs.
The
interest income component of other CAF income increased to an annualized 1.6% of
average managed receivables in the first quarter of fiscal 2010 from 1.1% in the
prior year quarter, primarily due to the increase in the amount of retained
subordinated bonds held by CarMax and due to the increase in the discount rate
assumption used to value the retained interest. CAF interest income
includes the interest earned on the retained subordinated bonds. 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.
PAST
DUE ACCOUNT INFORMATION
|
|
As
of May 31
|
|
|
As
of February 28 or 29
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Loans
securitized
|
|
$ |
3,891.4 |
|
|
$ |
3,893.8 |
|
|
$ |
3,831.9 |
|
|
$ |
3,764.5 |
|
Loans
held for sale or investment
|
|
|
149.5 |
|
|
|
84.1 |
|
|
|
154.8 |
|
|
|
74.0 |
|
Ending
managed
receivables
|
|
$ |
4,040.9 |
|
|
$ |
3,977.9 |
|
|
$ |
3,986.7 |
|
|
$ |
3,838.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
31+ days past
due
|
|
$ |
125.6 |
|
|
$ |
95.8 |
|
|
$ |
118.1 |
|
|
$ |
86.1 |
|
Past
due accounts as a percentage of ending
managed receivables
|
|
|
3.11 |
% |
|
|
2.41 |
% |
|
|
2.96 |
% |
|
|
2.24 |
% |
CREDIT
LOSS INFORMATION
|
|
Three
Months Ended May 31
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
Net
credit losses on managed
receivables
|
|
$ |
12.7 |
|
|
$ |
10.3 |
|
Average
managed
receivables
|
|
$ |
4,024.6 |
|
|
$ |
3,940.9 |
|
Annualized
net credit losses as a percentage of average
managed
receivables
|
|
|
1.26 |
% |
|
|
1.04 |
% |
Average
recovery
rate
|
|
|
48.5 |
% |
|
|
46.9 |
% |
We are at
risk for the performance of the managed securitized receivables to the extent of
our retained interest in the receivables. If the managed receivables
do not perform in accordance with the assumptions used in determining the fair
value of the retained interest, earnings could be affected. Our
retained interest was $433.3 million as of May 31, 2009, compared with $348.3
million as of February 28, 2009.
Compared
with the prior year periods, in the first quarter of fiscal 2010 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. We believe these increases were primarily the result of
the recession, which has adversely affected unemployment and industry trends for
losses and delinquencies. In response, we have tightened CAF’s
lending criteria over the last several quarters.
The
average recovery rate represents the average percentage of the outstanding
principal balance we receive when a vehicle is repossessed and liquidated at
wholesale auction. Historically, the annual recovery rate has ranged
from a low of 42% to a high of 51%, and it is primarily affected by changes in
the wholesale market pricing environment.
Selling,
General and Administrative Expenses. SG&A expenses
were reduced to $206.2 million from $243.0 million in the prior year quarter,
despite having five more stores open in fiscal 2010. The SG&A
reduction included decreases in growth-related costs, advertising expenses and
variable selling expenses, including payroll. We experienced a
significant reduction in pre-opening and relocation costs resulting from our
decision to temporarily suspend store growth. The reduction in
advertising costs reflected our decision to reduce our advertising spend in the
current environment, as well as the benefit of a decrease in advertising
rates. In addition, the current quarter SG&A expenses included
the benefit of a favorable litigation settlement, which increased net earnings
by $0.02 per share, while the prior year’s first quarter SG&A expenses
included unrelated accrued litigation costs, which reduced net earnings by $0.02
per share.
The
SG&A ratio increased to 11.2% compared with 11.0% in the first quarter of
the prior year. The decrease in overhead expenses was not sufficient
to fully offset the 17% decline in total sales and revenues.
Income
Taxes. The
effective income tax rate increased to 39.5% from 38.1% in the first quarter of
fiscal 2009. The higher effective tax rate had no material effect on
either net earnings or net earnings per share for the first quarter of fiscal
2010. The higher effective tax rate in fiscal 2010 is primarily due
to an increase in tax reserves.
OPERATIONS
OUTLOOK
Capital
Expenditures.
We currently estimate gross capital expenditures will total approximately
$20 million in fiscal 2010. Until we resume store growth,
capital spending will be incurred primarily for maintenance capital
items. Based on the relatively young average age of our store base,
maintenance capital has represented a very small portion of total capital
spending in recent years.
Fiscal
2010
Expectations.
As a result of the unprecedented decline in automotive industry sales
that has occurred in conjunction with the recession, as well as the continuing
volatility in the asset-backed
securitization
market, we do not believe we can make a meaningful projection of fiscal 2010
sales or earnings.
The
Federal Reserve launched the Term Asset-Backed Securities Loan Facility (“TALF”)
program in March 2009 and planned to continue the program through December 2009,
unless extended. The TALF program is intended to facilitate the
issuance of qualifying asset-backed securities and to improve market conditions
for these securities. We believe the program has been successful in
generating additional demand for auto asset-backed securities. In
April 2009, we completed a term securitization totaling $1.0 billion of auto
loan receivables, $840 million of which was eligible for investors to utilize
the TALF program.
In
June 2009, the U.S. automotive scrappage bill, Consumer Assistance
to Recycle and Save (CARS) Act, was signed into law, under which $1 billion was
allocated through November
1, 2009, to provide vouchers of between $3,500 and $4,500 for the purchase of a
new vehicle that achieves specified increases in fuel efficiency compared with
the consumer’s trade-in vehicle. The trade-in vehicle must have a
fuel efficiency rating of 18 miles per gallon or less and it must be scrapped
following the transaction. As a result, only trade-ins with a value
of less than $3,500 to $4,500 should be affected by this scrappage
program. Given the limited scope and term of this program, we do not
believe that it will have a material effect on our fiscal 2010 sales or
earnings.
FINANCIAL
CONDITION
Liquidity and Capital
Resources.
Operating
Activities. In the first quarter
of fiscal 2010, $79.4 million of cash was used in operating activities, while in
the first quarter of fiscal 2009, $79.4 million of cash was provided by
operating activities. The fiscal 2010 quarter reflected significant
cash use for increases in the retained interest in securitized receivables and
inventory, while the prior year quarter reflected the generation of cash
primarily from a reduction in inventory. The retained interest in
securitized receivables increased by $85.0 million during the first quarter of
fiscal 2010 primarily as a result of the subordinated bonds that were retained
in the April 2009 term securitization. These bonds had a fair value
of $88.8 million as of May 31, 2009.
Total
inventory was $781.1 million as of May 31, 2009, or 16% lower than the $934.0
million in total inventory as of May 31, 2008. During the first
quarter of fiscal 2010, total inventories rose $77.9 million, reflecting our
below-target inventory level at the start of fiscal 2010, a sequential
improvement in customer traffic and sales from the fourth quarter of fiscal 2009
to the first quarter of fiscal 2010, and rising vehicle acquisition
costs. During the first quarter of fiscal 2009, total inventories
declined $41.8 million, reflecting our reductions in retail used vehicle
inventories in response to falling customer demand and sales levels, as well as
declining vehicle acquisition costs for several vehicle categories, including
SUVs and trucks.
The
aggregate principal amount of outstanding auto loan receivables funded through
securitizations, which are discussed in Notes 3 and 4, totaled $3.89 billion as
of both May 31, 2009, and May 31, 2008. During
the first quarter of fiscal 2010, we completed a term securitization of auto
loan receivables, funding a total of $1.0 billion of auto loan
receivables. We retained subordinated bonds in this transaction that
had a fair value of $88.8 million as of May 31, 2009.
As
of May 31, 2009, the warehouse facility limit was $1.4
billion. At that date, $636.0 million of auto loan receivables were
funded in the warehouse facility and unused warehouse capacity totaled $764.0
million. In July 2009, we negotiated a 30-day extension of the warehouse
facility. During this period, we intend to renew or replace this
facility, and we expect to incur higher funding costs. We may
consider reducing the total size of the facility at the current renewal date,
given that our present needs are lower than in the prior year when our sales
were higher and we were still growing our store base. In the summer
of 2008, the warehouse facility limit was increased from $1.0 billion to $1.4
billion. Over the long-term, we anticipate that we will be able to
enter into new, or renew or expand, existing funding arrangements to meet CAF’s
future funding needs. However, based on conditions in the credit
markets, the cost for these
arrangements
could be materially higher than historical levels and the timing and capacity of
these transactions could be dictated by market availability rather than our
requirements. Note 4 includes additional discussion of the
warehouse facility.
Investing
Activities. Net cash used in
investing activities was $5.4 million in the first quarter of fiscal 2010
compared with $76.4 million in the prior year's quarter. The fiscal
2009 activity primarily represented store construction costs and the cost of
land acquired for future year store openings. The reduction in total
spending reflected our December 2008 decision to temporarily suspend store
growth.
Historically,
capital expenditures have been funded with internally generated funds, long-term
debt and sale-leaseback transactions. As of May 31, 2009, we owned 41
superstores currently in operation, 3 superstores that will not be opened until
market conditions improve, and our home office in Richmond,
Virginia. In addition, five superstores were accounted for as capital
leases.
Financing
Activities. During the first
quarter of fiscal 2010, net cash provided by financing activities totaled $77.8
million, including an increase in total debt of $80.5 million. During
the first quarter of fiscal 2009, net cash used in financing activities totaled
$4.1 million. During the prior year quarter, we used cash generated
from operations to decrease total debt by $12.4 million and we received $8.2
million in connection with employee stock option exercises.
As of May
31, 2009, we had total debt of $417.6 million, consisting of $389.1 million
outstanding under our revolving credit facility and $28.5 million of capitalized
leases. We have a $700 million revolving credit facility, which is
available until December 2011 and is secured by our vehicle
inventory. Borrowings under this credit facility are limited to 80%
of qualifying inventory, and they are available for working capital and general
corporate purposes. As of May 31, 2009, based on then-current
inventory levels, we had additional borrowing capacity of $187.7 million under
the credit facility. The outstanding balance as of May 31, 2009,
included $1.2 million classified as short-term debt, $237.9 million classified
as current portion of long-term debt and $150.0 million classified as long-term
debt. We classified $237.9 million as current portion of long-term
debt based on our expectation that this balance will not remain outstanding for
more than one year.
Starting
in the second half of fiscal 2009, we believed it was prudent to maintain a cash
balance in excess of our operating requirements. As of
May 31, 2009, we had cash and cash equivalents of $133.6
million.
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. We report money
market securities, retained interest in securitized receivables and financial
derivatives at fair value. See Note 6 for more information on fair
value measurements.
The
retained interest in securitized receivables was valued at $433.3 million as of
May 31, 2009, and $348.3 million as of February 28, 2009. Included in
the retained interest were interest-only strip receivables, various reserve
accounts and required excess receivables totaling $245.1 million and
$260.9 million, respectively, as of these dates. In addition,
the retained interest included retained subordinated bonds with a total fair
value of $188.2 million as of May 31, 2009, and $87.4 million as of
February 28, 2009.
As
described in Note 4, we use discounted cash flow models to measure the fair
value of the retained interest, excluding retained subordinated
bonds. In addition to funding costs and prepayment rates, the
estimates of future cash flows are based on certain key assumptions, such as
finance charge income, loss rates and discount rates appropriate for the type of
asset and risk, both of which are significant unobservable
inputs. Changes in these inputs could have a material impact on our
financial condition or results of operations.
In
measuring the fair value of the retained subordinated bonds, we use a widely
accepted third-party bond pricing model. Our key assumption is
determined based on current market spread quotes from third-party investment
banks and is currently a significant unobservable input. Changes in
this input could have a material impact on our financial condition or results of
operations.
As the
key assumptions used in measuring the fair value of the retained interest
(including the retained subordinated bonds) are significant unobservable inputs,
the retained interest is classified as a Level 3 asset, and as of May 31, 2009,
represented 82.6% 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 or regional U.S. economic
conditions.
|
§
|
Changes
in the availability or cost of capital and working capital financing,
including the availability and cost of financing auto loan
receivables.
|
§
|
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 of or access to sources of
inventory.
|
§
|
Factors
related to the regulatory and legislative environment in which we
operate.
|
§
|
The
loss of key employees from our store, regional or 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.
|
§
|
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.
|
§
|
Our
inability to acquire or lease suitable real estate at favorable
terms.
|
§
|
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 37 of this report, our Annual Report on Form 10-K for the
fiscal year ended February 28, 2009, 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.
4287.
ITEM
3.
QUANTITATIVE AND
QUALITATIVE
DISCLOSURES ABOUT
MARKET
RISK
Auto Loan
Receivables.
As of May 31, 2009, and February 28, 2009, all loans
in our portfolio of auto loan receivables were fixed-rate installment
loans. Financing for these auto loan receivables was achieved through
asset securitization programs that, in turn, issue both fixed- and floating-rate
securities. We manage the interest rate exposure relating to
floating-rate securitizations through the use of interest rate
swaps. Disruptions in the credit markets could impact the
effectiveness of our hedging strategies. Receivables held for investment or sale
are financed with working capital. Generally, changes in interest
rates associated with underlying swaps will not have a material impact on
earnings; however, they could have a material impact on cash and cash
flows.
Credit
risk is the exposure to nonperformance of another party to an
agreement. We mitigate credit risk by dealing with highly rated bank
counterparties. The market and credit risks associated with financial
derivatives are similar to those relating to other types of financial
instruments. Notes 5 and 6 provide additional information on
financial derivatives.
COMPOSITION
OF AUTO LOAN RECEIVABLES
(In
millions)
|
|
May
31, 2009
|
|
|
February
28, 2009
|
|
Principal
amount of:
|
|
|
|
|
|
|
Fixed-rate
securitizations
|
|
$ |
2,939.1 |
|
|
$ |
2,246.7 |
|
Floating-rate
securitizations synthetically altered to fixed (1)
|
|
|
952.2 |
|
|
|
1,584.6 |
|
Floating-rate
securitizations
|
|
|
0.1 |
|
|
|
0.6 |
|
Loans
held for investment (2)
|
|
|
127.0 |
|
|
|
145.1 |
|
Loans
held for sale (3)
|
|
|
22.5 |
|
|
|
9.7 |
|
Total
|
|
$ |
4,040.9 |
|
|
$ |
3,986.7 |
|
(1)
Includes variable-rate securities totaling $316.2 million as of May 31,
2009, and $370.2 million as of February 28, 2009, issued in connection
with certain term securitizations that were synthetically altered to fixed
at the bankruptcy-remote special purpose entity.
(2) The
majority is held by a bankruptcy-remote special purpose
entity.
(3)
Held by a bankruptcy-remote special purpose entity.
|
|
Interest
Rate Exposure. We also have
interest rate risk from changing interest rates related to our outstanding
debt. Substantially all of our debt is floating-rate debt based on
LIBOR. A 100-basis point increase in market interest rates would have
decreased our first quarter fiscal 2010 net earnings per share by less than
$0.01.
ITEM
4.
CONTROLS AND
PROCEDURES
We
maintain disclosure controls and procedures (“disclosure controls”) that are
designed to ensure that information required to be disclosed in our reports
filed under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the U.S. Securities
and Exchange Commission’s rules and forms. Disclosure controls are
also designed to ensure that this information is accumulated and communicated to
management, including the chief executive officer (“CEO”) and the chief
financial officer (“CFO”), as appropriate, to allow timely decisions regarding
required disclosure.
As of the
end of the period covered by this report, we evaluated the effectiveness of the
design and operation of our disclosure controls. This evaluation was
performed under the supervision and with the participation of management,
including the CEO and CFO. Based upon that evaluation, the CEO and
CFO concluded that our disclosure controls were effective as of the end of the
period. There was no change in our internal control over financial
reporting that occurred during the quarter ended May 31, 2009, 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 involved: (1) failure
to provide meal and rest breaks or compensation in lieu thereof; (2) failure to
pay wages of terminated or resigned employees related to meal and rest breaks
and overtime; (3) failure to pay overtime; (4) failure to comply with itemized
employee wage statement provisions; and (5) unfair competition. The
putative class consisted of sales consultants, sales managers, and other hourly
employees who worked for the company in California from April 2, 2004,
to the present. On May 12, 2009, the court dismissed all of the class
claims with respect to the sales manager putative class. On June 16,
2009, the court dismissed all claims related to the failure to comply with the
itemized employee wage statement provisions. The court also granted
CarMax's motion for summary adjudication with regard to CarMax's alleged failure
to pay overtime to the sales consultant putative class. The
plaintiffs have indicated that they will appeal the court's ruling regarding the
sales consultant overtime claim. In addition to the plaintiffs'
overtime claim, the claims currently remaining in the lawsuit regarding the
sales consultant putative class are: (1) failure to provide meal and rest breaks
or compensation in lieu thereof; (2) failure to pay wages of terminated or
resigned employees related to meal and rest breaks; and (3) unfair
competition. On June 16, 2009, the court entered a stay of
these claims pending the outcome of a California Supreme Court case involving
related legal issues. The lawsuit seeks compensatory and special
damages, wages, interest, civil and statutory penalties, restitution, injunctive
relief and the recovery of attorneys’ fees. We are unable to make a
reasonable estimate of the amount or range of loss that could result from an
unfavorable outcome in these matters.
We are
involved in various other legal proceedings in the normal course of
business. Based upon our evaluation of information currently available, we
believe that the ultimate resolution of any such proceedings will not have a
material adverse effect, either individually or in the aggregate, on our
financial condition or results of operations.
In
connection with information set forth in this Form 10-Q, the factors discussed
under “Risk Factors” in our Form 10-K for fiscal year ended February 28,
2009, should be considered. These risks could materially and adversely
affect our business, financial condition, and results of
operations. There have been no material changes to the factors
discussed in our Form 10-K.
Item
4.
|
Submission
of Matters to a Vote of Security
Holders
|
(a) The annual
meeting of the company’s shareholders was held June 23, 2009.
(b) At the
annual meeting, the shareholders re-elected Jeffrey E. Garten, Vivian M.
Stephenson, Beth A. Stewart and William R. Tiefel to the Board, each for a
three-year term expiring at the 2012 Annual Meeting of Shareholders pursuant to
the following vote:
Directors
|
|
Votes
For
|
|
|
Votes
Withheld
|
|
Jeffrey
E. Garten
|
|
|
196,956,687 |
|
|
|
3,422,734 |
|
Vivian
M. Stephenson
|
|
|
199,425,328 |
|
|
|
954,093 |
|
Beth
A. Stewart
|
|
|
196,835,199 |
|
|
|
3,544,222 |
|
William
R. Tiefel
|
|
|
197,051,445 |
|
|
|
3,327,976 |
|
The
following directors had terms of office that did not expire at the 2009 annual
meeting:
Ronald E.
Blaylock
Keith D.
Browning
James F.
Clingman, Jr.
Thomas J.
Folliard
Shira D.
Goodman
W. Robert
Grafton
Edgar H.
Grubb
Hugh G.
Robinson
Thomas G.
Stemberg
|
(c)
|
At
the annual meeting, the shareholders also voted upon the
following:
|
(i)
|
The
shareholders ratified the selection of KPMG LLP as the company’s
independent registered public accounting firm for our fiscal year ending
February 28, 2010, by a vote of 200,110,639 shares for, 208,316 shares
against, and 60,466 shares
abstaining.
|
(ii)
|
The
shareholders voted to approve the 2002 Stock Incentive Plan, as amended
and restated, by a vote of 160,476,305 shares for, 17,636,671 shares
against, and 122,161 shares
abstaining.
|
(iii)
|
The
shareholders voted to approve the 2002 Employee Stock Purchase Plan, as
amended and restated, by a vote of 171,009,562 shares for 7,128,202 shares
against, and 97,373 shares
abstaining.
|
|
10.1
|
CarMax,
Inc. 2002 Employee Stock Purchase Plan, as amended and restated
June 23, 2009, filed
herewith.
|
|
10.2
|
CarMax,
Inc. 2002 Stock Incentive Plan, as amended and restated June 23, 2009,
filed as Exhibit 10.1 to CarMax’s Current Report on Form 8-K, filed June
26, 2009 (File No. 1-31420, is incorporated by this reference.
*
|
|
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
|
July 9,
2009
EXHIBIT
INDEX
|
10.1
|
CarMax,
Inc. 2002 Employee Stock Purchase Plan, as amended and restated
June 23, 2009, filed
herewith.
|
|
10.2
|
CarMax,
Inc. 2002 Stock Incentive Plan, as amended and restated June 23, 2009,
filed as Exhibit 10.1 to CarMax’s Current Report on Form 8-K, filed June
26, 2009 (File No. 1-31420, is incorporated by this reference.
*
|
|
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.
|