UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x
|
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the fiscal year ended February 28, 2009
OR
¨
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from
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|
to
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|
Commission
File Number: 1-31420
CARMAX,
INC.
(Exact
name of registrant as specified in its charter)
VIRGINIA
(State
or other jurisdiction of
incorporation
or organization)
|
54-1821055
(I.R.S.
Employer
Identification
No.)
|
12800
TUCKAHOE CREEK PARKWAY, RICHMOND, VIRGINIA
(Address
of principal executive offices)
|
23238
(Zip
Code)
|
Registrant’s
telephone number, including area code: (804) 747-0422
Securities
registered pursuant to Section 12(b) of the Act:
Title of each
class |
Name of each
exchange on which registered |
Common Stock,
par value $0.50 |
New York Stock
Exchange |
Rights to
Purchase Series A Preferred Stock, |
New York Stock
Exchange |
par value
$20.00 |
|
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes x
No ¨
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes ¨ No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes ¨ No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer x
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨ (do
not check if a smaller reporting company)
|
Smaller
reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes ¨ No x
The
aggregate market value of the registrant’s common stock held by non-affiliates
as of August 31, 2008, computed by reference to the closing price of the
registrant’s common stock on the New York Stock Exchange on that date, was $3.3
billion.
On March
31, 2009, there were 220,391,906 outstanding shares of CarMax, Inc. common
stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the CarMax, Inc. Notice of 2009 Annual Meeting of Shareholders and Proxy
Statement are incorporated by reference in Part III of this Form
10-K.
FORM
10-K
FOR
FISCAL YEAR ENDED FEBRUARY 28, 2009
TABLE
OF CONTENTS
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Page
No.
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PART
I
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Item
1.
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Business
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4
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Item
1A.
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Risk
Factors
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11
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Item
1B.
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Unresolved
Staff Comments
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14
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Item
2.
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Properties
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14
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Item
3.
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Legal
Proceedings
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15
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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15
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PART
II
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Item
5.
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Market
for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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16
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Item
6.
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Selected
Financial Data
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18
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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19
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Item
7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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36
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Item
8.
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Consolidated
Financial Statements and Supplementary Data
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37
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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69
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Item
9A.
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Controls
and Procedures
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69
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Item
9B.
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Other
Information
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69
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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70
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Item
11.
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Executive
Compensation
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71
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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71
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Item
13.
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Certain
Relationships and Related Transactions and Director
Independence
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71
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Item
14.
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Principal
Accountant Fees and Services
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71
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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72
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Signatures
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73
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PART
I
In this
document, “we,” “our,” “us,” “CarMax” and “the company” refer to CarMax, Inc.
and its wholly owned subsidiaries, unless the context requires
otherwise.
FORWARD-LOOKING
AND CAUTIONARY STATEMENTS
This
Annual Report on Form 10-K and, in particular, the description of our business
set forth in Item 1 and our Management’s Discussion and Analysis of Financial
Condition and Results of Operations set forth in Item 7 contain a number of
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
statements regarding:
Ÿ
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Our
projected future sales growth, comparable store unit sales growth,
earnings and earnings per share.
|
Ÿ
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Our
expectations of factors that could affect CarMax Auto Finance
income.
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Ÿ
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Our
expected future expenditures, cash needs and financing
sources.
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Ÿ
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The
projected number, timing and cost of new store
openings.
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Ÿ
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Our
sales and marketing plans.
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Ÿ
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Our
assessment of the potential outcome and financial impact of litigation and
the potential impact of unasserted
claims.
|
Ÿ
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Our
assessment of competitors and potential
competitors.
|
Ÿ
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Our
assessment of the effect of recent legislation and accounting
pronouncements.
|
In
addition, any statements contained in or incorporated by reference into this
report that are not statements of historical fact should be considered
forward-looking statements. You can identify these forward-looking
statements by use of words such as “anticipate,” “believe,” “could,” “estimate,”
“expect,” “intend,” “may,” “plan,” “predict,” “should,” “will” and other similar
expressions, whether in the negative or affirmative. We cannot
guarantee that we will achieve the plans, intentions or expectations disclosed
in the forward-looking statements. There are a number of important
risks and uncertainties that could cause actual results to differ materially
from those indicated by our forward-looking statements. These risks
and uncertainties include, without limitation, those set forth in Item 1A under
the heading “Risk Factors.” We caution investors not to place undue
reliance on any forward-looking statements as these statements speak only as of
the date when made. We undertake no obligation to update any
forward-looking statements made in this report.
BUSINESS
OVERVIEW
CarMax
Background. CarMax, Inc. was incorporated under the laws of
the Commonwealth of Virginia in 1996. CarMax, Inc. is a holding
company and our operations are conducted through our
subsidiaries. Our home office is located at 12800 Tuckahoe Creek
Parkway, Richmond, Virginia.
Under the
ownership of Circuit City Stores, Inc. (“Circuit City”), we began operations in
1993 with the opening of our first CarMax superstore in Richmond,
Virginia. In 1997, Circuit City completed the initial public offering
of a tracking stock, Circuit City Stores, Inc.–CarMax Group common stock, which
was intended to track separately the performance of the CarMax
operations. On October 1, 2002, the CarMax business was separated
from Circuit City through a tax-free transaction, becoming an independent,
separately traded public company.
CarMax
Business. We are the nation’s largest retailer of used cars,
based on the 345,465 used vehicles we retailed during the fiscal year ended
February 28, 2009. As of the end of fiscal 2009, we operated 100
used car superstores in 46 metropolitan markets. In addition, we sold
194,081 wholesale vehicles in fiscal 2009 through on-site auctions.
We were
the first used vehicle retailer to offer a large selection of high quality used
vehicles at competitively low, “no-haggle” prices using a customer-friendly
sales process in an attractive, modern sales facility. The CarMax
consumer offer provides customers the opportunity to shop for vehicles the same
way they shop for items at other “big-box” retailers, and it is structured
around four customer benefits: low, no-haggle prices; a broad selection; high
quality vehicles; and a customer-friendly sales process. Our strategy
is to 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.
We
purchase, recondition and sell used vehicles. All of the used
vehicles we retail are thoroughly reconditioned to meet high mechanical,
electrical, safety and cosmetic standards, and each vehicle must pass a
comprehensive inspection before being offered for sale. Approximately
85% of the used vehicles we retail are 1 to 6 years old with fewer than 60,000
miles. We also offer a selection of used vehicles at each superstore
that are more than 6 years old or have more than 60,000 miles, if they meet
similar quality standards.
We also
sell new vehicles at five locations under franchise agreements with four new car
manufacturers (Chrysler, General Motors, Nissan and Toyota). In
fiscal 2009, new vehicles comprised 3% of our total retail vehicle unit
sales.
We
provide customers with a full range of related products and services, including
the financing of vehicle purchases through CarMax Auto Finance (“CAF”), our own
finance operation, and third-party financing providers; the sale of extended
service plans and accessories; the appraisal and purchase of vehicles directly
from consumers; and vehicle repair service.
The
CarMax consumer offer enables customers to evaluate separately each component of
the sales process and to make informed decisions based on comprehensive
information about the options, terms and associated prices of each
component. The customer can accept or decline any individual element
of the offer without affecting the price or terms of any other component of the
offer. Our no-haggle pricing and our commission structure, which is
generally based on a fixed dollars-per-unit standard, allow sales consultants to
focus solely on meeting customer needs.
We have
separated the practice of trading in a used vehicle in conjunction with the
purchase of another vehicle into two distinct and independent
transactions. We will appraise a consumer’s vehicle and make an offer
to buy that vehicle regardless of whether the owner is purchasing a vehicle from
us. Historically, we have acquired the majority of our retail used
vehicle inventory through this unique in-store appraisal process. We
also acquire a significant portion of our used vehicle inventory through
wholesale auctions and, to a lesser extent, directly from other sources,
including wholesalers, dealers and fleet owners. Vehicles purchased
through our in-store appraisal process that do not meet our retail standards are
sold to licensed dealers through on-site wholesale auctions.
Our
inventory management and pricing system tracks each vehicle throughout the sales
process. Using the information provided by this system and applying
statistical modeling techniques, we are able to optimize our inventory mix,
anticipate future inventory needs at each store, evaluate sales consultant and
buyer performance and refine our vehicle pricing strategy. Because of
the pricing discipline afforded by the inventory management and pricing system,
more than 99% of the entire used car inventory offered at retail is sold at
retail.
Industry and
Competition. The U.S. used car marketplace is highly fragmented and
competitive. According to industry sources, in December 2008
there were approximately 20,000 franchised automotive dealerships, who sell both
new and used vehicles. In addition, used vehicles were sold by
approximately 39,000 independent used vehicle dealers, as well as millions of
private individuals. Our primary competitors are the franchised auto
dealers, who sell the majority of late-model used
vehicles. Independent used car dealers predominantly sell older,
higher mileage cars than we do. During fiscal 2009, the recessionary
environment reduced consumers' desire and ability to purchase vehicles, and it
also increased the rate of dealership closures. In the coming year,
while the financial strains of the current economy will likely cause additional
dealerships to close or consolidate at a higher-than-average rate, we expect the
industry to remain highly fragmented.
Based on
industry data, there were more than 36 million used cars sold in the U.S. in
calendar year 2008, of which approximately 16 million were estimated to be
late-model, 1 to 6 year old vehicles. While we are the
largest retailer of used vehicles in the U.S., selling nearly twice as many used
vehicles as the next largest retailer in calendar 2008, we still represented
only approximately 2% of the total late-model used units sold. Over
the last several years, competition has been affected by the increasing use of
Internet-based marketing for both used vehicles and vehicle
financing. In both the used and new vehicle markets, we seek to
distinguish ourselves from traditional dealerships through our consumer offer,
sales approach and other innovative operating strategies.
We
believe that our principal competitive advantages in used vehicle retailing are
our ability to provide a high degree of customer satisfaction with the
car-buying experience; our competitively low prices; our breadth of selection of
the most popular makes and models available both on site and via our website,
carmax.com; the quality of our vehicles; our proprietary information systems;
and the locations of our retail stores. Upon request by a customer,
we will transfer virtually any used vehicle in our nationwide inventory to a
local superstore. Transfer fees may apply, depending on the distance
the vehicle needs to travel. In fiscal 2009, nearly 25% of our
vehicles sold were transferred at customer request. Our
Certified
Quality Inspection assures that every vehicle we offer for sale meets stringent
mechanical, electrical and safety standards. We back every vehicle
with a 5-day, money-back guarantee and at least a 30-day limited
warranty. Other competitive advantages include our ability to offer
or arrange customer financing with competitive terms and the comprehensiveness
and cost of the extended service plans we offer. We believe that we
are competitive in all of these areas and that we enjoy advantages over
competitors that employ traditional high-pressure, negotiation-oriented sales
techniques.
Our sales
consultants play a significant role in ensuring a customer-friendly sales
process. A sales consultant is paid a commission based on a fixed
dollars-per-unit standard, thereby earning the same dollar sales commission
regardless of the gross profit on the vehicle being sold. The sales
consultant normally receives no commission on the finance
process. This ensures that the sales consultant’s primary objective
is helping customers find the right vehicles for their needs at prices they can
afford. In contrast, sales and finance personnel at traditional
dealerships typically receive higher commissions for negotiating higher prices
and interest rates, and for steering customers toward vehicles with higher gross
profit.
In the
new vehicle market, we compete with other franchised
dealers. Historically, the new vehicle market has been served
primarily by dealerships employing traditional automotive selling
methods. We believe our customer-friendly, low-pressure sales methods
are points of competitive differentiation.
In our
wholesale auctions, we compete with other automotive auction
houses. We believe our principal competitive advantages include our
high vehicle sales rate, our conditional announcement and arbitration policies,
our broad geographic distribution and our dealer-friendly
practices. Because we own the cars that we auction, we generally sell
between 97% and 100% of the vehicles offered, which is substantially higher than
the sales rate at most other auto auctions. Our policy of making
conditional announcements, noting mechanical and other issues found during our
appraisal process, is also not a typical practice used at other auctions of
older, higher mileage vehicles. Together, these factors make our
auctions attractive to dealers, and they allow us to achieve a dealer-to-car
attendance ratio that is much higher than the typical auto auction.
Marketing and
Advertising. Our marketing strategies are focused on
developing awareness of the advantages of shopping at our stores and on
attracting customers who are already considering buying or selling a
vehicle. We use market awareness and customer satisfaction surveys to
help tailor our marketing efforts to the purchasing habits and preferences of
customers in each market area. Our marketing strategies are
implemented primarily through television and radio broadcasts, carmax.com,
Internet search engines and online classified listings. Television
and radio broadcast advertisements are designed to build consumer awareness of
the CarMax name, carmax.com and key components of the CarMax
offer. Broadcast and Internet advertisements are designed to drive
customers to our stores and to carmax.com. Newspaper advertisements
promote our broad selection of vehicles and price competitiveness, targeting
consumers with immediate purchase intentions.
We
continue to adjust our marketing programs in response to the evolving media
landscape. We have customized our marketing program based on
awareness levels in each market. In many markets, we have expanded
the use of Internet-based advertising while curtailing the use of newspaper
advertising. We are building awareness and driving traffic to our
stores and carmax.com by listing every retail vehicle on both AutoTrader.com and
cars.com. Through their syndicated networks, AutoTrader.com and
cars.com vehicle listings appear on sites that we believe are visited by a
majority of buyers of late-model used vehicles who use the Internet in their
shopping process. Our advertising on the Internet also includes
banner and keyword advertisements on search engines, such as Google and
Yahoo!
Our
website, carmax.com, is a marketing tool for communicating the CarMax consumer
offer in detail, a sophisticated search engine for finding the right vehicle and
a sales channel for customers who prefer to complete a part of the shopping and
sales process online. The website offers complete inventory and
pricing search capabilities. Information on each of the thousands of
cars available in our nationwide inventory is updated
daily. Carmax.com includes detailed information, such as vehicle
photos, prices, features, specifications and store locations, as well as
advanced feature-based search capabilities, and sorting and comparison tools
that allow consumers to easily compare vehicles. The site also
includes features such as detailed vehicle reviews, payment calculators and
email alerts when new inventory arrives. Virtually any used vehicle
in our nationwide inventory can be transferred at customer request to their
local superstore. Customers can contact sales consultants online via
carmax.com, by telephone or by fax. Customers can work with these
sales consultants from the comfort of home, including applying for financing,
and they need to visit the store only to sign the paperwork and pay for and pick
up their vehicle. Our survey data indicates that during fiscal 2009, more than
70% of customers who purchased a vehicle from us had visited our website
first.
Suppliers for
Used Vehicles. We acquire used vehicle inventory directly from
consumers through our in-store appraisal process and through other sources,
including local, regional and online auctions, wholesalers, franchised and
independent dealers and fleet owners, such as leasing companies and rental
companies. In calendar 2008, more than 36 million used
vehicles were remarketed in the U.S., of which approximately 9 million had been
sourced at wholesale auction.
Our used
vehicle inventory acquired directly from consumers through our appraisal process
helps provide an inventory of makes and models that reflects the tastes of each
market. In fiscal 2007, we began testing a stand-alone car-buying
center in Atlanta, Georgia. Our goal for the car-buying center was to
increase appraisal traffic and generate incremental vehicle purchases from
individual consumers. We expanded this test in fiscal 2008 and fiscal
2009, and we operated a total of five car-buying centers as of February 28,
2009.
We have
replaced the traditional “trade-in” transaction with a process in which a
CarMax-trained buyer appraises a customer’s vehicle and provides the owner with
a written, guaranteed offer that is good for seven days. An appraisal is
available to every customer free of charge, whether or not the customer
purchases a vehicle from us. Based on their age, mileage or
condition, fewer than half of the vehicles acquired through this in-store
appraisal process meet our high quality retail standards. Those
vehicles that do not meet our retail standards are sold to licensed dealers
through on-site wholesale auctions.
The
inventory purchasing function is primarily performed at the store level and is
the responsibility of the buyers, who handle both on-site appraisals and
off-site auction purchases. Our buyers evaluate all used vehicles
based on internal and external auction data and market sales, as well as
estimated reconditioning costs and, for off-site purchases, transportation
costs. Our buyers, in collaboration with our home office staff,
utilize the extensive inventory and sales trend data available through the
CarMax information system to decide which inventory to purchase at off-site
auctions. Our inventory and pricing models help the buyers tailor
inventories to the buying preferences at each superstore, recommend pricing
adjustments and optimize inventory turnover to help maintain gross profit per
unit.
Based on
consumer acceptance of the in-store appraisal process, our experience and
success to date in acquiring vehicles from auctions and other sources, and the
large size of the U.S. auction market relative to our needs, we believe that
sources of used vehicles will continue to be sufficient to meet our current and
future needs.
Suppliers for New
Vehicles. Our new car operations are governed by the terms of
the sales, service and dealer agreements. Among other things, these
agreements generally impose operating requirements and restrictions, including
inventory levels, working capital, monthly financial reporting, signage and
cooperation with marketing strategies. A manufacturer may terminate a
dealer agreement under certain circumstances, including a change in ownership
without prior manufacturer approval, failure to maintain adequate customer
satisfaction ratings or a material breach of other provisions of the
agreement. In addition to selling new vehicles using our low,
no-haggle price strategy, the franchise and dealer agreements generally allow us
to perform warranty work on these vehicles and sell related parts and services
within a specified market area. Designation of specified market areas
generally does not guarantee exclusivity within a specified
territory.
Seasonality. Historically,
our business has been seasonal. Typically, our superstores experience
their strongest traffic and sales in the spring and summer
quarters. Sales are typically slowest in the fall quarter, when used
vehicles generally experience proportionately more of their annual
depreciation. We believe this is partly the result of a decline in
customer traffic, as well as discounts on model year closeouts that can pressure
pricing for late-model used vehicles. Customer traffic generally
tends to slow in the fall as the weather changes and as customers shift their
spending priorities toward holiday-related expenditures. In fiscal
2009, the traditional seasonal sales patterns were masked by the weakness in the
economy and the stresses on consumer spending, which adversely affected
industry-wide auto sales.
Products
and Services
Merchandising. We
offer customers a broad selection of makes and models of used vehicles,
including both domestic and imported vehicles, at competitive
prices. Our used car selection covers popular brands from
manufacturers such as Chrysler, Ford, General Motors, Honda, Hyundai, Mazda,
Mitsubishi, Nissan, Subaru, Toyota and Volkswagen and luxury brands such as
Acura, BMW, Infiniti, Lexus and Mercedes. Our primary focus is
vehicles that are 1 to 6 years old, have fewer than 60,000 miles and generally
range in price from $11,000 to $28,000. For the more cost-conscious
consumer, we also offer used cars that are more than 6 years old or have 60,000
miles or more and that generally range in price from $7,700 to
$20,000.
We have
implemented an everyday low-price strategy under which we set no-haggle prices
on both our used and new vehicles. We believe that our pricing is
competitive with the best-negotiated prices in the market. Prices on
all vehicles are clearly displayed on each vehicle’s information sticker; on
carmax.com, AutoTrader.com and cars.com; and, where applicable, in our newspaper
advertising. We extend our no-haggle philosophy to every component of
the vehicle transaction, including vehicle appraisal offers, financing rates,
accessories, extended service plan pricing and vehicle documentation
fees.
Reconditioning
and Service. An
integral part of our used car consumer offer is the reconditioning
process. This process includes a comprehensive Certified Quality
Inspection of the engine and all major systems, including cooling, fuel,
drivetrain, transmission, electronics, suspension, brakes, steering, air
conditioning and other
equipment, as well as the interior and exterior of the vehicle. Based
on this quality inspection, we determine the reconditioning necessary to bring
the vehicle up to our high quality standards. Our service technicians
complete vehicle inspections. We perform most routine mechanical and
minor body repairs in-house; however, for some reconditioning services, we
engage third parties specializing in those services. Some superstores depend upon nearby, typically larger, superstores for
reconditioning, which
increases efficiency and reduces overhead.
All
CarMax used car superstores provide vehicle repair service including repairs of
vehicles covered by our extended service plans. We also provide
factory-authorized service at all new car franchises. We have
developed systems and procedures that are intended to ensure that our retail
repair service is conducted in the same customer-friendly and efficient manner
as our other operations.
We
believe that the efficiency of our reconditioning and service operations is
enhanced by our modern facilities, a technician mentoring process and our
information systems. The mentoring process and our compensation
programs are designed to increase the productivity of technicians, identify
opportunities for cost reduction and achieve high-quality
repairs. Our information systems provide the ability to track repair
history and enable trend analysis, which serves as guidance for our continuous
improvement efforts.
Wholesale
Auctions. Vehicles purchased through our in-store appraisal process
that do not meet our retail standards are sold through on-site wholesale
auctions. As of February 28, 2009, wholesale auctions were
conducted at 49 of our 100 superstores and were generally held on a weekly or
bi-weekly basis. Auction frequency at a given superstore is
determined by the number of vehicles to be auctioned, which depends on the
number of stores and the market awareness of CarMax and our in-store appraisal
offer in that market. The typical wholesale vehicle is approximately
10 years old and has more than 100,000 miles. Participation in our
wholesale auctions is restricted to licensed automobile dealers, the majority of
whom are independent dealers. To participate in a CarMax auction,
dealers must register with our centralized auction support group, at which time
we determine the purchase limit available to each dealer. We make
conditional announcements on each vehicle, including those for vehicles with
major mechanical issues, possible frame or flood damage, branded titles, salvage
history and unknown true mileage. Professional, licensed auctioneers
conduct our auctions. The average auction sales rate was 97% in
fiscal 2009. Dealers pay a fee to us based on the sales price of the
vehicles they purchase.
Customer Credit.
We
offer customers a wide range of financing alternatives, which we believe
enhances the CarMax consumer offer. Before the effect of 3-day
payoffs and vehicle returns, CAF financed more than 40% of our retail vehicle
unit sales in fiscal 2009. Customer credit applications are initially
reviewed by CAF and may also be reviewed by a third-party
provider. Customers who are not approved by either CAF or the initial
third-party provider may be evaluated by other lenders. Having a wide
array of financing sources not only increases discrete approvals, but also
expands the choices for our customers. To this end, we have tested,
and will continue to test, other third-party providers.
Customers
applying for financing provide credit information that is electronically
submitted by sales consultants through our proprietary information
system. A majority of applicants receive a response within five
minutes. The vehicle financings are retail installment contracts
secured by the vehicles financed. For the majority of the loans
arranged by the third-party providers, we are paid a fixed, prenegotiated fee
per vehicle financed. We have no recourse liability on retail
installment contracts arranged with third-party providers. Customers
are permitted to refinance or pay off their loans within three business days of
a purchase without incurring any finance or related
charges.
Extended Service
Plans. At the time of the sale, we offer the customer an
extended service plan. We sell these plans on behalf of unrelated
third parties that are the primary obligors. Under the third-party
service plan programs, we have no contractual liability to the
customer. The extended service plans have terms of coverage from 12
to 72 months, depending on the vehicle mileage, make and age. We
offer extended service plans at low, fixed prices, which are based primarily on
the historical repair record of the vehicle make and
model and
the length of coverage selected. All extended service plans that we
sell (other than manufacturer programs) have been designed to our specifications
and are administered by the third parties through private-label
arrangements. We receive a commission from the administrator at the
time the extended service plan is sold. In fiscal 2009, more
than half of the customers purchasing a used vehicle from CarMax also purchased
an extended service plan.
Our
extended service plan customers have access to vehicle repair service at each
CarMax store and to the third-party administrators’ nationwide network
consisting of thousands of independent and franchised service
providers. We believe that the quality of the services provided by
this network, as well as the broad scope of our extended service plans, helps
promote customer satisfaction and loyalty, and thus increases the likelihood of
repeat and referral business.
Systems
Our
stores are supported by an advanced information system that improves the
customer experience while providing tightly integrated automation of all
operating functions. Using in-store information kiosks, customers can
search our entire vehicle inventory and print a detailed listing for any
vehicle, which includes the vehicle’s features and specifications and its
location on the display lot. Our inventory management system tracks
every vehicle through its life from purchase through reconditioning and
test-drives to ultimate sale. Bar codes are placed on each vehicle
and on each parking space on the display lot, and all vehicle bar codes are
scanned daily as a loss prevention measure. Test-drive information is
captured on every vehicle using radio frequency identification devices, linking
the specific vehicle and the sales consultant. We also capture data
on vehicles we wholesale, which helps us track market pricing. An
online finance application process and computer-assisted document preparation
ensure rapid completion of the sales transaction. Behind the scenes,
our proprietary store technology provides our management with real-time
information about every aspect of store operations, such as inventory
management, pricing, vehicle transfers, wholesale auctions and sales consultant
productivity. In addition, our store system provides a direct link to our
proprietary credit processing information system to facilitate the credit review
and approval process.
Our
inventory management and pricing system allows us to buy the mix of makes,
models, age, mileage and price points tailored to customer buying preferences at
each superstore. This system also generates recommended initial
retail price points, as well as retail price markdowns for specific vehicles
based on complex algorithms that take into account factors including sales
history, consumer interest and seasonal patterns. We believe this
systematic approach to vehicle pricing allows us to optimize inventory turns,
which minimizes the depreciation risk inherent in used cars and helps us to
achieve our targeted gross profit dollars per unit.
In
addition to inventory management, our Electronic Repair Order system (“ERO”) is
used by the service department to sequence reconditioning
procedures. ERO provides information that helps increase quality and
reduce costs, which further enhances our customer service and
profitability.
Through
our centralized systems, we are able to immediately integrate new stores into
our store network, allowing the new stores to rapidly achieve operating
efficiency. We continue to enhance and refine our information
systems, which we believe to be a core competitive advantage. The
design of our information systems incorporates off-site backups, redundant
processing and other measures to reduce the risk of significant data loss in the
event of an emergency or disaster.
Associates
On
February 28, 2009, we had a total of 13,035 associates, including 10,101
hourly and salaried associates and 2,934 sales associates, who worked on a
commission basis. Sales consultants include both full-time and
part-time employees. We employ additional associates during peak
selling seasons. As of February 28, 2009, our location general
managers averaged more than nine years of CarMax experience, in addition to
prior retail management experience. We open new stores with
experienced management teams drawn from existing stores.
We
believe we have created a unique corporate culture and maintain good employee
relations. No associate is subject to a collective bargaining agreement. We
focus on providing our associates with the information and resources they need
to offer exceptional customer service. We reward associates whose
behavior exemplifies our culture, and we believe that our favorable working
conditions and compensation programs allow us to attract and retain highly
qualified individuals. We have been recognized for the success of our
efforts by a number of external organizations.
Training. To
further support our emphasis on attracting, developing and retaining qualified
associates, we have made a commitment to providing exceptional training
programs. On average, each store associate completed at least 13
online or classroom courses, totaling more than 57 hours of training per
associate in fiscal 2009. Store associates receive structured,
self-paced training that introduces them to company policies and their specific
job responsibilities through KMX University – our proprietary intranet-based
testing and tracking system. KMX University is comprised of
customized applications hosted within a learning management system that allow us
to author, deliver and track training events and to measure associate competency
before and after training. In fiscal 2009, nearly one million hours
of training were delivered through KMX University. Most new store
associates are also assigned mentors who provide on-the-job guidance and
support.
We also
provide comprehensive, facilitator-led classroom training courses to sales
consultants, buyers, automotive technicians and managers. All sales
consultants receive extensive customer service training both initially and on an
ongoing basis. Buyers-in-training undergo a 6- to 18-month
apprenticeship under the supervision of experienced buyers, and they generally
will assist with the appraisal of more than 1,000 cars before making their first
independent purchase. We utilize a mix of internal and external
technical training programs in an effort to provide a stable future supply of
qualified technicians. Reconditioning and mechanical technicians
attend in-house and vendor-sponsored training programs designed to develop their
skills in performing repairs on the diverse makes and models of vehicles we
sell. Technicians at our new car franchises also attend
manufacturer-sponsored training programs to stay abreast of current diagnostic,
repair and maintenance techniques for those manufacturers’
vehicles. Additionally, our new managers attend an intensive
week-long workshop at the home office where they meet with senior leaders and
learn fundamental CarMax management skills.
Laws
and Regulations
Vehicle Dealer
and Other Laws and Regulations. We operate in a highly
regulated industry. In every state in which we operate, we must
obtain various licenses and permits in order to conduct business, including
dealer, service, sales and finance licenses issued by state and certain local
regulatory authorities. A wide range of federal, state and local laws
and regulations govern the manner in which we conduct business,
including advertising, sales, financing and employment
practices. These laws include consumer protection laws, privacy laws,
anti-money laundering laws and state franchise laws, as well as other laws and
regulations applicable to new and used motor vehicle dealers. These
laws also include federal and state wage-hour, anti-discrimination and other
employment practices laws. Our financing activities with customers
are subject to federal truth-in-lending, consumer leasing and equal credit
opportunity laws and regulations, as well as state and local motor vehicle
finance and collection laws, installment finance laws and usury
laws.
Claims
arising out of actual or alleged violations of law could be asserted against us
by individuals or governmental authorities and could expose us to significant
damages or other penalties, including revocation or suspension of the licenses necessary to conduct business and
fines.
Environmental Laws and
Regulations. We are subject to a
variety of federal, state and local laws and regulations that pertain to the
environment. Our business involves the use, handling and disposal of
hazardous materials and wastes, including motor oil, gasoline, solvents,
lubricants, paints and other substances. We are subject to compliance
with regulations concerning the operation of underground and aboveground
gasoline storage tanks, aboveground oil tanks and automotive spray
booths.
AVAILABILITY OF REPORTS AND OTHER
INFORMATION
Our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and proxy statements on Schedule 14A, as well as any amendments to
those reports, are available without charge through our website, carmax.com, as
soon as reasonably practicable after filing or furnishing the material to the
Securities and Exchange Commission (“SEC”). The contents of our
website are not, however, part of this report.
In
addition, our Corporate Governance Guidelines and Code of Business Conduct, as
well as the charters of the Audit Committee, Nominating and Governance Committee
and Compensation and Personnel Committee, are available to shareholders and the
public through the “Corporate Governance” link on our investor information home
page at investor.carmax.com. Printed copies of these documents are
available to any shareholder, without charge, upon written request to our
corporate secretary at the address set forth on the cover page of this
report. Any changes to these documents or reportable waivers of the
Code of Business Conduct are promptly disclosed on our website.
Item
1A. Risk Factors.
We are
subject to various risks, including the risks described below. Our
business, results of operations and financial condition could be materially and
adversely affected by any of these risks or additional risks not presently known
or that we currently deem immaterial.
Economic
Conditions. In the normal course
of business, we are subject to changes in general or regional U.S. economic
conditions, including, but not limited to, consumer credit availability,
consumer credit delinquency and loss rates, interest rates, gasoline prices,
inflation, personal discretionary spending levels and consumer sentiment about
the economy in general. Any significant changes in economic
conditions could adversely affect consumer demand and/or increase
costs.
Capital. Changes
in the availability or cost of capital and working capital financing, including
the long-term financing to support our geographic expansion, when resumed, and
financing of auto loan receivables, could adversely affect growth and operating
strategies. Further, our current credit facility and certain
securitization and sale-leaseback agreements contain covenants and/or
performance triggers. Any failure to comply with these covenants
and/or performance triggers could have a material adverse effect on our
business, results of operations and financial condition.
We use
and have historically relied upon a securitization program to fund substantially
all of the auto loan receivables originated by CAF. Initially, we
sell these receivables into our warehouse facility. We periodically
refinance the receivables through term securitizations. Changes in
the condition of the asset-backed securitization market have led, and could in
the future lead, us to incur higher costs to access funds in this market or we
could be required to seek alternative means to finance our loan
originations. In the event that this market ceased to exist and there
were no immediate alternative funding sources available, we might be forced to
curtail our lending practices for some period of time. The impact of
reducing or curtailing CAF’s loan originations could have a material adverse
impact on our business, sales and results of operations.
Disruptions
in the capital and credit markets could adversely affect our ability to draw on
our revolving credit facility. If our ability to secure funds from the facility
were significantly impaired, our access to working capital would be impacted,
our ability to maintain appropriate inventory levels could be affected and these
conditions could have a material adverse effect on our business, sales, results
of operations and financial condition.
Third-Party
Financing Providers. CarMax provides financing to qualified
customers through CAF and a number of third-party financing providers. In the
event that one or more of these third-party providers could no longer, or
choose not to, provide financing to our customers, could only provide financing
to a reduced segment of our customers or could no longer provide financing at
competitive rates of interest, it could have a material impact on our business,
sales and results of operations. Additionally, if we were unable to
replace current third-party financing providers upon the occurrence of one or
more of the foregoing events, it could also have a material impact on our
business, sales and results of operations.
Competition. Automotive retailing
is a highly competitive business. Our competition includes publicly
and privately owned new and used car dealers, as well as millions of private
individuals. Competitors sell the same or similar makes of vehicles
that we offer in the same or similar markets at competitive
prices. Further, new entrants to the market could result in increased
acquisition costs for used vehicles and lower-than-expected vehicle sales and
margins. Competition could be affected by the increasing use of
Internet-based marketing for both used vehicles and vehicle
financing. Customers are increasingly using the Internet to compare
pricing for cars and related financing, which could further reduce sales and
adversely affect our results of operations. In addition, CAF is
subject to competition from various financial institutions.
Retail
Prices. Any significant changes in retail prices for used and
new vehicles could reduce sales and profits. If any of our
competitors seek to gain or retain market share by reducing prices for used or
new vehicles, we would likely reduce our prices in order to remain competitive,
which could result in a decrease in our sales revenue and results of operations
and require a change in our operating strategies.
Inventory. A
reduction in the availability or access to sources of inventory would adversely
affect our business. A failure to adjust appraisal offers to stay in
line with broader market trade-in offer trends, or a failure to recognize those
trends, could negatively impact the ability to acquire
inventory. Should we develop excess inventory, the inability to
liquidate the excess inventory at prices that allow us to meet margin targets or
to recover our costs would adversely affect our results of
operations.
Regulatory and
Legislative Environment. We are subject to a wide range of
federal, state and local laws and regulations, such as licensing requirements
and laws regarding advertising, vehicle sales, financing and employment
practices. Our facilities and business operations are also subject to
laws and regulations relating to environmental protection and health and
safety. The violation of these laws or regulations could result in
administrative, civil or criminal penalties or in a cease-and-desist order
against business operations. As a result, we have incurred and will
continue to incur, capital and operating expenditures and other costs to comply
with these laws and regulations. Further, over the past several
years, private plaintiffs and federal, state and local regulatory and law
enforcement authorities have increased their scrutiny of advertising, sales,
financing and insurance activities in the sale and leasing of motor
vehicles. If, as a result, other automotive retailers adopt more
transparent, consumer-oriented business practices, our differentiation versus
those retailers could be reduced.
The U.S.
Congress is considering and may adopt various forms of legislation designed to
spur automobile sales through the use of purchase vouchers, tax credits and mass
transit reimbursements. Depending on the legislation that is adopted,
if any, these incentives may only be available to consumers who purchase new
vehicles or vehicles achieving high fuel-efficiency standards. If
these incentives are limited solely to purchasers of new vehicles, or if we are
unable to maintain an inventory of vehicles achieving the mandated
fuel-efficiency standards, these conditions could have a material adverse effect
on our business, sales, results of operations and financial
condition.
Management and
Workforce. Our success depends upon the continued
contributions of our store, region and corporate management
teams. Consequently, the loss of the services of key employees could
have a material adverse effect on our business. In addition, when we
resume store growth, we will need to hire additional personnel as we open new
stores. The market for qualified employees in the industry and in the
regions in which we operate is highly competitive and could result in increased
labor costs during periods of low unemployment.
Information
Systems. Our business is dependent upon the efficient
operation of our information systems. In particular, we rely on our information
systems to effectively manage sales, inventory, consumer financing and customer
information. The failure of these systems to perform as designed or
the failure to maintain and continually enhance or protect the integrity of
these systems could disrupt our business operations, impact sales and results of
operations, expose us to customer or third-party claims or result in adverse
publicity.
Accounting
Policies and Matters. We have identified several accounting policies
as being “critical” to the fair presentation of our financial condition and
results of operations because they involve major aspects of our business and
require management to make judgments about matters that are inherently
uncertain. Materially different amounts could be recorded under
different conditions or using different assumptions.
Additionally,
the Financial Accounting Standards Board is currently considering various
proposed rule changes including, but not limited to, changes relating to the
accounting for securitization transactions and potential changes in accounting
for leases. The SEC is currently considering adopting rules that
would require U.S. issuers to prepare their financial statements contained in
SEC filings in accordance with International Financial Reporting Standards
(“IFRS”), as issued by the International Accounting Standards
Board. The implementation of these or other new accounting
requirements or changes to U.S. generally accepted accounting principles could
adversely affect our reported results of operations and financial
condition.
Confidential
Customer Information. In the normal course
of business, we collect, process and retain sensitive and confidential customer
information. Despite the security measures we have in place, our
facilities and systems, and those of third-party service providers, could be
vulnerable to security breaches, acts of vandalism, computer viruses, misplaced
or lost data, programming or human errors or other similar events. Any security
breach involving the misappropriation, loss or other unauthorized disclosure of
confidential information, whether by us or by third-party service providers,
could damage our reputation, expose us to the risks of litigation and liability,
disrupt our business or otherwise affect our results of operations.
Litigation. We
are subject to various litigation matters, which could adversely affect our
business. Claims arising out of actual or alleged violations of law
could be asserted against us by individuals, either individually or through
class actions, or by governmental entities in civil or criminal investigations
and proceedings. These actions could expose us to adverse publicity
and to substantial monetary damages and legal defense costs, injunctive relief
and criminal and civil fines and penalties, including suspension or revocation
of licenses to conduct business.
Domestic-based
Automotive Manufacturers. Adverse conditions affecting one or
more domestic-based automotive manufacturers could impact our
profitability. Recently, the financial condition and operating
results of these manufacturers have deteriorated significantly, and it is
possible that one or more of these manufacturers could file for bankruptcy
protection. Certain actions that these manufacturers may take,
including bankruptcy filing, could adversely affect consumer demand for and
values of used vehicles produced by these manufacturers, which could have a
material effect on our business, results of operations and financial
condition.
Weather. The
occurrence of severe weather events, such as rain, snow, wind, storms,
hurricanes or other natural disasters, could cause store closures, adversely
affecting consumer traffic, and could adversely affect our results of
operations.
Seasonal
Fluctuations. Our business is subject to seasonal
fluctuations. We generally realize a higher proportion of revenue and
operating profit during the first and second fiscal quarters. If
conditions arise that impair vehicle sales during the first or second fiscal
quarters, these conditions could have a disproportionately large adverse effect
on annual results of operations.
Geographic
Concentration. Our performance is subject
to local economic, competitive and other conditions prevailing in geographic
areas where we operate. Since a large number of our superstores are
located in the Southeastern U.S. and in the Chicago, Los Angeles and Washington,
D.C./Baltimore markets, our results of operations depend substantially on
general economic conditions and consumer spending habits in these
markets. In the event that any of these geographic areas experienced
a downturn in economic conditions, it could adversely affect our business and
results of operations.
Real
Estate. Our inability to acquire or lease suitable real estate
at favorable terms could limit our expansion, when resumed, and could have a
material adverse affect on our business and results of operations.
Other Material
Events. The occurrence of certain material events including
acts of terrorism, the outbreak of war or other significant national or
international events could adversely affect our business, results of operations
or financial condition.
Item
1B. Unresolved Staff Comments.
None.
Item
2. Properties.
We
conduct our used vehicle operations in two basic retail formats – production and
non-production superstores. Production superstores are those
locations at which vehicle reconditioning is performed, while non-production
superstores do not perform vehicle reconditioning. In determining
whether to construct a production or a non-production superstore on a given
site, we take several factors into account, including the anticipated long-term
reconditioning needs and the available acreage of this and other sites in that
market. As a result, some superstores that are constructed to
accommodate reconditioning activities may initially be operated as
non-production superstores until we expand our presence in that
market. As of February 28, 2009, we operated 59 production
superstores and 41 non-production superstores. At that date, we also
operated one new car store, which was located adjacent to our used car
superstore in Laurel, Maryland. Our remaining five new car franchises
are operated as part of our used car superstores.
Production
superstores are generally 40,000 to 60,000 square feet on 10 to 25 acres, but a
few range from approximately 70,000 to 95,000 square feet on 20 to 35
acres. Non-production superstores are generally 10,000 to 25,000
square feet on 4 to 12 acres.
Used
Car Superstores as of February 28, 2009
|
Total
|
Alabama
|
2
|
Arizona
|
3
|
California
|
13
|
Colorado
|
1
|
Connecticut
|
2
|
Florida
|
10
|
Georgia
|
5
|
Illinois
|
6
|
Indiana
|
2
|
Kansas
|
2
|
Kentucky
|
1
|
Maryland
|
4
|
Mississippi
|
1
|
Missouri
|
1
|
Nebraska
|
1
|
Nevada
|
2
|
New
Mexico
|
1
|
North
Carolina
|
8
|
Ohio
|
2
|
Oklahoma
|
2
|
South
Carolina
|
3
|
Tennessee
|
4
|
Texas
|
12
|
Utah
|
1
|
Virginia
|
8
|
Wisconsin
|
3
|
Total
|
100
|
We have
financed the majority of our stores through sale-leaseback
transactions. As of February 28, 2009, we leased 59 of our
100 used car superstores. We owned the remaining 41 stores
currently in operation and the three superstores that have been substantially
completed, but which will not be opened until market conditions
improve. We also own our home office building in Richmond, Virginia,
and land associated with planned future store openings.
Expansion
For the
last several years, we expanded our store base by approximately 15%
annually. In August 2008, we announced that we would temporarily slow
our store growth as a result of the weak economic and sales
environment. In December 2008, following further deterioration in
market conditions, we announced a temporary suspension in store
growth. At that time, we had four stores under construction that we
had originally planned to open in fiscal 2009, including stores in Potomac
Mills, Virginia; Augusta, Georgia; Cincinnati, Ohio; and Dayton,
Ohio. We only opened the Potomac Mills store in our well-established
Washington, D.C. market. The remaining three stores were
substantially completed at the end of fiscal 2009 and are in markets where
CarMax does not already have a presence, and given the resulting low consumer
awareness of our business model, we chose not to open these stores until market
conditions improve.
We
continue to believe that we are well positioned to succeed in the highly
competitive automotive retail industry. We have built a strong
foundation for future growth based upon our unique knowledge of the used car
market, established presence in key locations and ability to execute our
business plan in a market subject to continuous change. We continue
to refine our operating strategies and have grown to be the nation’s largest
retailer of used cars.
For
additional details on fiscal 2010, see “Operations Outlook,” included in Part
II, Item 7, of this Form 10-K.
Item 3. Legal
Proceedings.
On April
2, 2008, Mr. John Fowler filed a putative class action lawsuit against CarMax
Auto Superstores California, LLC and CarMax Auto Superstores West Coast, Inc. in
the Superior Court of California, County of Los
Angeles. Subsequently, two other lawsuits, Leena Areso et al.
v. CarMax Auto Superstores California, LLC and Justin Weaver v. CarMax Auto
Superstores California, LLC, were consolidated as part of the Fowler case. The
allegations in the consolidated case involve: (1) failure to provide meal and
rest breaks or compensation in lieu thereof; (2) failure to pay wages of
terminated or resigned employees related to meal and rest breaks and overtime;
(3) failure to pay overtime; (4) failure to comply with itemized employee wage
statement provisions; and (5) unfair competition. The putative class
consists of sales consultants, sales managers, and other hourly employees who
worked for the company in California from April 2, 2004, to the
present. The lawsuit seeks compensatory and special damages, wages,
interest, civil and statutory penalties, restitution, injunctive relief and the
recovery of attorneys’ fees. We are unable to make a reasonable
estimate of the amount or range of loss that could result from an unfavorable
outcome in this matter.
We are
involved in various other legal proceedings in the normal course of
business. Based upon our evaluation of information currently available, we
believe that the ultimate resolution of any such proceedings will not have a
material adverse effect, either individually or in the aggregate, on our
financial condition or results of operations.
No
matters were submitted to a vote of security holders during the fourth quarter
of fiscal 2009.
PART
II
Item
5. Market for the Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.
Our
common stock is listed and traded on the New York Stock Exchange under the
ticker symbol KMX.
As of
February 28, 2009, there were approximately 7,000 CarMax shareholders of
record.
The
following table sets forth for the fiscal periods indicated, the high and low
sales prices per share for our common stock, as reported on the New York Stock
Exchange composite tape and adjusted for the effect of the 2-for-1 stock split
in March 2007.
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
Fiscal
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$ |
21.99 |
|
|
$ |
19.95 |
|
|
$ |
20.70 |
|
|
$ |
10.38 |
|
Low
|
|
$ |
17.30 |
|
|
$ |
10.53 |
|
|
$ |
5.76 |
|
|
$ |
6.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$ |
27.75 |
|
|
$ |
27.42 |
|
|
$ |
25.38 |
|
|
$ |
23.47 |
|
Low
|
|
$ |
22.63 |
|
|
$ |
20.33 |
|
|
$ |
18.67 |
|
|
$ |
15.81 |
|
To date,
we have not paid a cash dividend on CarMax common stock. In the near
term, we believe it is prudent to retain our net earnings for use in operations
and to maintain maximum financial flexibility and liquidity for our
business. Longer term, we intend to continue to retain our net
earnings for use in operations and, when we resume our store growth plan, for
geographic expansion. Therefore, we do not anticipate paying any cash
dividends in the foreseeable future.
During
the fourth quarter of fiscal 2009, we sold no CarMax equity securities that were
not registered under the Securities Act of 1933, as amended. In
addition, we did not repurchase any CarMax equity securities during this
period.
Performance
Graph
The
following graph compares the five-year cumulative total return among CarMax
common stock, the S&P 500 Index and the S&P 500 Retailing
Index. The graph assumes an original investment of $100 in our common
stock and in each index on February 28, 2004, and the reinvestment of dividends,
if applicable.
|
|
As
of February 28 or 29
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
CarMax
|
|
$ |
100.00 |
|
|
$ |
97.06 |
|
|
$ |
92.41 |
|
|
$ |
155.00 |
|
|
$ |
108.00 |
|
|
$ |
55.47 |
|
S&P
500
Index
|
|
$ |
100.00 |
|
|
$ |
106.98 |
|
|
$ |
115.96 |
|
|
$ |
129.84 |
|
|
$ |
125.17 |
|
|
$ |
70.95 |
|
S&P
500 Retailing Index
|
|
$ |
100.00 |
|
|
$ |
110.07 |
|
|
$ |
123.02 |
|
|
$ |
136.39 |
|
|
$ |
107.35 |
|
|
$ |
71.56 |
|
Item
6. Selected Financial Data.
|
|
FY09
|
|
|
FY08
|
|
|
FY07
|
|
|
FY06
|
|
|
FY05
|
|
|
FY04
|
|
Income
statement information
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used vehicle
sales
|
|
$ |
5,690.7 |
|
|
$ |
6,589.3 |
|
|
$ |
5,872.8 |
|
|
$ |
4,771.3 |
|
|
$ |
3,997.2 |
|
|
$ |
3,470.6 |
|
New vehicle
sales
|
|
|
261.9 |
|
|
|
370.6 |
|
|
|
445.1 |
|
|
|
502.8 |
|
|
|
492.1 |
|
|
|
515.4 |
|
Wholesale vehicle
sales
|
|
|
779.8 |
|
|
|
985.0 |
|
|
|
918.4 |
|
|
|
778.3 |
|
|
|
589.7 |
|
|
|
440.6 |
|
Other sales and
revenues
|
|
|
241.6 |
|
|
|
254.6 |
|
|
|
229.3 |
|
|
|
207.6 |
|
|
|
181.3 |
|
|
|
171.1 |
|
Net sales and operating
revenues
|
|
|
6,974.0 |
|
|
|
8,199.6 |
|
|
|
7,465.7 |
|
|
|
6,260.0 |
|
|
|
5,260.3 |
|
|
|
4,597.7 |
|
Gross
profit
|
|
|
968.2 |
|
|
|
1,072.4 |
|
|
|
971.1 |
|
|
|
790.7 |
|
|
|
650.2 |
|
|
|
570.9 |
|
CarMax Auto Finance
income
|
|
|
15.3 |
|
|
|
85.9 |
|
|
|
132.6 |
|
|
|
104.3 |
|
|
|
82.7 |
|
|
|
85.0 |
|
SG&A
|
|
|
882.4 |
|
|
|
858.4 |
|
|
|
776.2 |
|
|
|
674.4 |
|
|
|
565.3 |
|
|
|
479.3 |
|
Earnings before income
taxes
|
|
|
96.8 |
|
|
|
297.1 |
|
|
|
323.3 |
|
|
|
217.6 |
|
|
|
165.8 |
|
|
|
178.4 |
|
Income tax
provision
|
|
|
37.6 |
|
|
|
115.0 |
|
|
|
124.8 |
|
|
|
83.4 |
|
|
|
64.5 |
|
|
|
68.9 |
|
Net
earnings
|
|
|
59.2 |
|
|
|
182.0 |
|
|
|
198.6 |
|
|
|
134.2 |
|
|
|
101.3 |
|
|
|
109.6 |
|
Share
and per share information
(Shares in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
217.5 |
|
|
|
216.0 |
|
|
|
212.5 |
|
|
|
209.3 |
|
|
|
208.1 |
|
|
|
207.0 |
|
Diluted
|
|
|
220.5 |
|
|
|
220.5 |
|
|
|
216.7 |
|
|
|
212.8 |
|
|
|
211.3 |
|
|
|
210.6 |
|
Net
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.27 |
|
|
$ |
0.84 |
|
|
$ |
0.93 |
|
|
$ |
0.64 |
|
|
$ |
0.49 |
|
|
$ |
0.53 |
|
Diluted
|
|
$ |
0.27 |
|
|
$ |
0.83 |
|
|
$ |
0.92 |
|
|
$ |
0.63 |
|
|
$ |
0.48 |
|
|
$ |
0.52 |
|
Balance sheet information
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
assets
|
|
$ |
1,287.8 |
|
|
$ |
1,356.9 |
|
|
$ |
1,150.5 |
|
|
$ |
941.7 |
|
|
$ |
853.0 |
|
|
$ |
760.5 |
|
Total
assets
|
|
|
2,379.2 |
|
|
|
2,333.2 |
|
|
|
1,885.6 |
|
|
|
1,509.6 |
|
|
|
1,306.3 |
|
|
|
1,055.1 |
|
Total current
liabilities
|
|
|
490.8 |
|
|
|
490.0 |
|
|
|
512.0 |
|
|
|
344.9 |
|
|
|
317.8 |
|
|
|
232.2 |
|
Short-term
debt
|
|
|
0.9 |
|
|
|
21.0 |
|
|
|
3.3 |
|
|
|
0.5 |
|
|
|
65.2 |
|
|
|
4.4 |
|
Current portion of long-term
debt
|
|
|
158.1 |
|
|
|
79.7 |
|
|
|
148.4 |
|
|
|
59.8 |
|
|
|
0.3 |
|
|
|
— |
|
Long-term debt, excluding current
portion
|
|
|
178.1 |
|
|
|
227.2 |
|
|
|
33.7 |
|
|
|
134.8 |
|
|
|
128.4 |
|
|
|
100.0 |
|
Total shareholders’
equity
|
|
|
1,593.1 |
|
|
|
1,488.9 |
|
|
|
1,247.4 |
|
|
|
980.1 |
|
|
|
814.2 |
|
|
|
688.0 |
|
Unit
sales information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used vehicle units
sold
|
|
|
345,465 |
|
|
|
377,244 |
|
|
|
337,021 |
|
|
|
289,888 |
|
|
|
253,168 |
|
|
|
224,099 |
|
New vehicle units
sold
|
|
|
11,084 |
|
|
|
15,485 |
|
|
|
18,563 |
|
|
|
20,901 |
|
|
|
20,636 |
|
|
|
21,641 |
|
Wholesale vehicle units
sold
|
|
|
194,081 |
|
|
|
222,406 |
|
|
|
208,959 |
|
|
|
179,548 |
|
|
|
155,393 |
|
|
|
127,168 |
|
Percent
changes in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable store used vehicle unit
sales
|
|
|
(16 |
) |
|
|
3 |
|
|
|
9 |
|
|
|
4 |
|
|
|
1 |
|
|
|
6 |
|
Total used vehicle unit
sales
|
|
|
(8 |
) |
|
|
12 |
|
|
|
16 |
|
|
|
15 |
|
|
|
13 |
|
|
|
18 |
|
Total net sales and operating
revenues
|
|
|
(15 |
) |
|
|
10 |
|
|
|
19 |
|
|
|
19 |
|
|
|
14 |
|
|
|
16 |
|
Net
earnings
|
|
|
(67 |
) |
|
|
(8 |
) |
|
|
48 |
|
|
|
32 |
|
|
|
(8 |
) |
|
|
21 |
|
Diluted net earnings per
share
|
|
|
(67 |
) |
|
|
(10 |
) |
|
|
46 |
|
|
|
31 |
|
|
|
(8 |
) |
|
|
21 |
|
Other
year-end information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used car
superstores
|
|
|
100 |
|
|
|
89 |
|
|
|
77 |
|
|
|
67 |
|
|
|
58 |
|
|
|
49 |
|
Associates
|
|
|
13,035 |
|
|
|
15,637 |
|
|
|
13,736 |
|
|
|
11,712 |
|
|
|
10,815 |
|
|
|
9,355 |
|
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”) is provided as a supplement to, and should be
read in conjunction with, our consolidated financial statements and the
accompanying notes presented in Item 8, Consolidated Financial Statements and
Supplementary Data. Note references are to the notes to consolidated
financial statements included in Item 8. Amounts and percentages in
tables may not total due to rounding. Certain prior year amounts have
been reclassified to conform to the current year’s presentation. All
share and per share amounts for prior periods have been adjusted to reflect our
2-for-1 common stock split in March 2007.
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 February 28, 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 auto retailing
marketplace. Our offer provides customers the opportunity to shop for
vehicles the same way they shop for items at other big box
retailers. Our consumer offer is structured around our four customer
benefits: low, no-haggle prices; a broad selection; high quality vehicles; and a
customer-friendly sales process. Our website, carmax.com, is a
valuable tool for communicating the CarMax consumer offer, a sophisticated
search engine and an efficient channel for customers who prefer to conduct their
shopping online. We generate revenues, income and cash flows
primarily by retailing used vehicles and associated items including vehicle
financing, extended service plans (“ESPs”) and vehicle repair
service.
We also
generate revenues, income and cash flows from the sale of vehicles purchased
through our appraisal process that do not meet our retail
standards. These vehicles are sold through on-site wholesale
auctions. Wholesale auctions are generally held on a weekly or
bi-weekly basis, and as of February 28, 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. As of February 28, 2009, these third parties included Bank
of America Dealer Financial Services, Capital One Auto Finance, CitiFinancial
Auto, Santander Consumer USA, Wachovia Dealer Services and Wells Fargo
Auto. 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. As of February 28, 2009, the used vehicle third-party ESP
providers were CNA National Warranty Corporation and The Warranty
Group. We have no contractual liability to the customer under these
third-party service plans. 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.
We are
still at a relatively early stage in the national rollout of our retail concept,
and as of February 28, 2009, we had used car superstores located in markets that
comprised approximately 45% of the U.S. population. Prior to August
2008, we had planned to open used car superstores at a rate of approximately 15%
of our used car superstore base each year. In August 2008, we
announced that we would temporarily slow our store growth as a result of the
weak economic and sales environment. In December 2008, following
further deterioration in market conditions we announced a temporary suspension
in store growth. We believe this suspension will reduce our capital
needs and improve profitability.
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. In fiscal 2009, we experienced a
large decline in customer traffic, which led to significant reductions in our
sales and gross profits and caused the deleveraging of our selling, general and
administrative expenses. A decline in investor interest in
asset-backed securities caused us to slow CAF’s share of originations in the
second half of fiscal 2009, in an effort to slow the utilization of our
warehouse facility.
Longer
term, when economic conditions improve and we resume geographic growth, we
believe the principal challenges we face will include our ability to build our
management bench strength to support the store growth and our ability to procure
suitable real estate at reasonable costs. We staff each newly opened
store with an experienced management team. Therefore, when we are
expanding our store base, we must recruit, train and develop managers and
associates to fill the pipeline necessary to support future store
openings.
Fiscal
2009 Highlights
·
|
We
believe the weakness in the economy and the stresses on consumer spending
caused by the recession adversely affected industry-wide auto sales in
fiscal 2009.
|
·
|
Net
sales and operating revenues decreased 15% to $6.97 billion from $8.20
billion in fiscal 2008, while net earnings decreased to $59.2 million, or
$0.27 per share, from $182.0 million, or $0.83 per
share.
|
·
|
Total
used vehicle revenues declined 14% to $5.69 billion versus $6.59 billion
in fiscal 2008. Total used vehicle unit sales decreased 8%,
reflecting the combination of a 16% decrease in comparable store used unit
sales partially offset by the growth in our store base. The
average used vehicle selling price declined 6%, primarily as a result of a
decline in acquisition costs caused by the weak wholesale vehicle
market.
|
·
|
We
opened 11 used car superstores in fiscal 2009, increasing our store base
by 12%. We expanded our presence in five existing markets and
we entered five new markets.
|
·
|
Total
wholesale vehicle revenues decreased 21% to $779.8 million versus $985.0
million in fiscal 2008, reflecting the combination of a 13% decline in
wholesale unit sales and a 10% decline in average wholesale selling
price. The decline in unit sales reflected a decrease in both
our appraisal traffic and our appraisal buy rate (defined as the number of
appraisal purchases as a percent of the number of vehicles
appraised).
|
·
|
Our
total gross profit decreased to $968.2 million compared with $1.07 billion
in fiscal 2008, primarily because of the significant decline in used and
wholesale unit sales. Despite the difficult sales environment,
our total gross profit dollars per unit decreased only $16 to $2,715 per
unit from $2,731 per unit in fiscal 2008. We believe our
ability to maintain a generally consistent level of gross profit per unit,
despite the challenging sales environment and an unprecedented decline in
wholesale market prices in fiscal 2009, was due in large part to the
effectiveness of our proprietary inventory management systems and
processes and our success in dramatically reducing inventories to keep
them aligned with sales.
|
·
|
CAF
income decreased to $15.3 million compared with $85.9 million in fiscal
2008. In both periods, CAF results were reduced by adjustments
related to loans originated in previous fiscal years. The
adjustments totaled $81.8 million, or $0.23 per share, in fiscal 2009 and
$9.6 million, or $0.03 per share, in fiscal 2008. The fiscal
2009 adjustments included approximately $32.0 million of mark-to-market
write-downs on subordinated bonds, $31.8 million for increased cumulative
net loss assumptions and $18.0 million for increased funding
costs. CAF’s gain on loans originated and sold declined to
$46.5 million compared with $58.1 million in fiscal 2008. In
fiscal 2009, CAF’s loan origination volume was adversely affected by the
decreases in our used unit sales and average selling price and a decrease
in the percentage of sales financed by
CAF.
|
·
|
Selling,
general and administrative (“SG&A”) expenses increased 3% to $882.4
million from $858.4 million in fiscal 2008, significantly less than the
12% increase in our store base. SG&A as a percent of net
sales and operating revenues (the “SG&A ratio”), increased to 12.7%
from 10.5% in fiscal 2008 reflecting the significant declines in
comparable store used unit sales and average selling price, partially
offset by reductions in variable
costs.
|
·
|
Net
cash provided by operating activities increased to $264.6 million compared
with $79.5 million in fiscal 2008, primarily reflecting the large
reduction in used vehicle inventories in fiscal 2009, partially offset by
the decrease in net earnings.
|
CRITICAL
ACCOUNTING POLICIES
Our
results of operations and financial condition as reflected in the consolidated
financial statements have been prepared in accordance with U.S. generally
accepted accounting principles. Preparation of financial statements
requires management to make estimates and assumptions affecting the reported
amounts of assets, liabilities, revenues, expenses and the disclosures of
contingent assets and liabilities. We use our historical experience
and other relevant factors when developing our estimates and
assumptions. We continually evaluate these estimates and
assumptions. Note 2 includes a discussion of significant accounting
policies. The accounting policies discussed below are the ones we
consider critical to an understanding of our consolidated financial statements
because their application places the most significant demands on our
judgment. Our financial results might have been different if
different assumptions had been used or other conditions had
prevailed.
Securitization
Transactions
We use a
securitization program to fund substantially all of the auto loan receivables
originated by CAF. The securitization transactions are accounted for
as sales. A gain, recorded at the time of the securitization
transaction, results from recording a receivable equal to the present value of
the residual cash flows we expect to receive over the life of the securitized
receivables. The fair value of our retained interest in
securitization transactions includes the present value of the residual cash
flows we expect to receive over the life of the securitized receivables, reserve
accounts, an undivided ownership interest in certain receivables and retained
subordinated bonds.
The
present value of the residual cash flows we expect to receive over the life of
the securitized receivables is determined by estimating the future cash flows
using our assumptions of key factors, such as finance charge income, loss rates,
prepayment rates, funding costs and discount rates appropriate for the type of
asset and risk. These assumptions are derived from historical
experience and projected economic trends. Adjustments to one or more
of these assumptions could have a material impact on the fair value of the
retained interest. The fair value of the retained interest could also
be affected by external factors, such as changes in the behavior patterns of
customers, changes in the strength of the economy and developments in the
interest rate and credit markets. Note 2(C) includes a discussion of
accounting policies related to securitizations. Note 4 includes a
discussion of securitizations and provides a sensitivity analysis showing the
hypothetical effect on the retained interest if there were variations from the
assumptions used. Note 6 includes a discussion on fair value
measurements. In addition, see the “CarMax Auto Finance Income”
section of this MD&A for a discussion of the effect of changes in our
assumptions.
Revenue
Recognition
We
recognize revenue when the earnings process is complete, generally either at the
time of sale to a customer or upon delivery to a customer. We
recognize used vehicle revenue when a sales contract has been executed and the
vehicle has been delivered, net of a reserve for returns under our 5-day,
money-back guarantee. A reserve for vehicle returns is recorded based
on historical experience and trends, and it could be affected if future vehicle
returns differ from historical averages.
We also
sell ESPs on behalf of unrelated third parties to customers who purchase a
vehicle. Because we are not the primary obligor under these service
plans, we recognize commission revenue on the ESPs at the time of sale, net of a
reserve for returns. The reserve for ESP cancellations is recorded
based on historical experience and trends, and it could be affected if future
ESP cancellations differ from historical averages.
Income
Taxes
Estimates
and judgments are used in the calculation of certain tax liabilities and in the
determination of the recoverability of certain deferred tax
assets. In the ordinary course of business, transactions occur for
which the ultimate tax outcome is uncertain at the time of the
transactions. We adjust our income tax provision in the period in
which we determine that it is probable that our actual results will differ from
our estimates. Tax law and rate changes are reflected in the income
tax provision in the period in which such changes are enacted. Note 8
includes information regarding income taxes.
We
evaluate the need to record valuation allowances that would reduce deferred tax
assets to the amount that will more likely than not be realized. When
assessing the need for valuation allowances, we consider available carrybacks,
future reversals of existing temporary differences and future taxable
income. Except for a valuation allowance recorded for a capital loss
carryforward that may not be utilized before its expiration, we believe that our
recorded deferred tax assets as of February 28, 2009, will more likely than not
be realized. However, if a change in circumstances results in a
change in our ability to realize our deferred tax assets, our tax provision
would increase in the period when the change in circumstances
occurs.
In
addition, the calculation of our tax liabilities involves dealing with
uncertainties in the application of complex tax regulations. We
recognize potential liabilities for anticipated tax audit issues in the U.S. and
other tax jurisdictions based on our estimate of whether, and the extent to
which, additional taxes will be due. If payments of these amounts
ultimately prove to be unnecessary, the reversal of the liabilities would result
in tax benefits being recognized in the period when we determine the liabilities
are no longer necessary. If our estimate of tax liabilities proves to
be less than the ultimate assessment, a further charge to expense would result
in the period of determination.
Defined
Benefit Retirement Plan
The plan
obligations and related assets of our defined benefit retirement plan are
presented in Note 9. Plan assets, which consist primarily of
marketable equity and debt instruments, are valued using current market
quotations. Plan obligations and the annual pension expense are
determined by independent actuaries using a number of assumptions that we
provide. Key assumptions used to measure the plan obligations include
the discount rate, the rate of compensation increases, the future return on plan
assets and the mortality rate. In determining the discount rate, we
use the current yield on high-quality, fixed-income debt instruments that have
maturities that approximate the expected timing of the anticipated benefit
payments. Compensation increase assumptions for periods prior to
December 31, 2008, were based upon our historical experience and anticipated
future board and management actions. Asset returns are estimated
based upon the anticipated average yield on the plan
assets. Effective December 31, 2008, we froze the benefits under the
plan, and no additional benefits will accrue to participants after that
date. Other than the effects of the plan freeze, we do not believe
that any significant changes in assumptions used to measure the plan obligations
are likely to occur that would have a material impact on our financial position
or results of operations.
RESULTS
OF OPERATIONS
Net
Sales and Operating Revenues
|
|
Years
Ended February 28 or 29
|
|
(In
millions)
|
|
2009
|
|
|
%
|
|
|
2008
|
|
|
%
|
|
|
2007
|
|
|
%
|
|
Used
vehicle
sales
|
|
$ |
5,690.7 |
|
|
|
81.6 |
|
|
$ |
6,589.3 |
|
|
|
80.4 |
|
|
$ |
5,872.8 |
|
|
|
78.7 |
|
New
vehicle
sales
|
|
|
261.9 |
|
|
|
3.8 |
|
|
|
370.6 |
|
|
|
4.5 |
|
|
|
445.1 |
|
|
|
6.0 |
|
Wholesale
vehicle
sales
|
|
|
779.8 |
|
|
|
11.2 |
|
|
|
985.0 |
|
|
|
12.0 |
|
|
|
918.4 |
|
|
|
12.3 |
|
Other
sales and revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extended service plan
revenues
|
|
|
125.2 |
|
|
|
1.8 |
|
|
|
132.4 |
|
|
|
1.6 |
|
|
|
114.4 |
|
|
|
1.5 |
|
Service department
sales
|
|
|
101.2 |
|
|
|
1.5 |
|
|
|
96.0 |
|
|
|
1.2 |
|
|
|
90.6 |
|
|
|
1.2 |
|
Third-party finance fees,
net
|
|
|
15.3 |
|
|
|
0.2 |
|
|
|
26.1 |
|
|
|
0.3 |
|
|
|
24.3 |
|
|
|
0.3 |
|
Total
other sales and revenues
|
|
|
241.6 |
|
|
|
3.5 |
|
|
|
254.6 |
|
|
|
3.1 |
|
|
|
229.3 |
|
|
|
3.1 |
|
Total
net sales and operating revenues
|
|
$ |
6,974.0 |
|
|
|
100.0 |
|
|
$ |
8,199.6 |
|
|
|
100.0 |
|
|
$ |
7,465.7 |
|
|
|
100.0 |
|
Retail
Vehicle Sales Changes
|
|
Years
Ended February 28 or 29
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Vehicle
units:
|
|
|
|
|
|
|
|
|
|
Used
vehicles
|
|
|
(8 |
)% |
|
|
12 |
% |
|
|
16 |
% |
New
vehicles
|
|
|
(28 |
)% |
|
|
(17 |
)% |
|
|
(11 |
)% |
Total
|
|
|
(9 |
)% |
|
|
10 |
% |
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle
dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
Used
vehicles
|
|
|
(14 |
)% |
|
|
12 |
% |
|
|
23 |
% |
New
vehicles
|
|
|
(29 |
)% |
|
|
(17 |
)% |
|
|
(11 |
)% |
Total
|
|
|
(14 |
)% |
|
|
10 |
% |
|
|
20 |
% |
Comparable
store used unit sales growth is one of the key drivers of our
profitability. A store is included in comparable store retail sales
in the store’s fourteenth full month of operation.
Comparable
Store Retail Vehicle Sales Changes
|
|
Years
Ended February 28 or 29
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Vehicle
units:
|
|
|
|
|
|
|
|
|
|
Used
vehicles
|
|
|
(16 |
)% |
|
|
3 |
% |
|
|
9 |
% |
New
vehicles
|
|
|
(25 |
)% |
|
|
(11 |
)% |
|
|
(11 |
)% |
Total
|
|
|
(17 |
)% |
|
|
2 |
% |
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle
dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
Used
vehicles
|
|
|
(21 |
)% |
|
|
3 |
% |
|
|
16 |
% |
New
vehicles
|
|
|
(26 |
)% |
|
|
(11 |
)% |
|
|
(12 |
)% |
Total
|
|
|
(21 |
)% |
|
|
2 |
% |
|
|
13 |
% |
Change
in Used Car Superstore Base
|
|
Years
Ended February 28 or 29
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Used
car superstores, beginning of
year
|
|
|
89 |
|
|
|
77 |
|
|
|
67 |
|
Superstore
openings
|
|
|
11 |
|
|
|
12 |
|
|
|
10 |
|
Used
car superstores, end of
year
|
|
|
100 |
|
|
|
89 |
|
|
|
77 |
|
Openings
as a percent of the beginning-of-year store base
|
|
|
12 |
% |
|
|
16 |
% |
|
|
15 |
% |
During
fiscal 2009, we opened 11 used car superstores, expanding our presence in 5
existing markets and opening stores in 5 new markets, including Huntsville,
Alabama; Phoenix, Arizona (2 stores opened); Colorado Springs, Colorado; Tulsa,
Oklahoma; and Charleston, South Carolina.
Used
Vehicle Sales
Fiscal 2009
Versus Fiscal 2008. Our 14% decrease in used vehicle revenues
in fiscal 2009 resulted from the combination of an 8% decline in unit sales and
a 6% decrease in average retail selling price. The decline in unit
sales reflected a 16% decrease in comparable store used units, partially offset
by sales from newer superstores not yet in the comparable store
base. The decrease in the average retail selling price was primarily
caused by a significant industry-wide drop in used car prices during the first
three quarters of the year, which reduced our inventory acquisition
costs. Early in fiscal 2009, the steep increase in the cost of
gasoline caused a temporary shift in consumer demand away from SUVs and trucks,
toward more fuel-efficient vehicles. However, in the latter half of
fiscal 2009, the combination of the decline in gasoline prices and the lower,
more affordable prices for these less fuel-efficient vehicles caused our sales
mix to return to the prior year levels.
We began
to see the initial effects of the slowdown in the automotive retail market in
the latter part of fiscal 2008. However, the weakness in the economy
and the stresses on consumer spending accelerated in fiscal 2009, causing
customer traffic to decline sharply starting in late May 2008. These
stresses included rising unemployment rates, decreases in home equity values and
personal wealth, and record low levels of consumer confidence. For
the year, the decline in customer traffic was slightly greater than the decrease
in comparable store unit sales. Despite the more difficult
environment, the solid execution by our store teams allowed us to modestly
improve our conversion rate compared with fiscal 2008. While both CAF
and our third-party providers tightened lending criteria for some higher-risk
customer segments, lack of credit availability was not a major contributor to
the reduction in sales. Our data for the year indicated that we
modestly gained market share in the late-model used vehicle market in fiscal
2009.
Fiscal 2008
Versus Fiscal 2007. The 12% increase in our used vehicle
revenues in fiscal 2008 resulted from a corresponding increase in unit
sales. The unit sales growth reflected sales from newer superstores
not yet included in the comparable store base and a 3% increase in comparable
store used units. This 3% increase in comparable store used units in
fiscal 2008 reflected the challenging comparison with the 9% increase in fiscal
2007, as well as declining consumer confidence in the latter part of fiscal
2008. Our average used vehicle selling price in fiscal 2008 was
similar to the prior year, as consumer-driven mix shifts from large and
mid-sized SUVs to smaller, more fuel-efficient vehicles in the latter half of
the year offset normal price inflation.
In fiscal
2008, we experienced an overall increase in consumer traffic, which we believe
was a benefit of the strength of our consumer offer, as well as a favorable
response to improvements made to carmax.com. However, compared with
fiscal 2007, our sales conversion rate declined slightly as consumers appeared
to be somewhat more hesitant in committing to big-ticket
purchases. Sales continued to be supported by the consistent
availability of credit from CAF and from third-party financing
providers. Despite the deceleration in automotive industry sales, our
data indicated that we continued to gain share within our existing markets in
fiscal 2008 in the late-model used vehicle market.
New
Vehicle Sales
Fiscal 2009
Versus Fiscal 2008. New vehicle revenues declined 29% in
fiscal 2009. The decline was the result of a 28% decrease in unit
sales and a 1% decrease in average selling price. New vehicle unit
sales primarily reflected the extremely soft new car industry sales trends, as
well as the sale of our Orlando Chrysler-Jeep-Dodge franchise in the second
quarter of fiscal 2008. For the fiscal year ended February 28, 2009,
new car manufacturers reported a 23% decline in U.S. new car unit
sales.
Fiscal 2008
Versus Fiscal 2007. The 17% decrease in new vehicle revenues
in fiscal 2008 was the result of a corresponding decrease in unit
sales. The decline in new vehicle unit sales reflected soft new car
industry sales trends, particularly for the domestic manufacturers that we
represent, and the sale of our Orlando Chrysler-Jeep-Dodge
franchise.
Wholesale
Vehicle Sales
Our
operating strategy is to build customer satisfaction by offering high-quality
vehicles. Fewer than half of the vehicles acquired from consumers
through the appraisal purchase process meet our standards for reconditioning and
subsequent retail sale. Those vehicles that do not meet our standards
are sold through on-site wholesale auctions. Our wholesale auction
prices usually reflect the trends in the general wholesale market for the types
of vehicles we sell, although they could also be affected by changes in vehicle
mix or the average age, mileage or condition of the vehicles
wholesaled.
Fiscal 2009
Versus Fiscal 2008. The 21% decrease in wholesale vehicle
revenues in fiscal 2009 resulted from a 13% decrease in wholesale unit sales
combined with a 10% decrease in average wholesale selling price. The
decline in unit sales primarily reflected a decrease in our appraisal traffic
and, to a lesser extent, a decline in our appraisal buy
rate. Industry wholesale prices for SUVs, trucks and other less fuel
efficient vehicles fell sharply in the first two quarters of fiscal 2009, and
prices for virtually all vehicle classes declined at an unprecedented rate
during the third quarter, reflecting the weak demand environment. We
believe the significant drop in wholesale market values, which resulted in
corresponding decreases in our appraisal offers, contributed to the reduction in
our buy rate. Appraisal traffic was affected by the overall slowdown
in customer traffic. The decline in average wholesale selling price
reflected the trends in the general wholesale market for the types of vehicles
we sell.
Fiscal 2008
Versus Fiscal 2007. The 7% increase in wholesale vehicle
revenues in fiscal 2008 resulted from a 6% increase in wholesale unit sales
combined with a 1% increase in average wholesale selling price. Our
wholesale unit sales benefited from an increase in appraisal traffic driven by
the combination of the expansion of our store base and our comparable store unit
sales growth. However, our appraisal buy rate declined from the prior
year level, reflecting, we believe, an increasing hesitancy of consumers to
commit to purchasing big-ticket items.
Other
Sales and Revenues
Other
sales and revenues include commissions on the sale of ESPs, service department
sales and net third-party finance fees. The fixed fees paid by
third-party finance providers vary by provider, reflecting their differing
levels of credit risk exposure. Providers who purchase the highest
risk loans purchase these loans at a discount, which is reflected as an offset
to finance fee revenues received from the other third-party
providers.
Fiscal 2009
Versus Fiscal 2008. Other sales and revenues decreased 5% in
fiscal 2009. ESP revenues declined 5%. Compared with the
8% decrease in total used vehicle unit sales in fiscal 2009, ESP revenues
benefited from a slow down in the rate of ESP cancellations, which we believe
was the result of the decline in auto industry sales and
trade-ins. Third-party finance fees decreased 42% due to a
combination of factors including the reduction in retail vehicle unit sales, a
shift in mix among providers and a change in discount arrangements with certain
of the providers during fiscal 2009. Collectively, the third-party
providers financed a larger percentage of our retail unit sales in the second
half of fiscal 2009, as we chose to route more credit applications to these
providers. Doing so allowed us to slow the use of capacity
in our warehouse facility, which is used to provide initial funding for
substantially all of the auto loan receivables originated by
CAF.
Fiscal 2008
Versus Fiscal 2007. Other sales and
revenues increased 11% in fiscal 2008, similar to the 12% increase in used
vehicle unit sales.
Supplemental
Sales Information
Unit
Sales
|
|
Years
Ended February 28 or 29
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Used
vehicles
|
|
|
345,465 |
|
|
|
377,244 |
|
|
|
337,021 |
|
New
vehicles
|
|
|
11,084 |
|
|
|
15,485 |
|
|
|
18,563 |
|
Wholesale
vehicles
|
|
|
194,081 |
|
|
|
222,406 |
|
|
|
208,959 |
|
Average
Selling Prices
|
|
Years
Ended February 28 or 29
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Used
vehicles
|
|
$ |
16,291 |
|
|
$ |
17,298 |
|
|
$ |
17,249 |
|
New
vehicles
|
|
$ |
23,490 |
|
|
$ |
23,795 |
|
|
$ |
23,833 |
|
Wholesale
vehicles
|
|
$ |
3,902 |
|
|
$ |
4,319 |
|
|
$ |
4,286 |
|
Retail
Vehicle Sales Mix
|
|
Years
Ended February 28 or 29
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Vehicle
units:
|
|
|
|
|
|
|
|
|
|
Used
vehicles
|
|
|
97 |
% |
|
|
96 |
% |
|
|
95 |
% |
New
vehicles
|
|
|
3 |
|
|
|
4 |
|
|
|
5 |
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Vehicle
dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
Used
vehicles
|
|
|
96 |
% |
|
|
95 |
% |
|
|
93 |
% |
New
vehicles
|
|
|
4 |
|
|
|
5 |
|
|
|
7 |
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
As of
February 28, 2009, we had a total of six new car franchises representing the
Chevrolet, Chrysler, Nissan and Toyota brands. During the second
quarter of fiscal 2008, we sold our Orlando Chrysler-Jeep-Dodge
franchise.
During
fiscal 2009, we expanded our car-buying center test with the openings in Dallas,
Texas, and Baltimore, Maryland. We now have a total of five
car-buying centers at which we conduct appraisals and purchase, but do not sell,
vehicles. We will continue to evaluate the performance of these five
centers before deciding whether to open additional ones in future
years. These test sites are part of our long-term program to increase
both appraisal traffic and retail vehicle sourcing self-sufficiency (equal to
the percentage of vehicles sold at retail that were purchased directly from
consumers).
Gross
Profit
|
|
Years
Ended February 28 or 29
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Used
vehicles gross
profit
|
|
$ |
644.4 |
|
|
$ |
708.6 |
|
|
$ |
641.2 |
|
New
vehicles gross
profit
|
|
|
9.0 |
|
|
|
15.4 |
|
|
|
21.7 |
|
Wholesale
vehicles gross
profit
|
|
|
162.5 |
|
|
|
176.7 |
|
|
|
155.0 |
|
Other
gross
profit
|
|
|
152.2 |
|
|
|
171.8 |
|
|
|
153.2 |
|
Total
gross
profit
|
|
$ |
968.2 |
|
|
$ |
1,072.4 |
|
|
$ |
971.1 |
|
Gross
Profit per Unit
|
|
Years
Ended February 28 or 29
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
$
per unit (1)
|
|
|
|
% |
(2) |
|
$
per unit (1)
|
|
|
|
% |
(2) |
|
$
per unit (1)
|
|
|
|
% |
(2) |
Used
vehicle gross profit
|
|
$ |
1,865 |
|
|
|
11.3 |
|
|
$ |
1,878 |
|
|
|
10.8 |
|
|
$ |
1,903 |
|
|
|
10.9 |
|
New
vehicle gross profit
|
|
$ |
814 |
|
|
|
3.4 |
|
|
$ |
994 |
|
|
|
4.2 |
|
|
$ |
1,169 |
|
|
|
4.9 |
|
Wholesale
vehicle gross profit
|
|
$ |
837 |
|
|
|
20.8 |
|
|
$ |
794 |
|
|
|
17.9 |
|
|
$ |
742 |
|
|
|
16.9 |
|
Other
gross
profit
|
|
$ |
427 |
|
|
|
63.0 |
|
|
$ |
437 |
|
|
|
67.5 |
|
|
$ |
431 |
|
|
|
66.8 |
|
Total
gross
profit
|
|
$ |
2,715 |
|
|
|
13.9 |
|
|
$ |
2,731 |
|
|
|
13.1 |
|
|
$ |
2,731 |
|
|
|
13.0 |
|
(1)
|
Calculated
as category gross profit divided by its respective units sold, except the
other and total categories, which are divided by total retail units
sold.
|
(2)
|
Calculated
as a percentage of its respective sales or
revenue.
|
Used
Vehicle Gross Profit
We target
a dollar range of gross profit per used unit sold. The gross profit
dollar target for an individual vehicle is based on a variety of factors,
including its anticipated probability of sale and its mileage relative to its
age; however, it is not primarily based on the vehicle’s selling
price. Our ability to quickly adjust appraisal offers to be
consistent with the broader market trade-in trends and our rapid inventory turns
reduce the exposure to the inherent continual depreciation in used vehicle
values and contribute to our ability to manage gross profit dollars per
unit. We employ a volume-based strategy, and we systematically mark
down individual vehicle prices based on proprietary pricing algorithms in order
to appropriately balance sales trends, inventory turns and gross profit
achievement. When customer traffic and sales are consistently strong,
we generally take fewer pricing markdowns, which in turn benefits gross profit
dollars per unit. When the sales pace slows, we may initially take
more pricing markdowns, which could pressure gross profit dollars per
unit. However, as we are successful in reducing inventories to align
them with a slower sales pace, this may allow us to return to target levels of
gross profit per unit. Over the past several years, we have continued
to refine our car-buying strategies, which we believe has benefited used vehicle
gross profit per unit.
Fiscal 2009
Versus Fiscal 2008. Our used vehicle gross profit decreased by
$64.2 million, or 9%, to $644.4 million from $708.6 million in fiscal 2008,
primarily as a result of the 8% decline in total used unit
sales. Despite the difficult sales environment in fiscal 2009, gross
profit per unit decreased only $13 to $1,865 per unit. Several
factors adversely affected our fiscal 2009 used vehicle gross profit per unit,
including a reduction in the percent of vehicles purchased directly from
customers and the sharp decrease in wholesale industry prices. These
were largely offset, however, by our success in managing our
inventories.
During
fiscal 2009, we experienced a decline in both appraisal traffic and buy rate,
which required us to source a larger percentage of our used vehicles at
auction. Vehicles purchased at auction typically generate less gross
profit per unit compared with vehicles purchased directly from
consumers. Additionally, wholesale industry prices for mid-sized and
large SUVs and trucks declined sharply in the spring and early summer of 2008,
and this rapid decline in valuation resulted in margin pressure on this segment
of inventory in the first half of fiscal 2009.
We
believe that our ability to maintain a generally consistent level of gross
profit per unit during fiscal 2009, despite the challenging sales environment
and the unprecedented decline in wholesale market prices, was due in large part
to the effectiveness of our proprietary inventory management systems and
processes. In response to the sharp decline in traffic and sales that
began in late May 2008, we rapidly reduced our used car inventories, which
brought them back in line with the current sales rates and minimized required
pricing markdowns in the second half of the fiscal year. Compared
with inventory levels at stores open as of February 29, 2008, we had
approximately 16,500 fewer total used vehicle units in inventory as of February
28, 2009, representing a 28% reduction. Due to the severe decline in
customer traffic during fiscal 2009, we generally chose not to reduce our gross
profit targets, as we believed doing so in the current economic environment
would not have spurred a sufficient increase in sales to offset the reduction in
per-unit profitability.
Fiscal 2008
Versus Fiscal 2007. Our used vehicle gross profit increased by
$67.4 million, or 11%, to $708.6 million from $641.2 million in fiscal 2007,
primarily as a result of the 12% increase in total used unit
sales. Our used vehicle gross profit per unit declined $25 to $1,878
per unit in fiscal 2008. The gross profit per unit increased modestly
in the first half of the year before declining in the second half of the
year. As the economic environment continued to weaken in the third
quarter of fiscal 2008, we moderately reduced our gross profit targets at the
beginning of the fourth quarter in an attempt to create additional value for
customers and drive sales.
New
Vehicle Gross Profit
Fiscal 2009
Versus Fiscal 2008. Our new vehicle gross
profit decreased $6.4 million to $9.0 million in fiscal 2009 from $15.4 million
in fiscal 2008, reflecting the 28% reduction in total new unit sales and a $180
decline in gross profit per unit. These reductions resulted from the
sharp decline in new car industry sales and the resulting increase in
competitiveness in the new car market.
Fiscal 2008
Versus Fiscal 2007. Our new vehicle gross
profit decreased $6.3 million to $15.4 million in fiscal 2008 from $21.7 million
in fiscal 2007, reflecting the 17% drop in total new unit sales and a $175
decline in gross profit per unit. The decline in overall consumer
demand for new cars in fiscal 2008 pressured profits for many new car retailers,
including CarMax.
Wholesale
Vehicle Gross Profit
Our
wholesale vehicle gross profit per unit has steadily increased over the last
several years, reflecting the benefits realized from improvements and
refinements in our car-buying strategies, appraisal delivery processes and
in-store auction processes. We have made continuous improvements in
these processes, which we believe has allowed us to become more
efficient. Our in-store auctions have benefited from initiatives to
increase our dealer-to-car ratio, which we believe has allowed us to achieve
higher prices. In addition, the frequency of our auctions, which are
generally held weekly or bi-weekly, minimizes the depreciation risk on these
vehicles.
Fiscal 2009
Versus Fiscal 2008. Our wholesale vehicle gross profit
decreased by $14.2 million, or 8%, to $162.5 million in fiscal 2009 from $176.7
million in fiscal 2008. The reduction was driven by the 13% decline
in wholesale vehicle unit sales, partially offset by an increase in wholesale
gross profit per unit of $43, or 5%, to $837 per unit in fiscal
2009. We experienced a record dealer-to-car ratio at our auctions for
the year, with the resulting price competition among bidders contributing to the
strong wholesale gross profit per unit. Our wholesale vehicles are
predominantly comprised of older, higher mileage vehicles, and we believe the
demand for these types of vehicles remained strong from dealers who specialize
in selling to credit-challenged customers.
Fiscal 2008
Versus Fiscal 2007. Our wholesale vehicle gross profit
increased by $21.7 million, or 14%, to $176.7 million in fiscal 2008 from $155.0
million in fiscal 2007. The increase was attributable to the 6%
increase in wholesale vehicle unit sales and an increase in wholesale gross
profit per unit of $52, or 7%, to $794 per unit in fiscal 2008. We
continued to experience strong dealer attendance at our auctions throughout the
year, despite the challenging economic environment.
Other
Gross Profit
Other
gross profit includes profits related to ESP revenues, third-party finance fees
and service department sales. 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. Accordingly, changes in the
mix of ESP revenues and third-party finance fees, relative to service department
sales, can affect the composition of other gross profit.
Fiscal 2009
Versus Fiscal 2008. Other gross profit
decreased by $19.6 million, or 11%, to $152.2 million in fiscal 2009 from $171.8
million in fiscal 2008. This decrease primarily reflected the
reductions in used and new retail unit sales and the related impact on ESP
revenues and third-party finance fees and a $10 decline in other gross profit
per unit in fiscal 2009. The decline in other gross profit per unit
was primarily associated with the increase in mix of other revenues represented
by service department sales.
Fiscal 2008
Versus Fiscal 2007. Other gross profit
increased by $18.6 million, or 12%, to $171.8 million in fiscal 2008 from $153.2
million in fiscal 2007. The increase was the result of the increase
in used unit sales and the related affects on ESP sales and third-party finance
fees, and a $6 increase in other gross profit per unit in fiscal
2008. The improvement in per unit profitability was the result of an
increase in mix of other revenues represented by ESP sales and third-party
finance fees.
Impact
of Inflation
Historically,
inflation has not been a significant contributor to
results. Profitability is primarily affected by our ability to
achieve targeted unit sales and gross profit dollars per vehicle rather than on
average retail prices. However, increases in average vehicle selling
prices benefit the SG&A ratio and CAF income, to the extent the average
amount financed also increases.
In fiscal
2009, the weakness in the economy and the stresses on consumer spending
contributed to the industry-wide slowdown in the sale of new and used vehicles
and to the unprecedented decline in wholesale market prices for most vehicle
classes during the first three quarters of the year. These lower
wholesale values reduced our vehicle acquisition costs and contributed to the
decline in our used and wholesale vehicle average selling price.
CarMax
Auto Finance Income
CAF
provides financing for a portion of our used and new car retail
sales. Because the purchase of a vehicle is often reliant on the
consumer’s ability to obtain on-the-spot financing, it is important to our
business that financing be available to creditworthy customers. While
financing can also be obtained from third-party sources, we believe that total
reliance on third parties can create unacceptable volatility and business
risk. Furthermore, we believe that our processes and systems, the
transparency of our pricing and our vehicle quality provide a unique and ideal
environment in which to procure high quality auto loans, both for CAF and for
the third-party financing providers. Generally, CAF has provided us
the opportunity to capture additional profits and cash flows from auto loan
receivables while managing our reliance on third-party financing
sources.
Components
of CAF Income
|
|
Years
Ended February 28 or 29
|
|
(In
millions)
|
|
2009
|
|
|
%
|
|
|
2008
|
|
|
%
|
|
|
2007
|
|
|
%
|
|
Total
(loss) gain (1)
|
|
$ |
(35.3 |
) |
|
|
(1.7 |
) |
|
$ |
48.5 |
|
|
|
1.9 |
|
|
$ |
99.7 |
|
|
|
4.3 |
|
Other
CAF income: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee
income
|
|
|
41.3 |
|
|
|
1.0 |
|
|
|
37.4 |
|
|
|
1.0 |
|
|
|
32.4 |
|
|
|
1.1 |
|
Interest
income
|
|
|
48.3 |
|
|
|
1.2 |
|
|
|
33.3 |
|
|
|
0.9 |
|
|
|
26.6 |
|
|
|
0.9 |
|
Total
other CAF income
|
|
|
89.6 |
|
|
|
2.2 |
|
|
|
70.7 |
|
|
|
2.0 |
|
|
|
59.0 |
|
|
|
1.9 |
|
Direct
CAF expenses: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAF payroll and fringe benefit
expense
|
|
|
19.2 |
|
|
|
0.5 |
|
|
|
15.9 |
|
|
|
0.4 |
|
|
|
12.0 |
|
|
|
0.4 |
|
Other direct CAF
expenses
|
|
|
19.9 |
|
|
|
0.5 |
|
|
|
17.4 |
|
|
|
0.5 |
|
|
|
14.0 |
|
|
|
0.5 |
|
Total
direct CAF
expenses
|
|
|
39.1 |
|
|
|
1.0 |
|
|
|
33.3 |
|
|
|
0.9 |
|
|
|
26.0 |
|
|
|
0.9 |
|
CarMax
Auto Finance income (3)
|
|
$ |
15.3 |
|
|
|
0.2 |
|
|
$ |
85.9 |
|
|
|
1.0 |
|
|
$ |
132.6 |
|
|
|
1.8 |
|
Total
loans
sold
|
|
$ |
2,031.2 |
|
|
|
|
|
|
$ |
2,534.4 |
|
|
|
|
|
|
$ |
2,322.7 |
|
|
|
|
|
Average
managed
receivables
|
|
$ |
4,021.0 |
|
|
|
|
|
|
$ |
3,608.4 |
|
|
|
|
|
|
$ |
3,071.7 |
|
|
|
|
|
Ending
managed receivables
|
|
$ |
3,986.7 |
|
|
|
|
|
|
$ |
3,838.5 |
|
|
|
|
|
|
$ |
3,311.0 |
|
|
|
|
|
Total
net sales and operating revenues
|
|
$ |
6,974.0 |
|
|
|
|
|
|
$ |
8,199.6 |
|
|
|
|
|
|
$ |
7,465.7 |
|
|
|
|
|
Percent
columns indicate:
(1)
|
Percent
of total loans sold.
|
(2)
|
Percent
of average managed receivables.
|
(3)
|
Percent
of total net sales and operating
revenues.
|
CAF
income does not include any allocation of indirect costs or
income. We present this information on a direct basis to avoid making
arbitrary decisions regarding the indirect benefits or costs that could be
attributed to CAF. Examples of indirect costs not included are retail
store expenses and corporate expenses such as human resources, administrative
services, marketing, information systems, accounting, legal, treasury and
executive payroll.
CAF
originates auto loans to qualified customers at competitive market rates of
interest. The majority of CAF income has typically been generated by
the spread between the interest rates charged to customers and the related cost
of funds. Substantially all of the loans originated by CAF are sold
in securitization transactions. A gain, recorded at the time of
securitization, results from recording a receivable approximately equal to the
present value of the expected residual cash flows generated by the securitized
receivables. Historically, the gain on loans originated and sold as a
percent of loans originated and sold (the “gain percentage”) has generally been
in the range of 3.5% to 4.5%. However, the gain percentage was
substantially below the low end of this range in fiscal 2009 and fiscal 2008,
primarily as a result of the more challenging economic environment and the
disruption in the global credit markets. These factors caused us to
increase the loss and discount rate assumptions that affect the gain recognized
on the sale of loans and increased our funding costs.
Gain
(Loss) on Loans Sold
|
|
Years
Ended February 28 or 29
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Gain
on sales of loans originated and sold (1)
|
|
$ |
46.5 |
|
|
$ |
58.1 |
|
|
$ |
86.7 |
|
Other
(losses) gains(1)
|
|
|
(81.8 |
) |
|
|
(9.6 |
) |
|
|
13.0 |
|
Total
(loss)
gain
|
|
$ |
(35.3 |
) |
|
$ |
48.5 |
|
|
$ |
99.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
originated and
sold
|
|
$ |
1,930.2 |
|
|
$ |
2,430.8 |
|
|
$ |
2,240.2 |
|
Receivables
repurchased from term securitizations and resold
|
|
|
101.0 |
|
|
|
103.6 |
|
|
|
82.5 |
|
Total
loans
sold
|
|
$ |
2,031.2 |
|
|
$ |
2,534.4 |
|
|
$ |
2,322.7 |
|
Gain
percentage on loans originated and sold
|
|
|
2.4 |
% |
|
|
2.4 |
% |
|
|
3.9 |
% |
Total
(loss) gain as a percentage of total loans sold
|
|
|
(1.7 |
)% |
|
|
1.9 |
% |
|
|
4.3 |
% |
(1)
|
To
the extent we recognize valuation or other adjustments related to loans
originated and sold during previous quarters of the same fiscal year, the
sum of amounts reported for the individual quarters may not equal the
amounts reported for the corresponding full fiscal
year.
|
The gain
on sales of loans originated and sold includes both the gain income recorded at
the time of securitization and the effect of any subsequent changes in valuation
assumptions or funding costs that are incurred in the same fiscal period that
the loans were originated. Other losses or gains include the effects
of changes in valuation assumptions or funding costs related to loans originated
and sold during previous fiscal periods. In addition, other losses or
gains could include the effects of new term securitizations, changes in the
valuation of retained subordinated bonds and the repurchase and resale of
receivables in existing term securitizations, as applicable.
Our term
securitizations typically contain an option to repurchase the securitized
receivables when the outstanding balance in the pool of auto loan receivables
falls below 10% of the original pool balance. This option was
exercised two times in each of fiscal 2009, 2008 and 2007. In each
case, the remaining eligible receivables were subsequently resold into the
warehouse facility. These transactions did not have a material effect
on CAF income in fiscal 2009, 2008 or 2007. In future periods, the
effects of refinancing, repurchase or resale activity could be favorable or
unfavorable, depending on the securitization structure and the market conditions
at the transaction date.
Beginning
in January 2008, we retained some or all of the subordinated bonds associated
with our term securitizations. These bonds were retained either
because the economics of doing so were more favorable than selling them or
because there was no market for the subordinated bonds at the applicable issue
date. The retained subordinated bonds, which had total face values of
$115 million and $44.7 million, respectively, at February 28, 2009, and February
29, 2008, are subject to mark-to-market adjustments.
Fiscal 2009
Versus Fiscal 2008. CAF income declined to $15.3 million in
fiscal 2009 from $85.9 million in fiscal 2008. In both periods, CAF
income was reduced by market-to-market write-downs and adjustments related to
loans originated in previous fiscal years. In fiscal 2009, these
adjustments totaled $81.8 million, or $0.23 per share, and they
included:
·
|
$32.0
million of mark-to-market write-downs in the carrying value of the
subordinated bonds. The size of the write-down reflected the
illiquidity in the credit markets in fiscal 2009, particularly for
subordinated bonds. This non-cash charge primarily affects the
timing of the recognition of CAF income. Assuming current
conditions persist, the mark-to-market write downs should reverse as we
get closer to the maturity dates of the underlying bonds, resulting in
positive contributions to CAF income in future
periods.
|
·
|
$31.8
million for increases in cumulative net loss rate
assumptions. The upper end of our cumulative net loss rate
assumption range was 4.0% at the end of fiscal 2009 versus 3.0% at the end
of fiscal 2008.
|
·
|
$18.0
million for increases in funding costs related to loans originated in
prior fiscal years. The majority of this increase related to
loans that were securitized in the warehouse facility at the end of fiscal
2008 and which were subsequently resold in term securitizations during
fiscal 2009.
|
·
|
$3.8
million for increasing the discount rate assumption to 19% from
17%.
|
·
|
Partly
offset by $3.8 million of net favorable adjustments primarily related to
reducing our prepayment rate
assumption.
|
In fiscal
2008, the adjustments totaled $9.6 million, or $0.03 per share, for adjustments
related to loans originated and sold in previous fiscal years. In fiscal 2009,
CAF’s gain on sales of loans originated and sold declined to $46.5 million
compared with $58.1 million in fiscal 2008. This decrease was
primarily the result of the reduction in CAF loan originations, which were
adversely affected by the decreases in our used unit sales and average retail
selling price. In addition, it reflected a decrease in the percentage
of sales financed by CAF resulting from our election to slow the use of capacity
in our warehouse facility during the second half of fiscal 2009. The
gain percentage was 2.4% in both fiscal 2009 and fiscal
2008. Compared with the prior year, the effects of using higher loss
and discount rate assumptions and higher credit enhancement levels for fiscal
2009 originations were offset by the benefit of a significant drop in our
funding cost benchmark rate.
The
increases in servicing fee income and direct CAF expenses in fiscal 2009 were
proportionate to the growth in managed receivables during the
year. The interest income component of other CAF income increased to
1.2% of average managed receivables in fiscal 2009 from 0.9% in fiscal 2008,
primarily due to the increase in the discount rate assumption used to value the
retained interest. The use of a higher discount rate reduces the gain
recognized at the time the loans are sold, but increases the interest income
recognized in subsequent periods. Additionally, interest income
includes the interest earned on the retained subordinated
bonds. Prior to January 2008, we had not retained any subordinated
bonds.
Fiscal 2008
Versus Fiscal 2007. CAF income declined to
$85.9 million in fiscal 2008 from $132.6 million in fiscal 2007. In
fiscal 2008, CAF income was reduced by $9.6 million, or $0.03 per share, and
they included the effects of increasing the discount rate to 17% from 12%,
increasing cumulative net loss assumptions and a $2.7 million mark-to-market
write-down of subordinated bonds. In fiscal 2007, CAF income was
increased by $13.0 million, or $0.04 per share, which included the effects of
reducing cumulative net loss assumptions on loans originated and sold in
previous fiscal years.
In fiscal
2008, CAF’s gain on sales of loans originated and sold decreased to $58.1
million compared with $86.7 million in fiscal 2007. Several factors
contributed to this decrease. In the second half of fiscal 2008,
credit spreads in the asset-backed securitization market widened, resulting in a
substantial increase in CAF’s funding costs. In addition, we
increased the discount rate assumption used to calculate our gain on sales of
loans to 17% in fiscal 2008 from 12% in fiscal 2007, and we increased our
cumulative net loss assumptions on loans originated and sold during fiscal 2008
to a range of 2.7% to 3.0%, which was significantly higher than the cumulative
net loss assumptions used on loans originated in fiscal 2007. As a
result, the gain percentage declined to 2.4% in fiscal 2008 compared with 3.9%
in fiscal 2007.
The
increases in other CAF income and total direct CAF expenses in fiscal 2008 were
proportionate to the growth in managed receivables during the year.
Past
Due Account Information
|
|
As
of February 28 or 29
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Loans
securitized
|
|
$ |
3,831.9 |
|
|
$ |
3,764.5 |
|
|
$ |
3,242.1 |
|
Loans
held for sale or
investment
|
|
|
154.8 |
|
|
|
74.0 |
|
|
|
68.9 |
|
Ending
managed
receivables
|
|
$ |
3,986.7 |
|
|
$ |
3,838.5 |
|
|
$ |
3,311.0 |
|
Accounts
31+ days past
due
|
|
$ |
118.1 |
|
|
$ |
86.1 |
|
|
$ |
56.9 |
|
Past
due accounts as a percentage of ending managed receivables
|
|
|
2.96 |
% |
|
|
2.24 |
% |
|
|
1.72 |
% |
Credit
Loss Information
|
|
Years
Ended February 28 or 29
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Net
credit losses on managed
receivables
|
|
$ |
69.8 |
|
|
$ |
38.3 |
|
|
$ |
20.7 |
|
Average
managed
receivables
|
|
$ |
4,021.0 |
|
|
$ |
3,608.4 |
|
|
$ |
3,071.1 |
|
Net
credit losses as a percentage of average managed receivables
|
|
|
1.74 |
% |
|
|
1.06 |
% |
|
|
0.67 |
% |
Recovery
rate
|
|
|
44 |
% |
|
|
50 |
% |
|
|
51 |
% |
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 $348.3 million as of February 28, 2009, compared with
$270.8 million as of February 29, 2008.
In fiscal
2009, we experienced increases in both past due accounts as a percentage of
ending managed receivables and 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.
We
continually strive to refine CAF’s origination strategy in order to optimize
profitability and sales while managing risk. Historically, we
originated pools of loans targeted to have cumulative net loss rates in the
range of 2.0% to 2.5%. Receivables originated in calendar years 2003,
2004 and early 2005 experienced loss rates well below both CAF’s historical
averages and these targeted loss rates. We believe this favorability
was due, in part, to the customized credit scorecard we implemented in late
2002. As it became evident that the scorecard was resulting in
lower-than-expected loss rates, CAF gradually expanded its credit offers
beginning in late 2004. As a result, receivables originated in late
2005 and periods thereafter have experienced higher loss and delinquency rates
compared with the receivables originated in these earlier
years. While the delinquency and projected loss rates on the more
recent originations have trended higher than our initial expectations, we
believe this has been primarily a reflection of the worsening economic
climate. Consequently, we have increased our cumulative net loss
assumptions on several recent securitizations, and we have continued to
incorporate similar economic stress into the projections for our most recent
originations. In addition, we have tightened CAF’s lending criteria
for some applicants with higher-risk credit profiles.
The
recovery rate represents the average percentage of the outstanding principal
balance we receive when a vehicle is repossessed and liquidated at wholesale
auction. Historically, the annual recovery rate has ranged from a low
of 42% to a high of 51%, and it is primarily affected by changes in the
wholesale market pricing environment.
Selling,
General and Administrative Expenses
SG&A
expenses primarily include rent and occupancy costs; payroll expenses, other
than payroll related to reconditioning and vehicle repair service, which is
included in cost of sales; fringe benefits; advertising; and other general
expenses.
Fiscal 2009
Versus Fiscal 2008. In fiscal 2009,
SG&A expenses increased to $882.4 million, or 12.7% of total revenues, from
$858.4 million, or 10.5% of total revenues in fiscal 2008. During
fiscal 2009, total SG&A expenses increased only 3%, despite the 12% increase
in our store base. In response to the decline in sales, we focused on
reducing store and corporate overhead costs, including payroll and
advertising. Our total number of associates declined to 13,035 as of
the end of fiscal 2009 from a peak of approximately 16,400 in May
2008. The fiscal 2009 SG&A expense also reflected reductions in
growth-related costs, including pre-opening and relocation costs, resulting from
the suspension of store growth. The increase in the SG&A ratio
was mainly the result of the significant declines in comparable store used unit
sales and average selling price.
The
fiscal 2009 SG&A expenses included a number of non-recurring items, which in
the aggregate increased the SG&A ratio by 22 basis points and reduced net
earnings by $0.04 per share. These non-recurring items included
severance costs associated with reduction in our service operations workforce in
October 2008, costs for the termination of store site acquisitions resulting
from our decision to temporarily suspend store growth and litigation costs,
partially offset by a benefit related to our decision to freeze our pension plan
benefits as of December 31, 2008.
Fiscal 2008
Versus Fiscal 2007. In fiscal 2008,
SG&A expenses increased to $858.4 million, or 10.5% of total revenues, from
$776.2 million, or 10.4% of total revenues in fiscal 2008. During
fiscal 2008, total SG&A expenses increased 11% compared with the 16%
increase in our store base. During fiscal 2008, we increased our
SG&A spending related to specific strategic, operational and Internet
initiatives intended to improve customer satisfaction and increase efficiencies
over the long term. As a result, our 3% increase in comparable store
used unit sales in fiscal 2008 did not generate sufficient overhead leverage to
offset the increases in spending related to our store growth plan and these
initiatives.
Income
Taxes
The
effective income tax rate was 38.8% in fiscal 2009, 38.7% in fiscal 2008 and
38.6% in fiscal 2007.
OPERATIONS
OUTLOOK
Store
Openings and Capital Expenditures
We
currently estimate gross capital expenditures will total approximately $20
million in fiscal 2010, compared with $185.7 million in fiscal 2009 and $253.1
million in fiscal 2008. This reduction reflects our decision to
temporarily suspend store growth and the related reduction in both construction
and land purchases for future store openings. At the date we
announced the suspension, we had four stores under construction. We
opened the store in Potomac Mills, Virginia. The stores in Augusta,
Georgia; Cincinnati, Ohio; and Dayton, Ohio, were substantially completed at the
end of fiscal 2009, but they will not be opened until market conditions
improve. 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 our total capital spending in recent
years.
Fiscal
2010 Expectations
As a
result of the unprecedented declines in traffic and sales and 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. However, assuming that sales trends do not improve from
fourth quarter fiscal 2009 levels and given all of the uncertainties in the
economy, we would anticipate a double-digit decline in comparable store used
unit sales in fiscal 2010, particularly early in the year.
Recent
credit spreads in the public asset-backed securitization market have been
significantly higher than the spreads implicit in our warehouse
facility. As a result, we estimate CAF income will be reduced by
incremental funding costs of between $60 million and $85 million before taxes,
or $0.17 to $0.24 per share, upon refinancing the $1.22 billion that was funded
in the warehouse facility at the end of fiscal 2009. The Federal
Reserve launched the Term Asset-Backed Securities Loan Facility (“TALF”) program
in March 2009, and it will continue through December 2009, unless
extended. The TALF program is intended to facilitate the issuance of
asset-backed securities and to improve market conditions for these
securities. Prior to the launch of this program, there had been
minimal new issuances of automotive asset-backed securities for several
months. In April 2009, we completed a term securitization totaling
$1.0 billion of auto loan receivables, which was eligible for investors to
utilize the TALF program.
Absent
further substantial deterioration in sales and earnings, and given the
assumptions set forth above, we believe we will remain in compliance with our
financial covenants in fiscal 2010.
RECENT
ACCOUNTING PRONOUNCEMENTS
For a
discussion of recent accounting pronouncements applicable to CarMax, see Note
17.
FINANCIAL
CONDITION
Liquidity
and Capital Resources
Operating
Activities. We generated net
cash from operating activities of $264.6 million in fiscal 2009, $79.5 million
in fiscal 2008 and $136.8 million in fiscal 2007. Cash generated by
operating activities was $185.1 million higher in fiscal 2009 compared with
fiscal 2008, primarily reflecting the significant decrease in inventory in
fiscal 2009, partially offset by the decline in net earnings. Despite
increasing our store base by 12%, we reduced inventories 28%, or $272.6 million,
in fiscal 2009 compared with an increase in inventory of $139.7 million in
fiscal 2008. In fiscal 2009, we dramatically reduced our used vehicle
inventory levels to bring them in line with the lower sales rate. In
fiscal 2008, the inventory increase reflected the combination of additional
inventories needed to support the expansion of our store base and the expansion
of an “inventory up” test in select stores to determine whether a modest
expansion of onsite vehicle inventory, generally in the range of 50 to 100 cars
per store, would have a favorable effect on sales. Our retained
interest in securitized receivables increased $77.5 million in fiscal 2009
compared with a $68.5 million increase in fiscal 2008. The fiscal
2009 growth reflected increases in the required excess receivables and the
amount of retained subordinated bonds we hold, partially offset by a decrease in
interest-only strip receivables.
Cash
generated by operating activities was $57.3 million lower in fiscal 2008
compared with fiscal 2007. The decrease resulted from a higher level
of working capital investment in fiscal 2008, combined with the $16.6 million
decrease in net earnings. Our retained interest in securitized
receivables increased $68.5 million in fiscal 2008 compared with a $44.0 million
increase
in fiscal
2007. The fiscal 2008 increase reflected our decision to retain $44.7
million face value of subordinated bonds in the January 2008 term securitization
and the growth in the total managed receivables. Inventories
increased 17%, or $139.7 million, in fiscal 2008, which was greater than our 10%
increase in vehicle revenues. The growth in inventories resulted from
the increase in our store base and from the “inventory up” test. In
the fourth quarter of fiscal 2008, this test was being conducted in
approximately 30% of our stores.
The
aggregate principal amount of outstanding auto loan receivables funded through
securitizations, which are discussed in Notes 3 and 4, totaled $3.83 billion as
of February 28, 2009; $3.76 billion as of February 29, 2008; and $3.24 billion
as of February 28, 2007. During fiscal 2009, we completed two term
securitizations of auto loan receivables, including $750 million in May 2008 and
$525 million in July 2008. We retained a total of $70.3 million face
value of subordinated bonds in these two securitizations. During
fiscal 2008, we completed three term securitizations, funding a total of $1.78
billion of auto loan receivables. In the term securitization in
January 2008, we retained $44.7 million face value of subordinated
bonds.
As of
February 28, 2009, the warehouse facility limit was $1.4 billion. At
that date, $1.22 billion of auto loan receivables were funded in the warehouse
facility and unused warehouse capacity totaled $185 million. As of
the beginning of fiscal 2009, the warehouse facility limit had been temporarily
increased to $1.3 billion from $1.0 billion. During fiscal 2009, we
increased the facility limit to $1.4 billion. The warehouse facility
has an annual term and it expires in July 2009. We intend to enter
into new, or renew or expand existing funding arrangements to meet CAF’s future
funding needs. However, based on conditions in the credit markets,
the cost and credit enhancements 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 $155.3
million in fiscal 2009, $257.0 million in fiscal 2008 and $187.2 million in
fiscal 2007. Capital expenditures were $185.7 million in fiscal 2009,
$253.1 million in fiscal 2008 and $191.8 million in fiscal 2007. In
addition to store construction costs, capital expenditures for fiscal 2008 and
fiscal 2007 included the cost of land acquired for future year store
openings. The decline in capital spending in fiscal 2009 reflected
our decision in December 2008 to temporarily suspend store growth.
Historically,
capital expenditures have been funded with internally generated funds, long-term
debt and sale-leaseback transactions. Net proceeds from the sales of
assets totaled $34.3 million in fiscal 2009, $1.1 million in fiscal 2008 and
$4.6 million in fiscal 2007. During fiscal 2009, we completed
sale-leaseback transactions for our two used car superstores in Austin, Texas
valued at $31.3 million.
As of
February 28, 2009, we owned our home office in Richmond, Virginia, 41 used car
superstores currently in operation and the three superstores that have been
substantially completed, but which will not be opened until market conditions
improve. In addition, five superstores were accounted for as capital
leases.
Financing
Activities. Net cash provided by financing activities totaled
$18.4 million in fiscal 2009, $171.0 million in fiscal 2008 and $48.1 million in
fiscal 2007. During the second half of fiscal 2009, due to the
unprecedented conditions in the credit markets, we believed that it was prudent
to maintain a higher-than-normal cash balance. As of February 28,
2009, we had cash and cash equivalents of $140.6 million compared with $13.0
million as of February 29, 2008, and $19.5 million as of February 28,
2007. Despite the increase in cash and the decline in earnings in
fiscal 2009, total debt increased by only $7.8 million to $337.0 million as of
February 28, 2009, primarily due to our significant reductions in
inventory. In fiscal 2008, we increased total debt by $148.9 million,
primarily to fund increased inventory and capital expenditures. In
fiscal 2007, we used cash generated from operations to reduce total debt by $9.5
million.
During
fiscal 2009, we increased the aggregate borrowing limit under our revolving
credit facility by $200 million to a total of $700 million. The
credit facility expires in December 2011 and is secured by our vehicle
inventory. Borrowings under this credit facility are limited to 80%
of qualifying inventory, and they are available for working capital and general
corporate purposes. As of February 28, 2009, $308.5 million was
outstanding under the credit facility and $227.7 million of the remaining
balance was available to us. The outstanding balance under the
facility included $0.9 million classified as short-term debt, $157.6 million
classified as current portion of long-term debt and $150.0 million classified as
long-term debt. We classified $157.6 million of the outstanding
balance as of February 29, 2008, as current portion of long-term debt based
on our expectation that this balance will not remain outstanding for more than
one year.
Cash
received on equity issuances, which primarily related to employee stock option
exercises, was $10.2 million in fiscal 2009, $14.7 million in fiscal 2008 and
$35.4 million in fiscal 2007. The fiscal 2007 receipts included
exercises by the former chief executive officer in connection with his
retirement and other exercises prompted by the significant increase in our stock
price during that fiscal year.
We expect
that cash generated by operations and proceeds from securitization transactions
or other funding arrangements, sale-leaseback transactions and borrowings under
existing or expanded credit facilities will be sufficient to fund capital
expenditures and working capital for the foreseeable future.
Fair Value
Measurements. On March 1, 2008, we adopted Statement of
Financial Accounting Standards No. 157 “Fair Value Measurements” (“SFAS
157”). SFAS 157 defines fair value and is applied in any situation
where an asset or liability is measured at fair value under existing U.S.
generally accepted accounting principles. In accordance with SFAS
157, we reported money market securities, retained interest in securitized
receivables and financial derivatives at fair value. As these
financial assets were already reported at fair value, the implementation of SFAS
157 did not have a material impact on our results of operations, liquidity or
financial condition. See Note 6 for more information on the adoption
and application of this standard.
The
retained interest in securitized receivables was valued at $348.3 million as of
February 28, 2009, and $270.8 million as of February 29,
2008. Included in the retained interest were interest-only strip
receivables, various reserve accounts and required excess receivables totaling
$260.9 million and $227.7 million, respectively, as of these
dates. In addition, the retained interest included retained
subordinated bonds with a total fair value of $87.4 million as of February 28,
2009, and $43.1 million as of February 29, 2008.
As
described in Note 4, we use discounted cash flow models to measure the fair
value of the retained interest, excluding the retained subordinated
bonds. In addition to funding costs and prepayment rates, the
estimates of future cash flows are based on certain key assumptions, such as
finance charge income, loss rates and discount rates appropriate for the type of
asset and risk, both of which are significant unobservable
inputs. Changes in these inputs could have a material impact on our
financial condition or results of operations.
In
measuring the fair value of the retained subordinated bonds, we use a widely
accepted third-party bond pricing model. Our key assumption is
determined based on current market spread quotes from third-party investment
banks and is currently a significant unobservable input. Changes in
this input could have a material impact on our financial condition or results of
operations.
During
fiscal 2009 changes were made to certain key assumptions used in measuring the
fair value of the retained interest. See the CarMax Auto Finance
Income section of MD&A for a discussion of the effects of these
changes.
As the
key assumptions used in measuring the fair value of the retained interest
(including the retained subordinated bonds) are significant unobservable inputs,
the retained interest is classified as a Level 3 asset in accordance with the
SFAS 157 hierarchy. As of February 28, 2009, the retained interest
represented 69.0% of the total assets measured at fair value, as disclosed in
Note 6.
Contractual
Obligations
|
|
As
of February 28, 2009
|
|
(In
millions)
|
|
Total
|
|
|
Less
Than
1
Year
|
|
|
1
to 3
Years
|
|
|
3
to 5
Years
|
|
|
More
Than
5
Years
|
|
|
Other
|
|
Revolving
credit agreement (1)
|
|
$ |
308.5 |
|
|
$ |
— |
|
|
$ |
308.5 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Capital
leases (2)
|
|
|
58.7 |
|
|
|
3.5 |
|
|
|
7.2 |
|
|
|
7.2 |
|
|
|
40.8 |
|
|
|
— |
|
Operating
leases (2)
|
|
|
1,004.3 |
|
|
|
82.3 |
|
|
|
163.3 |
|
|
|
162.8 |
|
|
|
595.9 |
|
|
|
— |
|
Purchase
obligations (3)
|
|
|
22.8 |
|
|
|
11.7 |
|
|
|
11.1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Asset
retirement obligations (4)
|
|
|
1.1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.1 |
|
|
|
— |
|
Defined
benefit retirement plans (5)
|
|
|
49.9 |
|
|
|
0.3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
49.6 |
|
Unrecognized
tax benefits (6)
|
|
|
22.9 |
|
|
|
3.6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19.3 |
|
Total
|
|
$ |
1,468.2 |
|
|
$ |
101.4 |
|
|
$ |
490.1 |
|
|
$ |
170.0 |
|
|
$ |
637.8 |
|
|
$ |
68.9 |
|
(1)
|
Due
to the uncertainty of forecasting expected variable interest rate
payments, those amounts are not included in the table. See Note
10.
|
(2)
|
Excludes
taxes, insurance and other costs payable directly by us. These
costs vary from year to year and are incurred in the ordinary course of
business. See Note 14.
|
(3)
|
Includes
certain enforceable and legally binding obligations related to the
purchase of real property and third-party outsourcing
services.
|
(4)
|
Represents
the liability to retire signage, fixtures and other assets at certain
leased locations.
|
(5)
|
Represents
the recognized funded status of our retirement plan, of which $49.6
million has no contractual payment schedule and we expect payments to
occur beyond 12 months from February 28, 2009. See Note
9.
|
(6)
|
Represents
the net unrecognized tax benefits related to uncertain tax
positions. The timing of payments associated with $19.3 million
of these tax benefits could not be estimated as of February 28,
2009. See Note 8.
|
Off-Balance
Sheet Arrangements
CAF provides financing for a portion of
our used and new car retail sales. We use a revolving securitization
program (“warehouse facility”) to fund substantially all of the auto loan
receivables originated by CAF until they can be funded through a term
securitization or alternative funding arrangement. We sell the auto
loan receivables to a wholly owned, bankruptcy-remote, special purpose entity
that transfers an undivided interest in the receivables to entities formed by
third-party investors.
Historically,
we have used term securitizations to refinance the receivables previously
securitized through the warehouse facility. The purpose of term
securitizations is to provide permanent funding for these
receivables. In these transactions, a pool of auto loan receivables
is sold to a bankruptcy-remote, special purpose entity that in turn transfers
the receivables to a special purpose securitization trust.
Additional
information regarding the nature, business purposes and importance of our
off-balance sheet arrangement to our liquidity and capital resources can be
found in the CarMax Auto Finance Income, Financial Condition and Market Risk
sections of MD&A, as well as in Notes 3 and 4.
Auto
Loan Receivables
As of
February 28, 2009, and February 29, 2008, all loans in our portfolio of auto
loan receivables were fixed-rate installment loans. Financing for
these auto loan receivables was achieved through asset securitization programs
that, in turn, issued both fixed- and floating-rate securities. We
manage the interest rate exposure relating to floating-rate securitizations
through the use of interest rate swaps. Disruptions in the credit
markets could impact the effectiveness of our hedging
strategies. Receivables held for investment or sale are financed with
working capital. Generally, changes in interest rates associated with
underlying swaps will not have a material impact on earnings; however, they
could have a material impact on cash and cash flows.
Credit
risk is the exposure to nonperformance of another party to an
agreement. We mitigate credit risk by dealing with highly rated bank
counterparties. The market and credit risks associated with financial
derivatives are similar to those relating to other types of financial
instruments. Notes 5 and 6 provide additional information on
financial derivatives.
Composition
of Auto loan receivables
|
|
As
of February 28 or 29
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
Principal
amount of:
|
|
|
|
|
|
|
Fixed-rate
securitizations
|
|
$ |
2,246.7 |
|
|
$ |
2,533.4 |
|
Floating-rate securitizations
synthetically altered to fixed (1)
|
|
|
1,584.6 |
|
|
|
1,230.6 |
|
Floating-rate
securitizations
|
|
|
0.6 |
|
|
|
0.5 |
|
Loans held for investment (2)
|
|
|
145.1 |
|
|
|
69.0 |
|
Loans held for sale (3)
|
|
|
9.7 |
|
|
|
5.0 |
|
Total
|
|
$ |
3,986.7 |
|
|
$ |
3,838.5 |
|
(1)
|
Includes
variable-rate securities totaling $370.2 million at February 28, 2009, and
$376.7 million at February 29, 2008, issued in connection with certain
term securitizations that were synthetically altered to fixed at the
bankruptcy-remote special purpose
entity.
|
(2)
|
The
majority is held by a bankruptcy-remote special purpose
entity.
|
(3)
|
Held
by a bankruptcy-remote special purpose
entity.
|
Interest
Rate Exposure
We also
have interest rate risk from changing interest rates related to our outstanding
debt. Substantially all of our debt is floating-rate debt based on
LIBOR. A 100-basis point increase in market interest rates would have
decreased our fiscal 2009 net earnings per share by $0.01.
Item
8. Consolidated Financial Statements and Supplementary
Data.
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL
OVER
FINANCIAL REPORTING
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting for the company. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Accordingly, even effective internal control over
financial reporting can provide only reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with U.S. generally accepted accounting
principles.
Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework and criteria established in Internal Control—Integrated
Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, our management has
concluded that our internal control over financial reporting was effective as of
February 28, 2009.
KPMG LLP,
the company's independent registered public accounting firm, has issued a report
on our internal control over financial reporting. Their report is
included herein.
/s/ Thomas J.
Folliard
THOMAS J.
FOLLIARD
PRESIDENT
AND CHIEF EXECUTIVE OFFICER
/s/ Keith D.
Browning
KEITH
D. BROWNING
EXECUTIVE
VICE PRESIDENT AND
CHIEF
FINANCIAL OFFICER
REPORT
OF INDEPENDENT REGISTERED
The Board
of Directors and Shareholders
CarMax,
Inc.:
We have
audited the accompanying consolidated balance sheets of CarMax, Inc. and
subsidiaries (the Company) as of February 28, 2009 and
February 29, 2008, and the related consolidated statements of earnings,
shareholders’ equity, and cash flows for each of the fiscal years in the
three-year period ended February 28, 2009. In connection with our audits of
the consolidated financial statements, we also have audited financial statement
schedule II – valuation and qualifying accounts and reserves as of and for each
of the fiscal years in the three-year period ended February 28, 2009. We
also have audited the Company’s internal control over financial reporting as of
February 28, 2009, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible for these
consolidated financial statements and financial statement schedule, for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Annual Report on
Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule and an opinion on the Company’s internal control
over financial reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the consolidated financial statements and financial statement schedule
referred to above present fairly, in all material respects, the financial
position of CarMax, Inc. and subsidiaries as of February 28, 2009 and
February 29, 2008, and the results of their operations and their cash flows
for each of the fiscal years in the three-year period ended February 28,
2009, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
February 28, 2009, based on criteria established in Internal Control — Integrated
Framework issued by COSO.
As
discussed in note 8 to the consolidated financial statements, the Company
adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes — an interpretation of FASB Statement No. 109, effective
March 1, 2007.
/s/ KPMG LLP
Richmond,
Virginia
April 23,
2009
CONSOLIDATED
STATEMENTS OF EARNINGS
|
|
Years
Ended February 28 or 29
|
|
(In
thousands except per share data) |
|
2009
|
|
|
|
% |
(1) |
|
2008 |
|
|
|
% |
(1) |
|
2007 |
|
|
|
% |
(1) |
SALES AND OPERATING
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Used
vehicle
sales
|
|
$ |
5,690,658 |
|
|
|
81.6 |
|
|
$ |
6,589,342 |
|
|
|
80.4 |
|
|
$ |
5,872,816 |
|
|
|
78.7 |
|
New
vehicle
sales
|
|
|
261,940 |
|
|
|
3.8 |
|
|
|
370,603 |
|
|
|
4.5 |
|
|
|
445,144 |
|
|
|
6.0 |
|
Wholesale
vehicle
sales
|
|
|
779,785 |
|
|
|
11.2 |
|
|
|
985,048 |
|
|
|
12.0 |
|
|
|
918,408 |
|
|
|
12.3 |
|
Other
sales and
revenues
|
|
|
241,583 |
|
|
|
3.5 |
|
|
|
254,578 |
|
|
|
3.1 |
|
|
|
229,288 |
|
|
|
3.1 |
|
NET SALES AND OPERATING
REVENUES
|
|
|
6,973,966 |
|
|
|
100.0 |
|
|
|
8,199,571 |
|
|
|
100.0 |
|
|
|
7,465,656 |
|
|
|
100.0 |
|
Cost
of
sales
|
|
|
6,005,796 |
|
|
|
86.1 |
|
|
|
7,127,146 |
|
|
|
86.9 |
|
|
|
6,494,594 |
|
|
|
87.0 |
|
GROSS
PROFIT
|
|
|
968,170 |
|
|
|
13.9 |
|
|
|
1,072,425 |
|
|
|
13.1 |
|
|
|
971,062 |
|
|
|
13.0 |
|
CARMAX
AUTO FINANCE INCOME
|
|
|
15,286 |
|
|
|
0.2 |
|
|
|
85,865 |
|
|
|
1.0 |
|
|
|
132,625 |
|
|
|
1.8 |
|
Selling,
general and administrative expenses
|
|
|
882,358 |
|
|
|
12.7 |
|
|
|
858,372 |
|
|
|
10.5 |
|
|
|
776,168 |
|
|
|
10.4 |
|
Gain
on franchise disposition
|
|
|
— |
|
|
|
— |
|
|
|
740 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Interest
expense
|
|
|
6,086 |
|
|
|
0.1 |
|
|
|
4,955 |
|
|
|
0.1 |
|
|
|
5,373 |
|
|
|
0.1 |
|
Interest
income
|
|
|
1,786 |
|
|
|
— |
|
|
|
1,366 |
|
|
|
— |
|
|
|
1,203 |
|
|
|
— |
|
Earnings
before income taxes
|
|
|
96,798 |
|
|
|
1.4 |
|
|
|
297,069 |
|
|
|
3.6 |
|
|
|
323,349 |
|
|
|
4.3 |
|
Income
tax
provision
|
|
|
37,585 |
|
|
|
0.5 |
|
|
|
115,044 |
|
|
|
1.4 |
|
|
|
124,752 |
|
|
|
1.7 |
|
NET
EARNINGS
|
|
$ |
59,213 |
|
|
|
0.8 |
|
|
$ |
182,025 |
|
|
|
2.2 |
|
|
$ |
198,597 |
|
|
|
2.7 |
|
Weighted
average common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
217,537 |
|
|
|
|
|
|
|
216,045 |
|
|
|
|
|
|
|
212,454 |
|
|
|
|
|
Diluted
|
|
|
220,513 |
|
|
|
|
|
|
|
220,522 |
|
|
|
|
|
|
|
216,739 |
|
|
|
|
|
NET
EARNINGS PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.27 |
|
|
|
|
|
|
$ |
0.84 |
|
|
|
|
|
|
$ |
0.93 |
|
|
|
|
|
Diluted
|
|
$ |
0.27 |
|
|
|
|
|
|
$ |
0.83 |
|
|
|
|
|
|
$ |
0.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Percents
are calculated as a percentage of net sales and operating revenues and may
not equal totals due to rounding.
|
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
BALANCE SHEETS
|
|
As
of February 28 or 29
|
|
(In
thousands except share data)
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash
equivalents
|
|
$ |
140,597 |
|
|
$ |
12,965 |
|
Accounts
receivable,
net
|
|
|
75,876 |
|
|
|
73,228 |
|
Auto
loan receivables held for
sale
|
|
|
9,748 |
|
|
|
4,984 |
|
Retained
interest in securitized
receivables
|
|
|
348,262 |
|
|
|
270,761 |
|
Inventory
|
|
|
703,157 |
|
|
|
975,777 |
|
Prepaid
expenses and other current
assets
|
|
|
10,112 |
|
|
|
19,210 |
|
TOTAL CURRENT
ASSETS
|
|
|
1,287,752 |
|
|
|
1,356,925 |
|
Property
and equipment,
net
|
|
|
938,259 |
|
|
|
862,497 |
|
Deferred
income
taxes
|
|
|
103,163 |
|
|
|
67,066 |
|
Other
assets
|
|
|
50,013 |
|
|
|
46,673 |
|
TOTAL
ASSETS
|
|
$ |
2,379,187 |
|
|
$ |
2,333,161 |
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
237,312 |
|
|
$ |
306,013 |
|
Accrued
expenses and other current
liabilities
|
|
|
55,793 |
|
|
|
58,054 |
|
Accrued
income
taxes
|
|
|
26,551 |
|
|
|
7,569 |
|
Deferred
income
taxes
|
|
|
12,129 |
|
|
|
17,710 |
|
Short-term
debt
|
|
|
878 |
|
|
|
21,017 |
|
Current
portion of long-term
debt
|
|
|
158,107 |
|
|
|
79,661 |
|
TOTAL CURRENT
LIABILITIES
|
|
|
490,770 |
|
|
|
490,024 |
|
Long-term
debt, excluding current
portion
|
|
|
178,062 |
|
|
|
227,153 |
|
Deferred
revenue and other
liabilities
|
|
|
117,288 |
|
|
|
127,058 |
|
TOTAL
LIABILITIES
|
|
|
786,120 |
|
|
|
844,235 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingent
liabilities
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
Common
stock, $0.50 par value; 350,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
220,392,014
and 218,616,069 shares issued and outstanding as of
|
|
|
|
|
|
|
|
|
February
28, 2009, and February 29, 2008,
respectively
|
|
|
110,196 |
|
|
|
109,308 |
|
Capital
in excess of par
value
|
|
|
685,938 |
|
|
|
641,766 |
|
Accumulated
other comprehensive
loss
|
|
|
(16,860 |
) |
|
|
(16,728 |
) |
Retained
earnings
|
|
|
813,793 |
|
|
|
754,580 |
|
TOTAL SHAREHOLDERS’
EQUITY
|
|
|
1,593,067 |
|
|
|
1,488,926 |
|
TOTAL LIABILITIES AND
SHAREHOLDERS’
EQUITY
|
|
$ |
2,379,187 |
|
|
$ |
2,333,161 |
|
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Years
Ended February 28 or 29
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
59,213 |
|
|
$ |
182,025 |
|
|
$ |
198,597 |
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and
amortization
|
|
|
54,741 |
|
|
|
46,615 |
|
|
|
34,551 |
|
Share-based
compensation
expense
|
|
|
35,436 |
|
|
|
33,467 |
|
|
|
31,826 |
|
Loss
on disposition of
assets
|
|
|
10,728 |
|
|
|
1,404 |
|
|
|
88 |
|
Deferred
income tax
benefit
|
|
|
(41,502 |
) |
|
|
(24,405 |
) |
|
|
(14,169 |
) |
Impairment
of long-lived
assets
|
|
|
— |
|
|
|
— |
|
|
|
4,891 |
|
Net
(increase) decrease in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable,
net
|
|
|
(2,648 |
) |
|
|
(1,815 |
) |
|
|
5,208 |
|
Auto
loan receivables held for sale,
net
|
|
|
(4,764 |
) |
|
|
1,178 |
|
|
|
(2,023 |
) |
Retained
interest in securitized
receivables
|
|
|
(77,501 |
) |
|
|
(68,459 |
) |
|
|
(43,994 |
) |
Inventory
|
|
|
272,620 |
|
|
|
(139,661 |
) |
|
|
(166,416 |
) |
Prepaid
expenses and other current
assets
|
|
|
9,090 |
|
|
|
(4,148 |
) |
|
|
(3,857 |
) |
Other
assets
|
|
|
647 |
|
|
|
1,360 |
|
|
|
(3,924 |
) |
Net
(decrease) increase in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable, accrued expenses and other current liabilities and accrued income
taxes
|
|
|
(40,276 |
) |
|
|
14,561 |
|
|
|
85,633 |
|
Deferred
revenue and other
liabilities
|
|
|
(11,193 |
) |
|
|
37,398 |
|
|
|
10,389 |
|
NET CASH PROVIDED BY OPERATING
ACTIVITIES
|
|
|
264,591 |
|
|
|
79,520 |
|
|
|
136,800 |
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(185,700 |
) |
|
|
(253,106 |
) |
|
|
(191,760 |
) |
Proceeds
from sales of
assets
|
|
|
34,341 |
|
|
|
1,089 |
|
|
|
4,569 |
|
(Purchases)
sales of money market securities, net
|
|
|
(3,987 |
) |
|
|
(19,565 |
) |
|
|
16,765 |
|
Sales
of investments
available-for-sale
|
|
|
— |
|
|
|
21,665 |
|
|
|
4,210 |
|
Purchases
of investments
available-for-sale
|
|
|
— |
|
|
|
(7,100 |
) |
|
|
(20,975 |
) |
NET CASH USED IN INVESTING
ACTIVITIES
|
|
|
(155,346 |
) |
|
|
(257,017 |
) |
|
|
(187,191 |
) |
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
increase in short-term debt,
net
|
|
|
(20,139 |
) |
|
|
17,727 |
|
|
|
2,827 |
|
Issuances
of long-term
debt
|
|
|
789,800 |
|
|
|
972,300 |
|
|
|
1,232,400 |
|
Payments
on long-term
debt
|
|
|
(761,827 |
) |
|
|
(841,119 |
) |
|
|
(1,244,762 |
) |
Equity
issuances,
net
|
|
|
10,162 |
|
|
|
14,730 |
|
|
|
35,411 |
|
Excess
tax benefits from share-based payment arrangements
|
|
|
391 |
|
|
|
7,369 |
|
|
|
22,211 |
|
NET CASH PROVIDED BY FINANCING
ACTIVITIES
|
|
|
18,387 |
|
|
|
171,007 |
|
|
|
48,087 |
|
Increase
(decrease) in cash and cash
equivalents
|
|
|
127,632 |
|
|
|
(6,490 |
) |
|
|
(2,304 |
) |
Cash
and cash equivalents at beginning of
year
|
|
|
12,965 |
|
|
|
19,455 |
|
|
|
21,759 |
|
CASH AND CASH EQUIVALENTS AT END
OF
YEAR
|
|
$ |
140,597 |
|
|
$ |
12,965 |
|
|
$ |
19,455 |
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
10,171 |
|
|
$ |
9,768 |
|
|
$ |
9,768 |
|
Income
taxes
|
|
$ |
64,023 |
|
|
$ |
124,868 |
|
|
$ |
99,380 |
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in long-term debt obligations from capitalization of
leases
|
|
$ |
1,382 |
|
|
$ |
(6,554 |
) |
|
$ |
— |
|
(Decrease)
increase in accrued capital expenditures
|
|
$ |
(12,861 |
) |
|
$ |
9,909 |
|
|
$ |
— |
|
Adjustment
to initially apply SFAS 158, net of tax
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
20,332 |
|
Adjustment
to initially apply FIN
48
|
|
$ |
— |
|
|
$ |
408 |
|
|
$ |
— |
|
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
Capital
in
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Shares
|
|
|
Common
|
|
|
Excess
of
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
(In thousands)
|
|
Outstanding
|
|
|
Stock
|
|
|
Par
Value
|
|
|
Earnings
|
|
|
Loss
|
|
|
Total
|
|
BALANCE
AS OF FEBRUARY 28, 2006
|
|
|
209,910 |
|
|
$ |
104,954 |
|
|
$ |
501,599 |
|
|
$ |
373,550 |
|
|
|
|
|
$ |
980,103 |
|
Net
earnings
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
198,597 |
|
|
|
|
|
|
198,597 |
|
Adjustment
to initially apply SFAS No. 158, net of taxes of $11,858
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
(20,332 |
) |
|
|
(20,332 |
) |
Share-based
compensation expense for stock options and restricted
stock
|
|
|
— |
|
|
|
— |
|
|
|
31,526 |
|
|
|
— |
|
|
|
— |
|
|
|
31,526 |
|
Exercise
of common stock options
|
|
|
5,280 |
|
|
|
2,640 |
|
|
|
34,383 |
|
|
|
— |
|
|
|
— |
|
|
|
37,023 |
|
Shares
issued under stock incentive plans
|
|
|
1,002 |
|
|
|
502 |
|
|
|
(201 |
) |
|
|
— |
|
|
|
— |
|
|
|
301 |
|
Shares
cancelled upon reacquisition
|
|
|
(164 |
) |
|
|
(82 |
) |
|
|
(1,531 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,613 |
) |
Tax
benefit from the exercise of common stock options
|
|
|
— |
|
|
|
— |
|
|
|
21,770 |
|
|
|
— |
|
|
|
— |
|
|
|
21,770 |
|
BALANCE
AS OF FEBRUARY 28, 2007
|
|
|
216,028 |
|
|
|
108,014 |
|
|
|
587,546 |
|
|
|
572,147 |
|
|
|
(20,332 |
) |
|
|
1,247,375 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
182,025 |
|
|
|
— |
|
|
|
182,025 |
|
Retirement
benefit plans, net of taxes of $2,091
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,604 |
|
|
|
3,604 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
185,629 |
|
Adjustment
to initially apply FIN 48
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
408 |
|
|
|
— |
|
|
|
408 |
|
Share-based
compensation expense for stock options and restricted
stock
|
|
|
— |
|
|
|
— |
|
|
|
33,146 |
|
|
|
— |
|
|
|
— |
|
|
|
33,146 |
|
Exercise
of common stock options
|
|
|
1,774 |
|
|
|
887 |
|
|
|
13,854 |
|
|
|
— |
|
|
|
— |
|
|
|
14,741 |
|
Shares
issued under stock incentive plans
|
|
|
927 |
|
|
|
463 |
|
|
|
(148 |
) |
|
|
— |
|
|
|
— |
|
|
|
315 |
|
Shares
cancelled upon reacquisition
|
|
|
(113 |
) |
|
|
(56 |
) |
|
|
45 |
|
|
|
— |
|
|
|
— |
|
|
|
(11 |
) |
Tax
benefit from the exercise of common stock options
|
|
|
— |
|
|
|
— |
|
|
|
7,323 |
|
|
|
— |
|
|
|
— |
|
|
|
7,323 |
|
BALANCE
AS OF FEBRUARY 29, 2008
|
|
|
218,616 |
|
|
|
109,308 |
|
|
|
641,766 |
|
|
|
754,580 |
|
|
|
(16,728 |
) |
|
|
1,488,926 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
59,213 |
|
|
|
— |
|
|
|
59,213 |
|
Retirement
benefit plans, net of taxes of $176
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(132 |
) |
|
|
(132 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,081 |
|
Share-based
compensation expense for stock options and restricted
stock
|
|
|
— |
|
|
|
— |
|
|
|
34,854 |
|
|
|
— |
|
|
|
— |
|
|
|
34,854 |
|
Exercise
of common stock options
|
|
|
817 |
|
|
|
408 |
|
|
|
9,778 |
|
|
|
— |
|
|
|
— |
|
|
|
10,186 |
|
Shares
issued under stock incentive plans
|
|
|
1,119 |
|
|
|
560 |
|
|
|
40 |
|
|
|
— |
|
|
|
— |
|
|
|
600 |
|
Shares
cancelled upon reacquisition
|
|
|
(160 |
) |
|
|
(80 |
) |
|
|
40 |
|
|
|
— |
|
|
|
— |
|
|
|
(40 |
) |
Tax
effect from the exercise of common stock options
|
|
|
— |
|
|
|
— |
|
|
|
(540 |
) |
|
|
— |
|
|
|
— |
|
|
|
(540 |
) |
BALANCE AS OF FEBRUARY 28,
2009
|
|
|
220,392 |
|
|
$ |
110,196 |
|
|
$ |
685,938 |
|
|
$ |
813,793 |
|
|
$ |
(16,860 |
) |
|
$ |
1,593,067 |
|
See
accompanying notes to consolidated financial statements.
1.
|
BUSINESS
AND BACKGROUND
|
CarMax,
Inc. (“we”, “our”, “us”, “CarMax” and “the company”), including its wholly owned
subsidiaries, is the largest retailer of used vehicles in the United
States. We were the first used vehicle retailer to offer a large
selection of high quality used vehicles at competitively low, no-haggle prices
using a customer-friendly sales process in an attractive, modern sales
facility. At select locations we also sell new vehicles under various
franchise agreements. We provide customers with a full range of
related products and services, including the financing of vehicle purchases
through our own finance operation, CarMax Auto Finance (“CAF”), and third-party
lenders; the sale of extended service plans and accessories; the appraisal and
purchase of vehicles directly from consumers; and vehicle repair
service. Vehicles purchased through the appraisal process that do not
meet our retail standards are sold to licensed dealers through on-site wholesale
auctions.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
(A)
Basis of Presentation and Use of Estimates
The consolidated financial
statements include the accounts of CarMax and our wholly owned
subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation. The preparation of
financial statements in conformity with U.S. generally accepted accounting
principles 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.
On
February 22, 2007, the board of directors declared a 2-for-1 stock split in the
form of a common stock dividend for shareholders of record on March 19, 2007,
which was distributed on March 26, 2007. All share and per share data
included in the consolidated financial statements and accompanying notes reflect
this stock split.
(B)
Cash and Cash Equivalents
Cash
equivalents of $128.3 million as of February 28, 2009, and $2.0 million as of
February 29, 2008, consisted of highly liquid investments with original
maturities of three months or less.
(C)
Securitizations
The
transfers of receivables associated with our auto loan securitization program
are accounted for as sales. We retain an interest in the auto loan
receivables that we securitize. The retained interest includes the
present value of the expected residual cash flows generated by the securitized
receivables, various reserve accounts, required excess receivables and retained
subordinated bonds. The retained interest is carried at fair value
and changes in fair value are included in earnings. See Notes 3 and 4
for additional discussion of securitizations.
(D)
Fair Value of Financial Instruments
Due to
the short-term nature and/or variable rates associated with these financial
instruments, the carrying value of our cash and cash equivalents, receivables
including auto loan receivables held for sale, restricted investments, accounts
payable, short-term debt and long-term debt approximates fair
value. Our retained interest in securitized receivables and
derivative financial instruments are recorded at fair value. See Note
6 for additional discussion of fair value measurements.
(E)
Accounts Receivable
Accounts
receivable, net of an allowance for doubtful accounts, include certain amounts
due from third-party finance companies and customers, from new car manufacturers
for incentives, from third parties for warranty reimbursements and for other
miscellaneous receivables. The allowance for doubtful accounts is
estimated based on historical experience and trends.
(F)
Inventory
Inventory
is primarily comprised of vehicles held for sale or currently undergoing
reconditioning and is stated at the lower of cost or market. Vehicle inventory
cost is determined by specific identification. Parts and labor used
to recondition vehicles, as well as transportation and other incremental
expenses associated with acquiring and reconditioning vehicles, are included in
inventory. Certain manufacturer incentives and rebates for new car
inventory, including holdbacks, are recognized as a reduction to new car
inventory when we purchase the vehicles. We recognize volume-based
incentives as a reduction to cost of sales when we determine the achievement of
qualifying sales volumes is probable.
(G)
Property and Equipment
Property
and equipment is stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are calculated using the
straight-line method over the shorter of the asset's estimated useful life or
the lease term, if applicable. Property held under capital lease is
stated at the lesser of the present value of the future minimum lease payments
at the inception of the lease or fair value. Amortization of capital
lease assets is computed on a straight-line basis over the shorter of the
initial lease term or the estimated useful life of the asset and is included in
depreciation expense. Costs incurred during new store construction
are capitalized as construction-in-progress and reclassified to the appropriate
fixed asset categories when the store is completed.
Estimated
Useful Lives
|
Life
|
Buildings
|
25
– 40 years
|
Capital
leases
|
15
– 20 years
|
Leasehold
improvements
|
8 –
15 years
|
Furniture,
fixtures and
equipment
|
5 –
15
years
|
We review
long-lived assets for impairment when circumstances indicate the carrying amount
of an asset may not be recoverable. We recognize impairment when the
sum of undiscounted estimated future cash flows expected to result from the use
of the asset is less than the carrying value of the asset. No
impairment of long-lived assets resulted from our impairment tests in fiscal
2009, 2008 or 2007.
(H)
Other Assets
Computer
Software Costs
We
capitalize external direct costs of materials and services used in and payroll
and related costs for employees directly involved in the development of
internal-use software. We amortize amounts capitalized on a
straight-line basis over five years.
Goodwill
and Intangible Assets
We review
goodwill and intangible assets for impairment annually or when circumstances
indicate the carrying amount may not be recoverable.
Restricted
Investments
Restricted
investments primarily consist of money market and other debt securities
associated with certain insurance programs. Due to the short-term
nature and/or variable rates associated with these financial instruments, the
carrying value approximates fair value.
(I)
Defined Benefit Plan Obligations
The
recognized funded status of defined benefit retirement plan obligations is
included both in accrued expenses and other current liabilities and in deferred
revenue and other liabilities. The current portion represents
benefits expected to be paid from our benefit restoration plan over the next 12
months. The defined benefit retirement plan obligations are
determined by independent actuaries using a number of assumptions provided by
CarMax. Key assumptions used in measuring the plan obligations
include the discount rate, rate of return on plan assets, rate of compensation
increases and mortality rate.
(J)
Insurance Liabilities
Insurance
liabilities are included in accrued expenses and other current liabilities. We
use a combination of insurance and self-insurance for a number of risks
including workers' compensation, general liability and employee-related health
care costs, a portion of which is paid by associates. Estimated
insurance liabilities are determined by considering historical claims
experience, demographic factors and other actuarial assumptions.
(K)
Revenue Recognition
We
recognize revenue when the earnings process is complete, generally either at the
time of sale to a customer or upon delivery to a customer. As part of
our customer service strategy, we guarantee the retail vehicles we sell with
a 5-day, money-back guarantee. If a customer returns the vehicle
purchased within the parameters of the guarantee, we will refund the customer's
money. We record a reserve for returns based on historical experience
and trends.
We sell
extended service plans on behalf of unrelated third parties. These
service plans have terms of coverage ranging from 12 to 72
months. Because we are not the primary obligor under these service
plans, we recognize commission revenue at the time of sale, net of a reserve for
estimated customer returns. The reserve for returns is based on
historical experience and trends.
We
collect sales taxes and other taxes from customers on behalf of governmental
authorities at the time of sale. These taxes are accounted for on a
net basis and are not included in net sales and operating revenues or cost of
sales.
(L)
Cost of Sales
Cost of
sales includes the cost to acquire vehicles and the reconditioning and
transportation costs associated with preparing the vehicles for resale. It also
includes payroll, fringe benefits and parts and repair costs associated with
reconditioning and vehicle repair services.
(M)
Selling, General and Administrative Expenses
Selling,
general and administrative (“SG&A”) expenses primarily include rent and
occupancy costs; payroll expenses, other than payroll related to reconditioning
and vehicle repair services; fringe benefits; advertising; and other general
expenses.
(N)
Advertising Expenses
Advertising
costs are expensed as incurred. Advertising expenses are included in
SG&A expenses.
(O)
Store Opening Expenses
Costs
related to store openings, including preopening costs, are expensed as incurred
and are included in SG&A expenses.
(P)
Share-Based Compensation
Share-based
compensation represents the cost related to share-based awards granted to
employees. We measure share-based compensation cost at grant date, based on the
estimated fair value of the award and recognize the cost on a straight-line
basis (net of estimated forfeitures) over the employee’s requisite service
period, which is generally the vesting period of the award. We estimate the fair
value of stock options using the binomial valuation model. Prior to fiscal 2009,
we used the Black-Scholes valuation model for the directors’
plan. Key assumptions used in estimating the fair value of options
are dividend yield, expected volatility, risk-free interest rate and expected
term. The fair value of restricted stock is valued at the weighted
average market value on the date of the grant. The share-based
compensation expense is recorded in either cost of sales, CAF income or SG&A
expenses based on the employees’ respective function.
We record
deferred tax assets for awards that result in deductions on our income tax
returns, based on the amount of compensation cost recognized and the statutory
tax rate in the jurisdiction in which we will receive a deduction. Differences
between the deferred tax assets recognized for financial reporting purposes and
the actual tax deduction reported on the income tax return are recorded in
capital in excess of par value (if the tax deduction exceeds the deferred tax
asset) or in the consolidated statements of earnings (if the deferred tax asset
exceeds the tax deduction and no capital in excess of par value exists from
previous awards).
(Q)
Derivative Financial Instruments
In
connection with certain securitization activities, we enter into interest rate
swap agreements to manage our exposure to interest rates and to more closely
match funding costs to the use of funding. We recognize the interest
rate swaps at fair value as either current assets or current liabilities with
changes in fair value included in earnings as a component of CAF
income.
(R)
Income Taxes
We file a
consolidated federal income tax return for a majority of our
subsidiaries. Certain subsidiaries are required to file separate
partnership or corporate federal income tax returns. Deferred income
taxes reflect the impact of temporary differences between the amounts of assets
and liabilities recognized for financial reporting purposes and the amounts
recognized for income tax purposes, measured by applying currently enacted tax
laws. A deferred tax asset is recognized if it is more likely than
not that a benefit will be realized. Changes in tax laws and tax
rates are reflected in the income tax provision in the period in which the
changes are enacted.
We
recognize tax liabilities when, despite our belief that our tax return positions
are supportable, we believe that certain positions may not be fully sustained
upon review by tax authorities. Benefits from tax positions are measured at the
highest tax benefit that is greater than 50% likely of being realized upon
settlement. The current portion of tax liabilities is included in accrued income
taxes and any noncurrent portion of tax liabilities is included in deferred
revenue and other liabilities. To the extent that the final tax
outcome of these matters is different from the amounts recorded, the differences
impact income tax expense in the period in which the determination is made.
Interest and penalties related to income tax matters are included in SG&A
expenses.
(S)
Net Earnings Per Share
Basic net
earnings per share is computed by dividing net earnings by the weighted average
number of shares of common stock outstanding. Diluted net earnings
per share is computed by dividing net earnings by the sum of the weighted
average number of shares of common stock outstanding and dilutive potential
common stock.
(T)
Risks and Uncertainties
We sell
used and new vehicles. The diversity of our customers and suppliers
and the highly fragmented nature of the U.S. automotive retail market reduce the
risk that near term changes in our customer base, sources of supply or
competition will have a severe impact on our business. However,
unanticipated events could have an adverse effect on our business, results of
operations and financial condition.
(U)
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current year’s
presentation with no effect on net earnings.
3.
|
CARMAX
AUTO FINANCE INCOME
|
|
|
Years
Ended February 28 or 29
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Gain
on sales of loans originated and sold (1)
|
|
$ |
46.5 |
|
|
$ |
58.1 |
|
|
$ |
86.7 |
|
Other
(losses) gains (1)
|
|
|
(81.8 |
) |
|
|
(9.6 |
) |
|
|
13.0 |
|
Total
(loss)
gain
|
|
|
(35.3 |
) |
|
|
48.5 |
|
|
|
99.7 |
|
Other
CAF income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing fee
income
|
|
|
41.3 |
|
|
|
37.4 |
|
|
|
32.4 |
|
Interest
income
|
|
|
48.3 |
|
|
|
33.3 |
|
|
|
26.6 |
|
Total
other CAF
income
|
|
|
89.6 |
|
|
|
70.7 |
|
|
|
59.0 |
|
Direct
CAF expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
CAF payroll and fringe benefit
expense
|
|
|
19.2 |
|
|
|
15.9 |
|
|
|
12.0 |
|
Other direct CAF
expenses
|
|
|
19.9 |
|
|
|
17.4 |
|
|
|
14.0 |
|
Total
direct CAF
expenses
|
|
|
39.1 |
|
|
|
33.3 |
|
|
|
26.0 |
|
CarMax
Auto Finance
income
|
|
$ |
15.3 |
|
|
$ |
85.9 |
|
|
$ |
132.6 |
|
(1)
|
To
the extent we recognize valuation or other adjustments related to loans
originated and sold during previous quarters of the same fiscal year, the
sum of amounts reported for the individual quarters may not equal the
amounts reported for the corresponding full fiscal
year.
|
CAF
provides financing for qualified customers at competitive market rates of
interest. Throughout each month, we sell substantially all of the loans
originated by CAF in securitization transactions as discussed in Note
4. The majority of CAF income has typically been generated by the
spread between the interest rates charged to customers and the related cost of
funds. A gain, recorded at the time of securitization, results from
recording a receivable approximately equal to the present value of the expected
residual cash flows generated by the securitized receivables. The
cash flows are calculated taking into account expected prepayments, losses and
funding costs.
The gain
on sales of loans originated and sold includes both the gain income recorded at
the time of securitization and the effect of any subsequent changes in valuation
assumptions or funding costs that are incurred in the same fiscal period that
the loans were originated. Other losses or gains include the effects
of changes in valuation assumptions or funding costs related to loans originated
and sold during previous fiscal periods. In addition, other losses or
gains could include the effects of new 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 benefit or costs that could be
attributed to CAF. Examples of indirect costs not included are retail
store expenses and corporate expenses such as human resources,
administrative services, marketing, information systems, accounting, legal,
treasury and executive payroll.
In July
2008 we renewed our revolving securitization program (“warehouse facility”) that
provides financing of up to $1.4 billion. The purpose of the
warehouse facility is 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. In addition, the warehouse facility renews on an annual
basis. 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. Depending
on the transaction structure and market conditions, refinancing receivables in a
term securitization could have a significant impact on our results of
operations. The impact of refinancing activity will depend upon the
securitization structure and market conditions at the refinancing
date.
The
warehouse facility and each term securitization are governed by various legal
documents that limit and specify the activities of the special purpose entities
and securitization trusts (collectively, “securitization vehicles”) used to
facilitate the securitizations. The securitization vehicles are
generally allowed to acquire the receivables being sold to them, issue
asset-backed securities to investors to fund the acquisition of the receivables
and enter into derivatives or other yield maintenance contracts to hedge or
mitigate certain risks related to the pool of receivables or asset-backed
securities. Additionally, the securitization vehicles are required to service
the receivables they hold and the securities they have issued. These servicing
functions are performed by CarMax as appointed within the underlying legal
documents. Servicing functions include, but are not limited to, collecting
payments from borrowers, monitoring delinquencies, liquidating assets, investing
funds until distribution, remitting payments to the trustee who in turn remits
payments to the investors, and accounting for and reporting information to
investors.
ENDING
MANAGED RECEIVABLES
|
|
As
of February 28 or 29
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Warehouse
facility
|
|
$ |
1,215.0 |
|
|
$ |
854.5 |
|
|
$ |
598.0 |
|
Term
securitizations
|
|
|
2,616.9 |
|
|
|
2,910.0 |
|
|
|
2,644.1 |
|
Loans
held for investment
|
|
|
145.1 |
|
|
|
69.0 |
|
|
|
62.7 |
|
Loans
held for sale
|
|
|
9.7 |
|
|
|
5.0 |
|
|
|
6.2 |
|
Total
ending managed receivables
|
|
$ |
3,986.7 |
|
|
$ |
3,838.5 |
|
|
$ |
3,311.0 |
|
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, and 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.
Gain
(Loss) on Loans Sold
|
|
Years
Ended February 28 or 29
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Net
loans
originated
|
|
$ |
1,935.0 |
|
|
$ |
2,429.7 |
|
|
$ |
2,242.3 |
|
Total
loans
sold
|
|
$ |
2,031.2 |
|
|
$ |
2,534.4 |
|
|
$ |
2,322.7 |
|
Total
(loss)
gain
|
|
$ |
(35.3 |
) |
|
$ |
48.5 |
|
|
$ |
99.7 |
|
Total
(loss) gain as a percentage of total loans sold
|
|
|
(1.7 |
)% |
|
|
1.9 |
% |
|
|
4.3 |
% |
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 February 28, 2009, on a combined
basis, the reserve accounts and required excess receivables were 4.5% 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 $348.3 million as of
February 28, 2009, and $270.8 million as of February 29,
2008. Additional information on fair value measurements is included
in Note 6. The receivables underlying the retained interest had a
weighted average life of 1.5 years as of February 28, 2009, and
February 29, 2008. The weighted average life in periods
(for example, months or years) of prepayable assets is calculated by multiplying
the principal collections expected in each future period by the number of
periods until that future period, summing those products and dividing the sum by
the initial principal balance.
Interest-only
strip receivables. Interest-only strip receivables represent
the present value of residual cash flows we expect to receive over the life of
the securitized receivables. The value of these receivables is
determined by estimating the future cash flows using our assumptions of key
factors, such as finance charge income, loss rates, prepayment rates, funding
costs and discount rates appropriate for the type of asset and
risk. The value of interest-only strip receivables 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 $41.4 million as of February 28, 2009, and $37.0 million
as of February 29, 2008.
Required excess
receivables. The total value of the securitized receivables
must exceed the principal amount owed to the investors by a specified
amount. The required excess receivables balance represents this
specified amount. Any cash flows generated by the required excess
receivables are used, if needed, to make payments to the
investors. Any remaining cash flows from the required excess
receivables are released through the special purpose entity to
us. The unpaid principal balance related to the required excess
receivables was $139.1 million as of February 28, 2009, and $63.0
million as of February 29, 2008.
Retained
subordinated bonds. In fiscal 2009
and 2008, we retained subordinated bonds issued by securitization
trusts. We receive interest payments on the bonds. The
bonds are carried at fair value and changes in fair value are included in
earnings as a component of CAF income. We base our valuation on
observable market prices of the same or similar instruments when available;
however, observable market prices are not currently available for these assets
due to illiquidity in the credit markets. Our current valuations are
primarily based on an average of three non-binding, current market spread quotes
from third-party investment banks. By applying these average spreads to current
bond benchmarks, as determined through the use of a widely accepted third-party
bond pricing model, we have
measured a current fair value. The value of retained subordinated
bonds was $87.4 million as of February 28, 2009, and $43.1 million as
of February 29, 2008.
Key
Assumptions Used in Measuring the Fair Value of the Retained Interest and
Sensitivity Analysis
The
following table shows the key economic assumptions used in measuring the fair
value of the retained interest as of February 28, 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
|
|
|
|
|
1.36%
- 1.46 |
% |
|
$ |
8.1 |
|
|
$ |
15.7 |
|
|
|
|
1.65%
- 4.00 |
% |
|
$ |
10.3 |
|
|
$ |
20.7 |
|
|
|
|
19.00 |
% |
|
$ |
6.0 |
|
|
$ |
11.7 |
|
Warehouse
facility costs (1)
|
|
|
2.05 |
% |
|
$ |
3.8 |
|
|
$ |
7.7 |
|
(1)
|
Expressed
as a spread above appropriate benchmark rates. Applies only to
retained interest in receivables securitized through the warehouse
facility. As of February 28, 2009, there were receivables of
$1.22 billion 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 February 28 or 29
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Accounts
31+ days past
due
|
|
$ |
118.1 |
|
|
$ |
86.1 |
|
|
$ |
56.9 |
|
Ending
managed
receivables
|
|
$ |
3,986.7 |
|
|
$ |
3,838.5 |
|
|
$ |
3,311.0 |
|
Past
due accounts as a percentage of ending managed receivables
|
|
|
2.96 |
% |
|
|
2.24 |
% |
|
|
1.72 |
% |
Credit
Loss Information
|
|
Years
Ended February 28 or 29
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Net
credit losses on managed
receivables
|
|
$ |
69.8 |
|
|
$ |
38.3 |
|
|
$ |
20.7 |
|
Average
managed
receivables
|
|
$ |
4,021.0 |
|
|
$ |
3,608.4 |
|
|
$ |
3,071.1 |
|
Net
credit losses as a percentage of average managed
receivables
|
|
|
1.74 |
% |
|
|
1.06 |
% |
|
|
0.67 |
% |
Recovery
rate
|
|
|
44 |
% |
|
|
50 |
% |
|
|
51 |
% |
Selected
Cash Flows from Securitized Receivables
|
|
Years
Ended February 28 or 29
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Proceeds
from new
securitizations
|
|
$ |
1,622.8 |
|
|
$ |
2,040.2 |
|
|
$ |
1,867.5 |
|
Proceeds
from collections
|
|
$ |
840.6 |
|
|
$ |
1,095.0 |
|
|
$ |
1,011.8 |
|
Servicing
fees
received
|
|
$ |
41.3 |
|
|
$ |
37.0 |
|
|
$ |
32.0 |
|
Other
cash flows received from the retained interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-only strip
receivables
|
|
$ |
96.7 |
|
|
$ |
98.6 |
|
|
$ |
88.4 |
|
Reserve account
releases
|
|
$ |
6.4 |
|
|
$ |
9.4 |
|
|
$ |
15.2 |
|
Proceeds
from new securitizations. Proceeds from new
securitizations include proceeds from receivables that are newly securitized in
or refinanced through the warehouse facility during the indicated
period. Balances previously outstanding in term securitizations that
were refinanced through the warehouse facility totaled $101.0 million in fiscal
2009, $103.6 million in fiscal 2008 and $82.5 million in fiscal
2007. 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 and amounts released to us from reserve
accounts.
Financial
Covenants and Performance Triggers
The
securitization agreement related to the warehouse facility includes various
financial covenants and performance triggers. 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 could have us replaced
as servicer and charge us a higher rate of interest. Further, we could be forced
to deposit collections on the securitized receivables with the warehouse agent
on a daily basis, deliver executed lockbox agreements to the warehouse facility
agent and obtain a replacement counterparty for the interest rate cap agreement
related to the warehouse facility. As of February 28, 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 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. During fiscal
2009, we entered into 84 interest rate swaps with initial notional amounts
totaling $1.88 billion and terms ranging from 16 to 46 months. The
notional amount of outstanding swaps totaled $1.36 billion as of February 28,
2009, and $898.7 million as of February 29, 2008.
FAIR
VALUE OF DERIVATIVE INSTRUMENTS (1)
|
|
|
As
of February 28 or 29
|
|
(In
thousands)
|
Consolidated
Balance Sheets
|
|
2009
|
|
|
2008
|
|
Asset
derivatives
|
|
|
|
|
|
|
|
Interest
rate
swaps
|
Retained
interest in securitized receivables
|
|
$ |
33 |
|
|
$ |
— |
|
Interest
rate
swaps
|
Accounts
payable
|
|
|
52 |
|
|
|
— |
|
Liability
derivatives
|
|
|
|
|
|
|
|
|
|
Interest
rate
swaps
|
Accounts
payable
|
|
|
(30,590 |
) |
|
|
(15,130 |
) |
Total
|
|
$ |
(30,505 |
) |
|
$ |
(15,130 |
) |
CHANGES IN FAIR
VALUE OF DERIVATIVE INSTRUMENTS (1)
|
|
|
Years
Ended February 28 or 29
|
|
(In
thousands)
|
Consolidated
Statements of Earnings
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Loss
on interest rate swaps
|
CarMax
Auto Finance income
|
|
$ |
(15,214 |
) |
|
$ |
(14,107 |
) |
|
$ |
(2,627 |
) |
(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
|
We
adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair
Value Measurements” ("SFAS 157"), on March
1, 2008. SFAS 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value
measurements. SFAS 157 defines “fair value” as the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the principal market, or if none
exists, the most advantageous market, for the specific asset or liability at the
measurement date (referred to as the “exit price”). The fair value
should be based on assumptions that market participants would use, including a
consideration of nonperformance risk.
We assess
the inputs used to measure fair value using the three-tier hierarchy in
accordance with SFAS 157 and as disclosed in the tables below. The
hierarchy indicates the extent to which inputs used in measuring fair value are
observable in the market.
|
Level 1
|
Inputs
include unadjusted quoted prices in active markets for identical assets or
liabilities that we can access at the measurement
date.
|
|
Level 2
|
Inputs
other than quoted prices included within Level 1 that are observable for
the asset or liability, either directly or indirectly, including quoted
prices for similar assets in active markets and observable inputs such as
interest rates and yield curves.
|
|
Level 3
|
Inputs
that are significant to the measurement that are not observable in the
market and include management's judgments about the assumptions market
participants would use in pricing the asset or liability (including
assumptions about
risk).
|
Our fair
value processes include controls that are designed to ensure that fair values
are appropriate. Such controls include model validation, review of
key model inputs, analysis of period-over-period fluctuations and reviews by
senior management.
Valuation
Methodologies
Money
market securities. Money market securities
are cash equivalents, which are included in either cash and cash equivalents or
other assets, and consist of highly liquid investments with original maturities
of three months or less. We use quoted market prices for identical
assets to measure fair value. Therefore, all money market securities
are classified as Level 1.
Retained
interest in securitized receivables. We
retain an interest in the auto loan receivables that we securitize, including
interest-only strip receivables, various reserve accounts, required excess
receivables and retained subordinated bonds. Excluding the retained
subordinated bonds, we estimate the fair value of the retained interest using
internal valuation models. These models include a combination of market inputs
and our own assumptions as described in Note 4. As the valuation
models include significant unobservable inputs, we classified the retained
interest as Level 3.
For the
retained subordinated bonds, we base our valuation on observable market prices
for similar assets when available. Otherwise, our valuations are
based on input from independent third parties and internal valuation models, as
described in Note 4. As the key assumption used in the valuation is
currently based on unobservable inputs, we classified the retained subordinated
bonds as Level 3.
Financial
derivatives. Financial derivatives are included in either
prepaid expenses and other current assets or accounts payable. As part of our
risk management strategy, we utilize interest rate swaps relating to our auto
loan receivable securitizations and our investment in retained subordinated
bonds. Swaps are used to better match funding costs to the interest
on the fixed-rate receivables being securitized and the retained subordinated
bonds and to minimize the funding costs related to certain of our securitization
trusts. Our derivatives are not exchange-traded and are
over-the-counter customized derivative instruments. All of our
derivative exposures are with highly rated bank counterparties.
We
measure derivative fair values assuming that the unit of account is an
individual derivative instrument and that derivatives are sold or transferred on
a stand-alone basis. We estimate the fair value of our derivatives
using quotes determined by the swap counterparties. We validate these
quotes using our own internal model. Both our internal model and
quotes received from bank counterparties project future cash flows and discount
the future amounts to a present value using market-based expectations for
interest rates and the contractual terms of the derivative
instruments. Because model inputs can typically be observed in the
liquid market and the models do not require significant judgment, these
derivatives are classified as Level 2.
Our
derivative fair value measurements consider assumptions about counterparty and
our own nonperformance risk. We monitor counterparty and our own
nonperformance risk and, in the event that we determine that a party is unlikely
to perform under terms of the contract, we would adjust the derivative fair
value to reflect the nonperformance risk.
ITEMS
MEASURED AT FAIR VALUE ON A RECURRING BASIS
|
|
As
of February 28, 2009
|
|
(In
millions)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market securities
|
|
$ |
156.8 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
156.8 |
|
Retained
interest in securitized receivables
|
|
|
— |
|
|
|
— |
|
|
|
348.3 |
|
|
|
348.3 |
|
Total
assets at fair value
|
|
$ |
156.8 |
|
|
$ |
— |
|
|
$ |
348.3 |
|
|
$ |
505.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of total assets at fair value
|
|
|
31.0 |
% |
|
|
— |
% |
|
|
69.0 |
% |
|
|
100.0 |
% |
Percent
of total assets
|
|
|
6.6 |
% |
|
|
— |
% |
|
|
14.6 |
% |
|
|
21.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
derivatives
|
|
$ |
— |
|
|
$ |
30.5 |
|
|
$ |
— |
|
|
$ |
30.5 |
|
Total
liabilities at fair value
|
|
$ |
— |
|
|
$ |
30.5 |
|
|
$ |
— |
|
|
$ |
30.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of total liabilities
|
|
|
— |
% |
|
|
3.9 |
% |
|
|
— |
% |
|
|
3.9 |
% |
CHANGES
IN THE LEVEL 3 ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS
(In
millions)
|
|
Retained
interest in
securitized
receivables
|
|
Balance
as of March 1,
2009
|
|
$ |
270.8 |
|
Total
realized/unrealized losses (1)
|
|
|
(46.4 |
) |
Purchases,
sales, issuances and settlements,
net
|
|
|
123.9 |
|
Balance
as of February 28,
2009
|
|
$ |
348.3 |
|
|
|
|
|
|
Change
in unrealized losses on assets still held (1)
|
|
$ |
(33.5 |
) |
|
|
(1)
Reported in CarMax Auto Finance income on the consolidated
statements of earnings.
|
|
7.
|
PROPERTY
AND EQUIPMENT
|
|
|
As
of February 28 or 29
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
Land
|
|
$ |
198,809 |
|
|
$ |
162,786 |
|
Land
held for
sale
|
|
|
1,432 |
|
|
|
921 |
|
Land
held for
development
|
|
|
38,200 |
|
|
|
42,311 |
|
Buildings
|
|
|
509,682 |
|
|
|
397,183 |
|
Capital
leases
|
|
|
30,640 |
|
|
|
29,258 |
|
Leasehold
improvements
|
|
|
83,823 |
|
|
|
64,947 |
|
Furniture,
fixtures and
equipment
|
|
|
230,552 |
|
|
|
199,996 |
|
Construction
in
progress
|
|
|
71,289 |
|
|
|
140,389 |
|
Total
property and
equipment
|
|
|
1,164,427 |
|
|
|
1,037,791 |
|
Less
accumulated depreciation and
amortization
|
|
|
226,168 |
|
|
|
175,294 |
|
Property
and equipment,
net
|
|
$ |
938,259 |
|
|
$ |
862,497 |
|
Land held
for development represents land owned for potential expansion. Leased
property meeting capital lease criteria is capitalized and the present value of
the related lease payments is recorded as long-term debt. Accumulated
amortization on capital lease assets was $7.9 million as of February 28, 2009,
and $6.2 million as of February 29, 2008.
Income
Tax Provision
|
|
Years
Ended February 28 or 29
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
69,095 |
|
|
$ |
121,274 |
|
|
$ |
120,250 |
|
State
|
|
|
9,992 |
|
|
|
18,175 |
|
|
|
18,671 |
|
Total
|
|
|
79,087 |
|
|
|
139,449 |
|
|
|
138,921 |
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(37,835 |
) |
|
|
(21,222 |
) |
|
|
(13,596 |
) |
State
|
|
|
(3,667 |
) |
|
|
(3,183 |
) |
|
|
(573 |
) |
Total
|
|
|
(41,502 |
) |
|
|
(24,405 |
) |
|
|
(14,169 |
) |
Income
tax
provision
|
|
$ |
37,585 |
|
|
$ |
115,044 |
|
|
$ |
124,752 |
|
Effective
Income Tax Rate Reconciliation
|
|
Years
Ended February 28 or 29
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Federal
statutory income tax
rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State
and local income taxes, net of federal benefit
|
|
|
2.7 |
|
|
|
3.1 |
|
|
|
3.5 |
|
Nondeductible
items
|
|
|
0.3 |
|
|
|
0.1 |
|
|
|
0.1 |
|
Valuation
allowance
|
|
|
0.8 |
|
|
|
0.5 |
|
|
|
— |
|
Effective
income tax
rate
|
|
|
38.8 |
% |
|
|
38.7 |
% |
|
|
38.6 |
% |
Temporary
Differences Resulting in Deferred Tax Assets and Liabilities
|
|
As
of February 28 or 29
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Accrued
expenses
|
|
$ |
27,914 |
|
|
$ |
28,972 |
|
Partnership
basis
|
|
|
44,376 |
|
|
|
18,394 |
|
Inventory
|
|
|
2,108 |
|
|
|
— |
|
Stock
compensation
|
|
|
45,687 |
|
|
|
34,191 |
|
Capital
loss carry
forward
|
|
|
2,413 |
|
|
|
1,636 |
|
Total
gross deferred tax
assets
|
|
|
122,498 |
|
|
|
83,193 |
|
Less: valuation
allowance
|
|
|
(2,413 |
) |
|
|
(1,636 |
) |
Net
gross deferred tax
assets
|
|
|
120,085 |
|
|
|
81,557 |
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Securitized
receivables
|
|
|
18,620 |
|
|
|
18,524 |
|
Prepaid
expenses
|
|
|
8,168 |
|
|
|
10,034 |
|
Inventory
|
|
|
— |
|
|
|
1,677 |
|
Depreciation
and
amortization
|
|
|
2,263 |
|
|
|
1,966 |
|
Total
gross deferred tax
liabilities
|
|
|
29,051 |
|
|
|
32,201 |
|
Net
deferred tax
asset
|
|
$ |
91,034 |
|
|
$ |
49,356 |
|
Except
for amounts for which a valuation allowance has been provided, we believe it is
more likely than not that the results of future operations will generate
sufficient taxable income to realize the deferred tax assets. The
valuation allowance as of February 28, 2009, relates to capital loss
carryforwards that are not more likely than not to be utilized prior to their
expiration.
We
adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (“FIN 48”) as of March 1, 2007,
which established a consistent framework for determining the appropriate level
of tax reserves to maintain for “uncertain tax positions.” This
interpretation of SFAS No. 109, “Accounting for Income Taxes,” uses a two-step
approach in which a tax benefit is recognized if a position is more likely than
not to be sustained. The amount of the benefit is then measured as the
highest tax
benefit that
is greater than 50% likely to be realized upon settlement. FIN 48 also
established new disclosure requirements related to tax reserves. In
accordance with FIN 48, we recorded a decrease of $0.4 million in accrued tax
reserves and a corresponding increase in retained earnings.
Reconciliation
of Unrecognized Tax Benefits
|
|
Years
Ended February 28 or 29
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
Balance
at beginning of
year
|
|
$ |
32,669 |
|
|
$ |
24,957 |
|
Increases
for tax positions of prior
years
|
|
|
10,757 |
|
|
|
12,485 |
|
Decreases
for tax positions of prior
years
|
|
|
(10,265 |
) |
|
|
(6,321 |
) |
Increases
based on tax positions related to the current year
|
|
|
136 |
|
|
|
1,608 |
|
Settlements
|
|
|
(7,713 |
) |
|
|
(60 |
) |
Balance
at end of
year
|
|
$ |
25,584 |
|
|
$ |
32,669 |
|
As of
February 28, 2009, we had $25.6 million of gross unrecognized tax benefits, $2.6
million of which, if recognized, would affect our effective tax
rate. It is reasonably possible that the amount of the unrecognized
tax benefit with respect to certain of our uncertain tax positions will increase
or decrease during the next 12 months; however, we do not expect the change to
have a significant effect on our results of operations, financial condition or
cash flows. As of February 29, 2008, we had $32.7 million of
gross unrecognized tax benefits, $2.8 million of which, if recognized, would
affect our effective tax rate.
Our
continuing practice is to recognize interest and penalties related to income tax
matters in SG&A expenses. In fiscal 2009, our accrual for
interest decreased $0.4 million to $5.2 million as of
February 28, 2009, from $5.6 million as of
February 29, 2008. In fiscal 2008, our accrual for interest increased
$1.7 million to $5.6 million as of February 29, 2008, from $3.9
million as of March 1, 2007.
CarMax is
subject to U.S. federal income tax as well as income tax of multiple states and
local jurisdictions. With a few insignificant exceptions, we are no
longer subject to U.S. federal, state and local income tax examinations by tax
authorities for years prior to fiscal 2003.
(A)
Retirement Benefit Plans
We have a
noncontributory defined benefit pension plan (the “pension plan”) covering the
majority of full-time employees. We also have an unfunded
nonqualified plan (the “restoration plan”) that restores retirement benefits for
certain senior executives who are affected by Internal Revenue Code limitations
on benefits provided under the pension plan. We use a fiscal year end
measurement date for both the pension plan and the restoration
plan.
On
October 21, 2008, the board of directors approved amendments to freeze the
pension plan and the restoration plan effective December 31, 2008. No
additional benefits will accrue under these plans after that date. These changes
resulted in the recognition of a non-cash net curtailment gain of $7.4
million. In connection with benefits earned prior to the freeze, we
will have a continuing obligation to fund the pension plan and will continue to
recognize net periodic pension expense for both plans.
Benefit
Plan Information
|
|
Years
Ended February 28 or 29
|
|
|
|
Pension
Plan
|
|
|
Restoration
Plan
|
|
|
Total
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Change
in projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation at beginning of
year
|
|
$ |
103,342 |
|
|
$ |
94,653 |
|
|
$ |
12,244 |
|
|
$ |
7,195 |
|
|
$ |
115,586 |
|
|
$ |
101,848 |
|
Service
cost
|
|
|
10,548 |
|
|
|
15,670 |
|
|
|
832 |
|
|
|
688 |
|
|
|
11,380 |
|
|
|
16,358 |
|
Interest
cost
|
|
|
6,343 |
|
|
|
5,996 |
|
|
|
739 |
|
|
|
468 |
|
|
|
7,082 |
|
|
|
6,464 |
|
Plan
amendments
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,046 |
|
|
|
— |
|
|
|
1,046 |
|
Actuarial (gain)
loss
|
|
|
(2,691 |
) |
|
|
(12,358 |
) |
|
|
2,809 |
|
|
|
3,020 |
|
|
|
118 |
|
|
|
(9,338 |
) |
Curtailment
gain
|
|
|
(32,857 |
) |
|
|
— |
|
|
|
(7,521 |
) |
|
|
— |
|
|
|
(40,378 |
) |
|
|
— |
|
Benefits
paid
|
|
|
(919 |
) |
|
|
(619 |
) |
|
|
(173 |
) |
|
|
(173 |
) |
|
|
(1,092 |
) |
|
|
(792 |
) |
Obligation at end of
year
|
|
|
83,766 |
|
|
|
103,342 |
|
|
|
8,930 |
|
|
|
12,244 |
|
|
|
92,696 |
|
|
|
115,586 |
|
Change
in fair value of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets at beginning of
year
|
|
|
54,769 |
|
|
|
45,892 |
|
|
|
— |
|
|
|
— |
|
|
|
54,769 |
|
|
|
45,892 |
|
Actual return on plan
assets
|
|
|
(26,667 |
) |
|
|
(1,904 |
) |
|
|
— |
|
|
|
— |
|
|
|
(26,667 |
) |
|
|
(1,904 |
) |
Employer
contributions
|
|
|
15,606 |
|
|
|
11,400 |
|
|
|
173 |
|
|
|
173 |
|
|
|
15,779 |
|
|
|
11,573 |
|
Benefits
paid
|
|
|
(919 |
) |
|
|
(619 |
) |
|
|
(173 |
) |
|
|
(173 |
) |
|
|
(1,092 |
) |
|
|
(792 |
) |
Plan assets at end of
year
|
|
|
42,789 |
|
|
|
54,769 |
|
|
|
— |
|
|
|
— |
|
|
|
42,789 |
|
|
|
54,769 |
|
Funded
status
recognized
|
|
$ |
(40,977 |
) |
|
$ |
(48,573 |
) |
|
$ |
(8,930 |
) |
|
$ |
(12,244 |
) |
|
$ |
(49,907 |
) |
|
$ |
(60,817 |
) |
Amounts
recognized in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liability
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(336 |
) |
|
$ |
(283 |
) |
|
$ |
(336 |
) |
|
$ |
(283 |
) |
Noncurrent
liability
|
|
|
(40,977 |
) |
|
|
(48,573 |
) |
|
|
(8,594 |
) |
|
|
(11,961 |
) |
|
|
(49,571 |
) |
|
|
(60,534 |
) |
Net amount
recognized
|
|
$ |
(40,977 |
) |
|
$ |
(48,573 |
) |
|
$ |
(8,930 |
) |
|
$ |
(12,244 |
) |
|
$ |
(49,907 |
) |
|
$ |
(60,817 |
) |
Accumulated
benefit obligation
|
|
$ |
83,766 |
|
|
$ |
67,094 |
|
|
$ |
8,930 |
|
|
$ |
6,398 |
|
|
$ |
92,696 |
|
|
$ |
73,492 |
|
Benefit
Obligations. Accumulated and
projected benefit obligations (“ABO” and “PBO”) represent the obligations of the
benefit plans for past service as of the measurement date. ABO is the
present value of benefits earned to date with benefits computed based on current
service and compensation levels. PBO is ABO increased to reflect
expected future service and increased compensation levels. As a
result of the freeze of plan benefits under our pension and restoration plans as
of December 31, 2008, the ABO and PBO balances are equal to one another at all
subsequent dates.
Assumptions
Used to Determine Benefit Obligations
|
|
As
of February 28 or 29
|
|
|
|
Pension
Plan
|
|
|
Restoration
Plan
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Discount
rate
|
|
|
6.85 |
% |
|
|
6.85 |
% |
|
|
6.85 |
% |
|
|
6.85 |
% |
Rate
of compensation increase (1)
|
|
|
— |
% |
|
|
5.00 |
% |
|
|
— |
% |
|
|
7.00 |
% |
(1)
|
The
rate of compensation increase assumption is no longer applicable due to
the freeze of plan benefits effective
December 31, 2008.
|
Plan
Assets. The fair value of plan assets is measured using
current market values. No plan assets are expected to be returned to
us during the fiscal year ended February 28, 2010.
Funding
Policy. For the pension plan, we contribute amounts sufficient
to meet minimum funding requirements as set forth in the employee benefit and
tax laws, plus any additional amounts as we may determine to be
appropriate. We expect to contribute approximately $31.0 million to
the pension plan in fiscal 2010. For the non-funded restoration plan,
we contribute an amount equal to the expected benefit payments.
Estimated
Future Benefit Payments
(In
thousands)
|
|
Pension
Plan
|
|
|
Restoration
Plan
|
|
Fiscal
2010
|
|
$ |
807 |
|
|
$ |
336 |
|
Fiscal
2011
|
|
$ |
1,049 |
|
|
$ |
369 |
|
Fiscal
2012
|
|
$ |
1,258 |
|
|
$ |
383 |
|
Fiscal
2013
|
|
$ |
1,508 |
|
|
$ |
401 |
|
Fiscal
2014
|
|
$ |
1,800 |
|
|
$ |
413 |
|
Fiscal
2015 to
2019
|
|
$ |
13,297 |
|
|
$ |
2,174 |
|
Our
pension plan assets are held in trust and management sets the investment
policies and strategies. Long-term strategic investment objectives
include asset preservation and appropriately balancing risk and
return. We oversee the investment allocation process, which includes
selecting investment managers, setting long-term strategic targets and
monitoring asset allocations and performance. Target allocations are
guidelines, not limitations, and occasionally plan fiduciaries will approve
allocations above or below the targets.
Pension
Plan Asset Allocation
|
|
As
of February 28 or 29
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Target
|
|
|
Actual
|
|
|
Target
|
|
|
Actual
|
|
|
|
Allocation
|
|
|
Allocation
|
|
|
Allocation
|
|
|
Allocation
|
|
Equity
securities
|
|
|
75 |
% |
|
|
76 |
% |
|
|
75 |
% |
|
|
76 |
% |
Fixed
income
securities
|
|
|
25 |
|
|
|
24 |
|
|
|
25 |
|
|
|
24 |
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Components
of Net Pension Expense
|
|
Years
Ended February 28 or 29
|
|
(In
thousands)
|
|
Pension
Plan
|
|
|
Restoration
Plan
|
|
|
Total
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Service
cost
|
|
$ |
10,548 |
|
|
$ |
15,670 |
|
|
$ |
12,048 |
|
|
$ |
832 |
|
|
$ |
688 |
|
|
$ |
411 |
|
|
$ |
11,380 |
|
|
$ |
16,358 |
|
|
$ |
12,459 |
|
Interest
cost
|
|
|
6,343 |
|
|
|
5,996 |
|
|
|
4,096 |
|
|
|
739 |
|
|
|
468 |
|
|
|
393 |
|
|
|
7,082 |
|
|
|
6,464 |
|
|
|
4,489 |
|
Expected
return
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on
plan assets
|
|
|
(5,572 |
) |
|
|
(3,994 |
) |
|
|
(2,949 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,572 |
) |
|
|
(3,994 |
) |
|
|
(2,949 |
) |
Amortization
of prior service
cost
|
|
|
23 |
|
|
|
37 |
|
|
|
37 |
|
|
|
74 |
|
|
|
119 |
|
|
|
24 |
|
|
|
97 |
|
|
|
156 |
|
|
|
61 |
|
Recognized
actuarial (gain) loss
|
|
|
(1,244 |
) |
|
|
2,973 |
|
|
|
1,754 |
|
|
|
247 |
|
|
|
172 |
|
|
|
249 |
|
|
|
(997 |
) |
|
|
3,145 |
|
|
|
2,003 |
|
Pension
expense
|
|
|
10,098 |
|
|
|
20,682 |
|
|
|
14,986 |
|
|
|
1,892 |
|
|
|
1,447 |
|
|
|
1,077 |
|
|
|
11,990 |
|
|
|
22,129 |
|
|
|
16,063 |
|
Curtailment
(gain) loss
|
|
|
(8,229 |
) |
|
|
— |
|
|
|
— |
|
|
|
800 |
|
|
|
— |
|
|
|
— |
|
|
|
(7,429 |
) |
|
|
— |
|
|
|
— |
|
Net
periodic
expense
|
|
$ |
1,869 |
|
|
$ |
20,682 |
|
|
$ |
14,986 |
|
|
$ |
2,692 |
|
|
$ |
1,447 |
|
|
$ |
1,077 |
|
|
$ |
4,561 |
|
|
$ |
22,129 |
|
|
$ |
16,063 |
|
Changes
Not Recognized in Net Pension Expense but
Recognized
in Other Comprehensive Income
|
|
Year
Ended February 28, 2009
|
|
(In
thousands, before income taxes)
|
|
Pension
Plan
|
|
|
Restoration
Plan
|
|
|
Total
|
|
Net
actuarial loss
|
|
$ |
29,548 |
|
|
$ |
2,809 |
|
|
$ |
32,357 |
|
In fiscal
2010, we do not anticipate that any estimated actuarial losses will be amortized
from accumulated other comprehensive loss.
Assumptions
Used to Determine Net Pension Expense
|
|
Years
Ended February 28 or 29
|
|
|
|
Pension
Plan
|
|
|
Restoration
Plan
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Discount
rate (1)
|
|
|
6.85 |
% |
|
|
5.75 |
% |
|
|
5.75 |
% |
|
|
6.85 |
% |
|
|
5.75 |
% |
|
|
5.75 |
% |
Expected
rate of return on plan assets
|
|
|
8.00 |
% |
|
|
8.00 |
% |
|
|
8.00 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Rate
of compensation
increase
|
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
7.00 |
% |
|
|
7.00 |
% |
|
|
7.00 |
% |
(1)
|
For
fiscal 2009, a discount rate of 7.70% was used to determine the effects of
the curtailment at October 21,
2008.
|
Assumptions. Underlying
both the calculation of the PBO and the net pension expense are actuarial
calculations of each plan's liability. These calculations use
participant-specific information such as salary, age and years of service, as
well as certain assumptions, the most significant being the discount rate, rate
of return on plan assets, rate of compensation increases and mortality
rate. We evaluate these assumptions annually, at a minimum, and make
changes as necessary.
The
discount rate used for retirement benefit plan accounting reflects the yields
available on high-quality, fixed income debt instruments. For our
plans, we review high quality corporate bond indices in addition to a
hypothetical portfolio of corporate bonds with maturities that
approximate the expected timing of the anticipated benefit
payments.
To
determine the expected long-term return on plan assets, we consider the current
and anticipated asset allocations, as well as historical and estimated returns
on various categories of plan assets. We apply the estimated rate of
return to a market-related value of assets, which reduces the underlying
variability in the asset values. The use of expected long-term rates
of return on pension plan assets could result in recognized asset returns that
are greater or less than the actual returns of those pension plan assets in any
given year. Over time, however, the expected long-term returns are
anticipated to approximate the actual long-term returns, and therefore, result
in a pattern of income and expense recognition that more closely matches the
pattern of the services provided by the employees. Differences
between actual and expected returns, a component of unrecognized actuarial
gains/losses, are recognized over the average future expected service of the
active employees in the pension plan.
We
determine the rate of compensation increases based upon our long-term plans for
these increases. The rate of compensation increases is no longer
applicable for periods subsequent to December 31, 2008. Mortality
rate assumptions are based on the life expectancy of the population and were
updated as of February 28, 2009, to account for recent increases in life
expectancy.
(B)
Retirement Savings 401(k) Plan
We
sponsor a 401(k) plan for all associates meeting certain eligibility
criteria. In conjunction with the retirement benefit plan
curtailments, enhancements were made to the 401(k) plan effective January 1,
2009. The enhancements increased the maximum salary contribution for
eligible associates and increased our matching
contribution. Additionally, an annual company-funded contribution
regardless of associate participation was implemented as well as an additional
company-funded contribution to those associates meeting certain age and service
requirements. The total cost for company contributions was $5.7
million in fiscal 2009, $3.2 million in fiscal 2008 and $2.7 million in fiscal
2007.
(C)
Retirement Restoration Plan
Effective
January 1, 2009, we replaced the frozen restoration plan with a new
non-qualified retirement plan for certain associates who are affected by
Internal Revenue Code limitations on benefits provided under the retirement
savings 401(k) plan. Under this plan, these associates may continue
to defer portions of their compensation for retirement savings. We
match the associates’ contributions at the same rate provided under the 401(k)
plan, and also provide the annual company-funded contribution made regardless of
associate participation, as well as the additional company-funded contribution
to the associates meeting the same age and service requirements. This
plan is unfunded with lump sum payments to be made upon the associate’s
retirement. The total cost for this plan was immaterial in fiscal
2009.
|
|
As
of February 28 or 29
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
Revolving
credit
agreement
|
|
$ |
308,478 |
|
|
$ |
300,217 |
|
Obligations
under capital
leases
|
|
|
28,569 |
|
|
|
27,614 |
|
Total
debt
|
|
|
337,047 |
|
|
|
327,831 |
|
Less
short-term debt and current portion:
|
|
|
|
|
|
|
|
|
Revolving
credit
agreement
|
|
|
158,478 |
|
|
|
100,217 |
|
Obligations
under capital
leases
|
|
|
507 |
|
|
|
461 |
|
Total
long-term debt, excluding current
portion
|
|
$ |
178,062 |
|
|
$ |
227,153 |
|
We have a
$700 million revolving credit facility (the “credit facility”) with Bank of
America, N.A. and various other financial institutions. The credit
facility is secured by vehicle inventory and contains customary representations
and warranties, conditions and covenants. The financial covenants
include a maximum total liabilities to tangible net worth ratio and a minimum
fixed charge coverage ratio. Borrowings under this credit
facility are limited to 80% of qualifying inventory, and they are available for
working capital and general corporate purposes. Borrowings accrue interest at
variable rates based on LIBOR, the federal funds rate, or the prime rate,
depending on the type of borrowing. We pay a commitment fee on the
used and unused portions of the available funds. All outstanding
principal amounts will be due and payable in December 2011, and there are no
penalties for prepayment.
As of
February 28, 2009, $308.5 million was outstanding under the credit facility and
$227.7 million of the remaining borrowing limit was available to
us. The outstanding balance included $0.9 million classified as
short-term debt, $157.6 million classified as current portion of long-term debt
and $150.0 million classified as long-term debt. We classified $157.6
million of the outstanding balance as of February 28, 2009, as current portion
of long-term debt based on our expectation that this balance will not remain
outstanding for more than one year.
The
weighted average interest rate on outstanding short-term and long-term debt was
3.5% in fiscal 2009, 5.9% in fiscal 2008 and 6.4% in fiscal 2007.
We
capitalize interest in connection with the construction of certain
facilities. Capitalized interest totaled $1.9 million in fiscal 2009,
$5.0 million in fiscal 2008 and $4.5 million in fiscal 2007.
We have
recorded five capital leases for store facilities. The related
capital lease assets are included in property and equipment. These
leases were structured at varying interest rates with initial lease terms
ranging from 15 to 20 years with payments made monthly. The present
value of future minimum lease payments totaled $28.6 million as of February 28,
2009, and $27.6 million as of February 29, 2008.
11.
|
STOCK
AND STOCK-BASED INCENTIVE PLANS
|
(A)
Shareholder Rights Plan and Undesignated Preferred Stock
In
conjunction with our shareholder rights plan, shareholders received preferred
stock purchase rights as a dividend at the rate of one right for each share of
CarMax, Inc. common stock owned. The rights are exercisable only upon
the attainment of, or the commencement of a tender offer to attain, a 15% or
greater ownership interest in the company by a person or group. When
exercisable, and as adjusted for our March 2007 2-for-1 stock split, each right
would entitle the holder to buy one half of one one-thousandth of a share of
Cumulative Participating Preferred Stock, Series A, $20 par value, at an
exercise price of $140 per share, subject to adjustment. A total of
120,000 shares of such preferred stock, which has preferential dividend and
liquidation rights, have been authorized and designated. No such
shares are outstanding. In the event that an acquiring person or
group acquires the specified ownership percentage of CarMax, Inc. common stock
(except pursuant to a cash tender offer for all outstanding shares determined to
be fair by the board of directors) or engages in certain transactions with the
company after the rights become exercisable, each right will be converted into a
right to purchase, for half the current market price at that time, shares of
CarMax, Inc. common stock valued at two times the exercise price. We
also have an additional 19,880,000 authorized shares of undesignated preferred
stock of which no shares are outstanding.
(B)
Stock Incentive Plans
We
maintain long-term incentive plans for management, key employees and the
nonemployee members of our board of directors. The plans allow for
the grant of equity-based compensation awards, including nonqualified stock
options, incentive stock options, stock appreciation rights, restricted stock
awards, stock grants or a combination of awards. To date, we have
awarded no incentive stock options.
In fiscal
2006 and prior years, we primarily awarded stock options to employees who
received share-based compensation. Beginning in fiscal 2007, the
majority of employees receiving awards now receive restricted stock instead of
stock options. Senior management continues to receive awards of
nonqualified stock options. Nonemployee directors continue to receive
awards of nonqualified stock options and stock grants.
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 are subject to specified
restrictions and a risk of forfeiture. The restrictions typically
lapse three years from the grant date.
As of
February 28, 2009, a total of 34,500,000 shares of CarMax common stock have been
authorized to be issued under the long-term incentive plans. The
number of unissued common shares reserved for future grants under the long-term
incentive plans was 5,182,895 as of February 28, 2009.
(C)
Share-Based Compensation
Composition
of ShareBased
Compensation Expense
|
|
Years
Ended February 28 or 29
|
|
(In
thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Cost
of
sales
|
|
$ |
2,136 |
|
|
$ |
1,945 |
|
|
$ |
1,392 |
|
CarMax
Auto Finance
income
|
|
|
1,181 |
|
|
|
1,250 |
|
|
|
917 |
|
Selling,
general and administrative
expenses
|
|
|
33,201 |
|
|
|
31,487 |
|
|
|
30,379 |
|
Share-based
compensation expense, before income taxes
|
|
$ |
36,518 |
|
|
$ |
34,682 |
|
|
$ |
32,688 |
|
We
recognize compensation expense for stock options and restricted stock on a
straight-line basis (net of estimated forfeitures) over the requisite service
period, which is generally the vesting period of the award. Our
employee stock purchase plan is considered a liability-classified compensatory
plan; the associated costs of $1.1 million in fiscal 2009, $1.2 million in
fiscal 2008 and $0.9 million in fiscal 2007 are included in share-based
compensation expense. There were no capitalized share-based
compensation costs as of February 28, 2009, February 29, 2008, and
February 28, 2007.
Stock
Option Activity
(Shares
and intrinsic value in thousands)
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
as of March 1,
2008
|
|
|
13,648 |
|
|
$ |
14.55 |
|
|
|
|
|
|
|
Options
granted
|
|
|
2,220 |
|
|
$ |
19.56 |
|
|
|
|
|
|
|
Options
exercised
|
|
|
(817 |
) |
|
$ |
12.47 |
|
|
|
|
|
|
|
Options
forfeited or
expired
|
|
|
(207 |
) |
|
$ |
15.95 |
|
|
|
|
|
|
|
Outstanding
as of February 28, 2009
|
|
|
14,844 |
|
|
$ |
15.40 |
|
|
|
4.9 |
|
|
$ |
2,213 |
|
Exercisable
as of February 28, 2009
|
|
|
9,450 |
|
|
$ |
13.17 |
|
|
|
4.5 |
|
|
$ |
2,213 |
|
We
granted nonqualified options to purchase 2,219,857 shares of common stock in
fiscal 2009 and 1,882,183 shares of common stock in fiscal 2008. The
total cash received as a result of stock option exercises was $10.2 million in
fiscal 2009, $14.7 million in fiscal 2008 and $35.4 million in fiscal
2007. We settle stock option exercises with authorized but unissued
shares of CarMax common stock. The total intrinsic value of options
exercised was $5.7 million for fiscal 2009, $26.8 million for fiscal 2008 and
$74.7 million for fiscal 2007. We realized related tax benefits of
$2.2 million for fiscal 2009, $10.6 million for fiscal 2008 and $28.7
million for fiscal 2007.
Outstanding
Stock Options
|
|
|
As
of February 28, 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
|
|
$ |
6.62
to $9.30
|
|
|
|
2,167 |
|
|
|
4.0 |
|
|
$ |
7.16 |
|
|
|
2,167 |
|
|
$ |
7.16 |
|
$ |
10.74
to $13.42
|
|
|
|
4,189 |
|
|
|
4.9 |
|
|
$ |
13.21 |
|
|
|
3,237 |
|
|
$ |
13.21 |
|
$ |
14.13
to $15.72
|
|
|
|
2,828 |
|
|
|
5.1 |
|
|
$ |
14.71 |
|
|
|
2,710 |
|
|
$ |
14.70 |
|
$ |
16.33
to $22.29
|
|
|
|
3,978 |
|
|
|
5.2 |
|
|
$ |
18.61 |
|
|
|
909 |
|
|
$ |
17.20 |
|
$ |
24.99
to $25.79
|
|
|
|
1,682 |
|
|
|
5.1 |
|
|
$ |
25.04 |
|
|
|
427 |
|
|
$ |
25.05 |
|
|
|
|
|
14,844 |
|
|
|
4.9 |
|
|
$ |
15.40 |
|
|
|
9,450 |
|
|
$ |
13.17 |
|
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 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 were $7.16
per share in fiscal 2009, $8.43 per share in fiscal 2008 and $7.08 per share in
fiscal 2007. The unrecognized compensation costs related to nonvested
options totaled $20.7 million as of February 28, 2009. These costs
are expected to be recognized over a weighted average period of 2.0
years.
Assumptions
Used to Estimate Option Values
|
|
Years
Ended February 28 or 29
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Expected
volatility factor (1)
|
|
|
34.8%-60.9 |
% |
|
|
28.0%-54.0 |
% |
|
|
29.8%-63.4 |
% |
Weighted
average expected
volatility
|
|
|
44.1 |
% |
|
|
38.5 |
% |
|
|
47.4 |
% |
Risk-free
interest rate (2)
|
|
|
1.5%-3.7 |
% |
|
|
4.3%-5.0 |
% |
|
|
4.5%-5.1 |
% |
Expected
term (in years) (3)
|
|
|
4.8-5.2 |
|
|
|
4.2-4.4 |
|
|
|
4.5-4.6 |
|
(1)
|
Measured
using historical daily price changes of our stock for a period
corresponding to the term of the option and the implied volatility derived
from the market prices of traded options on our
stock.
|
(2)
|
Based on
the U.S. Treasury yield curve in effect at the time of
grant.
|
(3)
|
Represents
the estimated number of years that options will be outstanding prior to
exercise.
|
Restricted
Stock Activity
(In
thousands)
|
|
Number
of Shares
|
|
|
Weighted
Average Grant Date Fair Value
|
|
|
Outstanding
as of March 1, 2008
|
|
|
1,721 |
|
|
$ |
21.04 |
|
|
|
|
1,079 |
|
|
$ |
19.82 |
|
Restricted
stock vested or cancelled
|
|
|
(167 |
) |
|
$ |
20.83 |
|
Outstanding
as of February 28, 2009
|
|
|
2,633 |
|
|
$ |
20.55 |
|
We
granted 1,078,580 shares of restricted stock to our employees in fiscal 2009 and
914,505 shares in fiscal 2008. 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.
The
unrecognized compensation costs related to nonvested restricted stock awards
totaled $19.3 million as of February 28, 2009. These costs are
expected to be recognized over a weighted average period of 1.2
years.
(D)
Employee Stock Purchase Plan
We
sponsor an employee stock purchase plan for all associates meeting certain
eligibility criteria. Associate contributions are limited to 10% of
eligible compensation, up to a maximum of $7,500 per year. For each
$1.00 contributed by associates to the plan, we match $0.15. We have
authorized up to 4,000,000 shares of common stock for the employee stock
purchase plan. Shares are acquired through open-market
purchases.
As of
February 28, 2009, a total of 1,180,195 shares remained available under the
plan. Shares purchased on the open market on behalf of associates
totaled 677,944 during fiscal 2009; 409,004 during fiscal 2008; and 337,311
during fiscal 2007. The average price per share for purchases under
the plan was $12.22 in fiscal 2009, $22.24 in fiscal 2008 and $19.32 in fiscal
2007. The total cost for matching contributions was $1.1 million in
fiscal 2009, $1.2 million in fiscal 2008 and $0.9 million in fiscal
2007. These costs are included in share-based compensation
expense.
12.
|
NET
EARNINGS PER SHARE
|
Basic
and Dilutive Net Earnings per Share Reconciliations
|
|
Years
Ended February 28 or 29
|
|
(In
thousands except per share data)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Net
earnings available to common shareholders
|
|
$ |
59,213 |
|
|
$ |
182,025 |
|
|
$ |
198,597 |
|
Weighted
average common shares outstanding
|
|
|
217,537 |
|
|
|
216,045 |
|
|
|
212,454 |
|
Dilutive
potential common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
1,820 |
|
|
|
3,918 |
|
|
|
4,111 |
|
Restricted
stock
|
|
|
1,156 |
|
|
|
559 |
|
|
|
174 |
|
Weighted
average common shares and dilutive potential common shares
|
|
|
220,513 |
|
|
|
220,522 |
|
|
|
216,739 |
|
Basic
net earnings per share
|
|
$ |
0.27 |
|
|
$ |
0.84 |
|
|
$ |
0.93 |
|
Diluted
net earnings per share
|
|
$ |
0.27 |
|
|
$ |
0.83 |
|
|
$ |
0.92 |
|
For
fiscal 2009, weighted-average options to purchase 8,340,996 shares of common
stock were outstanding and not included in the calculation of diluted net
earnings per share because their inclusion would be antidilutive. For
fiscal 2008, weighted-average options to purchase 1,586,357 shares of common
stock were outstanding and not included in the calculation. For
fiscal 2007, weighted-average options to purchase 1,421,999 were outstanding and
not included in the calculation.
13.
|
ACCUMULATED
OTHER COMPREHENSIVE LOSS
|
|
|
Years
Ended February 28 or 29
|
|
(In
thousands, net of income taxes)
|
|
Unrecognized
Actuarial Losses (Gains)
|
|
|
Unrecognized
Prior
Service Cost
|
|
|
Total
Accumulated
Other
Comprehensive
Loss
|
|
Balance
as of February 28, 2006
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Adoption
of SFAS 158
|
|
|
20,094 |
|
|
|
238 |
|
|
|
20,332 |
|
Balance
as of February 28, 2007
|
|
|
20,094 |
|
|
|
238 |
|
|
|
20,332 |
|
Amounts
arising during the year
|
|
|
(2,177 |
) |
|
|
662 |
|
|
|
(1,515 |
) |
Amortization
recognized in net pension expense
|
|
|
(1,991 |
) |
|
|
(98 |
) |
|
|
(2,089 |
) |
Balance
as of February 29, 2008
|
|
|
15,926 |
|
|
|
802 |
|
|
|
16,728 |
|
Amounts
arising during the year
|
|
|
20,363 |
|
|
|
— |
|
|
|
20,363 |
|
Amortization
recognized in net pension expense
|
|
|
604 |
|
|
|
(65 |
) |
|
|
539 |
|
Curtailment
of retirement benefit plans
|
|
|
(20,033 |
) |
|
|
(737 |
) |
|
|
(20,770 |
) |
Balance
as of February 28, 2009
|
|
$ |
16,860 |
|
|
$ |
— |
|
|
$ |
16,860 |
|
Effective
March 1, 2007, changes in the funded status of our retirement plans are
recognized in accumulated other comprehensive loss. The cumulative
balances are net of deferred tax of $9.9 million as of February 28, 2009, and
$9.8 million as of February 29, 2008.
We
conduct a majority of our business in leased premises. Our lease
obligations are based upon contractual minimum rates. Most leases
provide that we pay taxes, maintenance, insurance and operating expenses
applicable to the premises. The initial term of most real property
leases will expire within the next 20 years; however, most of the leases have
options providing for renewal periods of 5 to 20 years at terms similar to the
initial terms. For operating leases, rent is recognized on a
straight-line basis over the lease term, including scheduled rent increases and
rent holidays. Rent expense for all operating leases was $82.1
million in fiscal 2009, $78.9 million in fiscal 2008 and $75.4 million in fiscal
2007.
Future
Minimum Lease Obligations
|
|
As
of February 28, 2009
|
|
(In
thousands)
|
|
Capital
Leases
(1)
|
|
|
Operating
Leases
(1)
|
|
Fiscal
2010
|
|
$ |
3,462 |
|
|
$ |
82,335 |
|
Fiscal
2011
|
|
|
3,608 |
|
|
|
81,988 |
|
Fiscal
2012
|
|
|
3,608 |
|
|
|
81,271 |
|
Fiscal
2013
|
|
|
3,608 |
|
|
|
81,237 |
|
Fiscal
2014
|
|
|
3,643 |
|
|
|
81,554 |
|
Fiscal
2015 and
thereafter
|
|
|
40,804 |
|
|
|
595,909 |
|
Total
minimum lease
payments
|
|
|
58,733 |
|
|
$ |
1,004,294 |
|
Less
amounts representing
interest
|
|
|
(30,164 |
) |
|
|
|
|
Present
value of net minimum capital lease
payments
|
|
$ |
28,569 |
|
|
|
|
|
(1)
|
Excludes
taxes, insurance and other costs payable directly by us. These
costs vary from year to year and are incurred in the ordinary course of
business.
|
We
completed sale-leaseback transactions involving two superstores valued at
approximately $31.3 million in fiscal 2009. We did not enter into any
sale-leaseback transactions in fiscal 2008 or 2007. All
sale-leaseback transactions are structured at competitive
rates. Gains or losses on sale-leaseback transactions are recorded as
deferred rent and amortized over the lease term. We do not have
continuing involvement under the sale-leaseback transactions. In
conjunction with certain sale-leaseback transactions, we must meet financial
covenants relating to minimum tangible net worth and minimum coverage of rent
expense. We were in compliance with all such covenants as of
February 28, 2009.
15.
|
SUPPLEMENTAL
FINANCIAL STATEMENT INFORMATION
|
(A)
Goodwill and Other Intangibles
Other
assets included goodwill and other intangibles with a carrying value of $10.1
million as of February 28, 2009, and
February 29, 2008. No impairment of goodwill or intangible
assets resulted from our annual impairment tests in fiscal 2009 or fiscal
2008. In fiscal 2007, we recognized an impairment charge of $4.9
million, included in SG&A expenses, related to goodwill and franchise rights
associated with one of our new car franchises.
(B)
Restricted Investments
Restricted
investments, included in other assets, consisted of $28.5 million in money
market securities and $2.2 million in other debt securities as of February 28,
2009, and $24.5 million in money market securities and $2.2 million in other
debt securities as of February 29, 2008. For fiscal year 2009, there
were no proceeds from the sales of other debt securities. For fiscal
year 2008, proceeds from the sales of other debt securities totaled $33.1
million. Due to the short-term nature and/or variable rates
associated with these financial instruments, the carrying value approximates
fair value.
(C)
Accrued Compensation and Benefits
Accrued
expenses and other current liabilities included accrued compensation and
benefits of $46.5 million as of February 28, 2009, and $48.1 million as of
February 29, 2008.
(D)
Advertising Expense
SG&A
expenses included advertising expense of $101.5 million in fiscal 2009, $108.8
million in fiscal 2008 and $97.8 million in fiscal 2007. Advertising
expenses were 1.5% of net sales and operating revenues for fiscal 2009 and 1.3%
for fiscal years 2008 and 2007.
16.
|
CONTINGENT
LIABILITIES
|
(A)
Litigation
On April
2, 2008, Mr. John Fowler filed a putative class action lawsuit against CarMax
Auto Superstores California, LLC and CarMax Auto Superstores West Coast, Inc. in
the Superior Court of California, County of Los
Angeles. Subsequently, two other lawsuits, Leena Areso et al.
v. CarMax Auto Superstores California, LLC and Justin Weaver v. CarMax Auto
Superstores California, LLC, were consolidated as part of the Fowler case. The
allegations in the consolidated case involve: (1) failure to provide meal and
rest breaks or compensation in lieu thereof; (2) failure to pay wages of
terminated or resigned employees related to meal and rest breaks and overtime;
(3) failure to pay overtime; (4) failure to comply with itemized employee wage
statement provisions; and (5) unfair competition. The putative class
consists of sales consultants, sales managers, and other hourly employees who
worked for the company in California from April 2, 2004, to the
present. The lawsuit seeks compensatory and special damages, wages,
interest, civil and statutory penalties, restitution, injunctive relief and the
recovery of attorneys’ fees. We are unable to make a reasonable
estimate of the amount or range of loss that could result from an unfavorable
outcome in this matter.
We are
involved in various other legal proceedings in the normal course of
business. Based upon our evaluation of information currently available, we
believe that the ultimate resolution of any such proceedings will not have a
material adverse effect, either individually or in the aggregate, on our
financial condition or results of operations.
(B)
Other Matters
In
accordance with the terms of real estate lease agreements, we generally agree to
indemnify the lessor from certain liabilities arising as a result of the use of
the leased premises, including environmental liabilities and repairs to leased
property upon termination of the lease. Additionally, in accordance
with the terms of agreements entered into for the sale of properties, we
generally agree to indemnify the buyer from certain liabilities and costs
arising subsequent to the date of the sale, including environmental liabilities
and liabilities resulting from the breach of representations or warranties made
in accordance with the agreements. We do not have any known material
environmental commitments, contingencies or other indemnification issues arising
from these arrangements.
As part
of our customer service strategy, we guarantee the used vehicles we retail with
a 30-day limited warranty. A vehicle in need of repair within 30 days
of the customer's purchase will be repaired free of charge. As a
result, each vehicle sold has an implied liability associated with
it. Accordingly, we record a provision for estimated repairs during
the guarantee period for each vehicle sold based on historical
trends. The liability for this guarantee was $2.0 million as of
February 28, 2009, and $3.2 million as of February 29, 2008, and is included in
accrued expenses and other current liabilities.
17.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
Issued in
February 2007, SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities – including an amendment of FASB Statement No. 115” (“SFAS
159”) was effective for our fiscal year beginning
March 1, 2008. SFAS 159 permits entities to measure certain
financial assets and liabilities at fair value. The fair value option
may be elected on an instrument-by-instrument basis and is
irrevocable. Unrealized gains and losses on items for which the fair
value option has been elected are recognized in earnings at each subsequent
reporting date. We did not elect to apply the fair value option to
any of our financial assets or liabilities not already within the scope of SFAS
157.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations
(revised 2007)” (“SFAS 141(R)”). SFAS 141(R) replaces SFAS
No. 141, “Business Combinations” (“SFAS 141”), but retains the requirement
that the purchase method of accounting for acquisitions be used for all business
combinations. SFAS 141(R) expands on the disclosures previously
required by SFAS 141, better defines the acquirer and the acquisition date in a
business combination and establishes principles for recognizing and measuring
the assets acquired (including goodwill), the liabilities assumed and any
noncontrolling interests in the acquired business. SFAS 141(R) also
requires an acquirer to record an adjustment to income tax expense for changes
in valuation allowances or uncertain tax positions related to acquired
businesses. SFAS 141(R) is effective for all business combinations
with an acquisition date in the first annual period following December 15,
2008; early adoption is not permitted. We will apply the provisions
of SFAS 141(R) when applicable.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS
160”). SFAS 160 requires that noncontrolling (or minority) interests
in subsidiaries be reported in the equity section of our balance sheet, rather
than in a mezzanine section of the balance sheet between liabilities and
equity. SFAS 160 also changes the manner in which the net income of
the subsidiary is reported and disclosed in the controlling company's income
statement. SFAS 160 also establishes guidelines for accounting for
changes in ownership percentages and for deconsolidation. SFAS 160 is
effective for financial statements for fiscal years beginning on or after
December 15, 2008, and interim periods within those years. As of
February 28, 2009, we did not hold any noncontrolling interests in
subsidiaries.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS 161”),
which expands the disclosure requirements about an entity’s derivative
instruments and hedging activities. SFAS 161 requires that objectives
for using derivative instruments and related hedged activities be disclosed in
terms of the underlying risk that the entity is intending to manage and in terms
of accounting designation. The fair values of derivative instruments
and related hedged activities and their gains are to be disclosed in tabular
format showing both the derivative positions existing at period end and the
effect of using derivatives during the reporting period. Any
credit-risk-related contingent features are to be disclosed and are to include
information on the potential effect on an entity’s liquidity from using
derivatives. Finally, SFAS 161 requires cross-referencing within the
notes to enable users of financial statements to better locate information about
derivative instruments. These expanded disclosure requirements are
required for every annual and interim reporting period for which a balance sheet
and statement of operations are presented. SFAS 161 is effective for
any reporting period (annual or quarterly interim) beginning after
November 15, 2008, with early application encouraged. We
adopted SFAS 161 for fiscal 2009. The adoption had no impact on our
results of operations, financial condition or cash flows.
In April
2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, “Determination
of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS
142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”
(“SFAS 142”). In developing assumptions about renewal or extension,
FSP FAS 142-3 requires an entity to consider its own historical experience (or,
if no experience, market participant assumptions) adjusted for the
entity-specific factors in paragraph 11 of SFAS 142. FSP FAS 142-3
expands the disclosure requirements of SFAS 142 and is effective for financial
statements issued for fiscal years beginning after December 15, 2008, with
early adoption prohibited. The guidance for determining the useful
life of a recognized intangible asset shall be applied prospectively to
intangible assets acquired after the effective date. The disclosure
requirements shall be applied prospectively to all intangible assets recognized
as of, and subsequent to, the effective date. We believe the adoption
of FSP FAS 142-3 will have no material impact on our results of operations,
financial condition or cash flows.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources
of accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles
(“GAAP”) in the United States (“the GAAP hierarchy”). SFAS 162 makes
the GAAP hierarchy explicitly and directly applicable to preparers of financial
statements, a step that recognizes preparers’ responsibilities for selecting the
accounting principles for their financial statements, and sets the stage for
making the framework of FASB Concept Statements fully
authoritative. The effective date for SFAS 162 is 60 days following
the SEC’s approval of the Public Company Accounting Oversight Board’s related
amendments to remove the GAAP hierarchy from auditing standards, where it has
resided for some time. The adoption of SFAS 162 will have no impact
on our results of operations, financial condition or cash flows.
In June 2008, the FASB
issued FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are
Participating Securities” (“FSP
EITF 03-6-1”). FSP EITF 03-6-1 addresses whether instruments
granted in share-based payment transactions are participating securities prior
to vesting, and therefore need to be included in the earnings allocation in
computing earnings per share under the two-class method as described in SFAS
No. 128, “Earnings per Share.” Under the guidance of FSP
EITF 03-6-1, unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method. Our restricted
stock awards are considered “participating securities” because they contain
nonforfeitable rights to dividends. FSP EITF 03-6-1 is effective
for financial statements issued for fiscal years beginning after
December 15, 2008, and all prior-period earnings per share data presented
shall be adjusted retrospectively. Early application
is not permitted. We are currently evaluating the impact of FSP EITF 03-6-1
on our consolidated financial statements and will adopt FSP EITF 03-6-1
effective March 1, 2009.
In
September 2008, the FASB issued exposure drafts that eliminate qualifying
special purpose entities from the guidance of SFAS No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,” and FASB Interpretation 46 (revised December 2003),
“Consolidation of Variable Interest Entities − an interpretation
of ARB No. 51,” as well as other modifications. While the
proposed revised pronouncements have not been finalized and the proposals are
subject to further public comment, the changes could have a significant impact
on our consolidated financial statements as we could potentially be precluded
from using sales accounting treatment for our securitization transactions, which
would change the timing of the recognition of CAF income. In addition, the
changes could result in the consolidation of the financial assets and
liabilities transferred to our qualified special purpose
entities. The changes would be effective March 1, 2010, on a
prospective basis.
In
October 2008, the FASB issued FSP No. FAS 157-3, “Determining the Fair Value of
a Financial Asset When the Market for That Asset is Not Active,” (“FSP FAS
157-3”), which clarifies application of SFAS 157 in a market that is not
active. FSP FAS 157-3 was effective upon issuance, including prior
periods for which financial statements have not been issued. The
adoption of FSP FAS 157-3 had no impact on our results of operations, financial
condition or cash flows.
In
December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, “Disclosures
by Public Entities (Enterprises) about Transfers of Financial Assets and
Interests in Variable Interest Entities.” This disclosure-only FSP
improves the transparency of transfers of financial assets and an enterprise’s
involvement with variable interest entities, including qualifying
special-purpose entities. This FSP is effective for the first
reporting period (interim or annual) ending after December 15, 2008, with
earlier application encouraged. We adopted this FSP for fiscal
2009. The adoption of the FSP had no impact on our results of
operations, financial condition or cash flows.
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 consistent with guidance contained in
SFAS 157 (see Note 6). 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 are currently evaluating the impact the
new disclosure requirements will have on our consolidated financial statements
and notes and will adopt FSP FAS 132(R)-1 effective March 1, 2009.
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. We are currently evaluating the impact of FSP
FAS 157-4 on our consolidated financial statements and will adopt this FSP
effective June 1, 2009.
In April
2009, we completed a term securitization totaling $1.0 billion of auto loan
receivables and retained subordinated bonds with a total face value of $140.0
million. This transaction was eligible for investors to utilize the
Federal Reserve’s Term Asset-Backed Securities Facility (“TALF”)
program.
19.
|
SELECTED
QUARTERLY FINANCIAL DATA
(UNAUDITED)
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Fiscal
Year
|
|
(In
thousands except per share data)
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
Net
sales and operating revenues
|
|
$ |
2,208,763 |
|
|
$ |
1,839,054 |
|
|
$ |
1,455,632 |
|
|
$ |
1,470,517 |
|
|
$ |
6,973,966 |
|
Gross
profit
|
|
$ |
282,714 |
|
|
$ |
255,913 |
|
|
$ |
199,236 |
|
|
$ |
230,307 |
|
|
$ |
968,170 |
|
CarMax
Auto Finance income
(loss)
|
|
$ |
9,819 |
|
|
$ |
(7,141 |
) |
|
$ |
(15,360 |
) |
|
$ |
27,968 |
|
|
$ |
15,286 |
|
Selling,
general and administrative
expenses
|
|
$ |
242,984 |
|
|
$ |
225,148 |
|
|
$ |
217,482 |
|
|
$ |
196,744 |
|
|
$ |
882,358 |
|
Net
earnings
(loss)
|
|
$ |
29,558 |
|
|
$ |
14,006 |
|
|
$ |
(21,874 |
) |
|
$ |
37,523 |
|
|
$ |
59,213 |
|
Net
earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.14 |
|
|
$ |
0.06 |
|
|
$ |
(0.10 |
) |
|
$ |
0.17 |
|
|
$ |
0.27 |
|
Diluted
|
|
$ |
0.13 |
|
|
$ |
0.06 |
|
|
$ |
(0.10 |
) |
|
$ |
0.17 |
|
|
$ |
0.27 |
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Fiscal
Year
|
|
(In
thousands except per share data)
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
Net
sales and operating revenues
|
|
$ |
2,147,134 |
|
|
$ |
2,122,530 |
|
|
$ |
1,885,300 |
|
|
$ |
2,044,607 |
|
|
$ |
8,199,571 |
|
Gross
profit
|
|
$ |
284,221 |
|
|
$ |
288,194 |
|
|
$ |
242,883 |
|
|
$ |
257,127 |
|
|
$ |
1,072,425 |
|
CarMax
Auto Finance income (loss)
|
|
$ |
37,068 |
|
|
$ |
33,412 |
|
|
$ |
16,347 |
|
|
$ |
(962 |
) |
|
$ |
85,865 |
|
Selling,
general and administrative
expenses
|
|
$ |
213,814 |
|
|
$ |
214,196 |
|
|
$ |
210,508 |
|
|
$ |
219,854 |
|
|
$ |
858,372 |
|
Net
earnings
|
|
$ |
65,355 |
|
|
$ |
64,995 |
|
|
$ |
29,846 |
|
|
$ |
21,829 |
|
|
$ |
182,025 |
|
Net
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.30 |
|
|
$ |
0.30 |
|
|
$ |
0.14 |
|
|
$ |
0.10 |
|
|
$ |
0.84 |
|
Diluted
|
|
$ |
0.30 |
|
|
$ |
0.29 |
|
|
$ |
0.14 |
|
|
$ |
0.10 |
|
|
$ |
0.83 |
|
Item
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item
9A. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures (“disclosure controls”) that are
designed to ensure that information required to be disclosed in our reports
filed under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the U.S. Securities
and Exchange Commission’s rules and forms. Disclosure controls are
also designed to ensure that this information is accumulated and communicated to
management, including the chief executive officer (“CEO”) and the chief
financial officer (“CFO”), as appropriate, to allow timely decisions regarding
required disclosure.
As of the
end of the period covered by this report, we evaluated the effectiveness of the
design and operation of our disclosure controls. This evaluation was
performed under the supervision and with the participation of management,
including the CEO and CFO. Based upon that evaluation, the CEO and
CFO concluded that our disclosure controls were effective as of the end of the
period.
Changes
in Internal Control over Financial Reporting
There was
no change in our internal control over financial reporting that occurred during
the quarter ended February 28, 2009, that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
Management's
Report on Internal Control over Financial Reporting
Management's
annual report on internal control over financial reporting is included in Item
8, Consolidated Financial Statements and Supplementary Data, of this Form 10-K
and is incorporated herein by reference.
Item
9B. Other Information.
None.
Part
III
With the
exception of the information incorporated by reference from our 2009 Proxy
Statement in Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on
Form 10-K, our 2009 Proxy Statement is not to be deemed filed as a part of this
Form 10-K.
The
following table identifies our executive officers as of February 28,
2009. We are not aware of any family relationships among any of our
executive officers or between any of our executive officers and any
directors. All executive officers are elected annually and serve for
one year or until their successors are elected and qualify. The next
election of officers will occur in June 2009.
Name
|
Age
|
Office
|
Thomas
J. Folliard
|
44
|
President,
Chief Executive Officer and Director
|
Keith
D. Browning
|
56
|
Executive
Vice President, Chief Financial Officer and Director
|
Michael
K. Dolan
|
59
|
Executive
Vice President and Chief Administrative Officer
|
Joseph
S. Kunkel
|
46
|
Senior
Vice President, Marketing and Strategy
|
Richard
M. Smith
|
51
|
Senior
Vice President and Chief Information Officer
|
Eric
M. Margolin
|
55
|
Senior
Vice President, General Counsel and Corporate
Secretary
|
Mr.
Folliard joined CarMax in 1993 as senior buyer and became director of purchasing
in 1994. He was promoted to vice president of merchandising in 1996,
senior vice president of store operations in 2000 and executive vice president
of store operations in 2001. Mr. Folliard became president and chief
executive officer and a director of CarMax in 2006.
Mr.
Browning joined CarMax in 1996 as vice president and chief financial officer
after spending 14 years at Circuit City, his last position being corporate
controller and vice president. He has been involved in the
development of accounting procedures, systems and internal controls for CarMax
since its inception. Mr. Browning was promoted to executive vice
president and chief financial officer in 2001. He has served as a
director of CarMax since 1997.
Mr. Dolan
joined CarMax in 1997 as vice president and chief information
officer. He was named senior vice president in 2001 and was promoted
to executive vice president and chief administrative officer in
2006. Mr. Dolan had prior executive experience in information systems
with H.E. Butt Grocery Company, a privately held grocery retailer, where he was
vice president and chief information officer.
Mr.
Kunkel joined CarMax in 1998 as vice president, marketing and
strategy. Mr. Kunkel was named senior vice president in
2001. Prior to joining CarMax, Mr. Kunkel was president of Wholesome
Kidfoods, Inc. and a senior manager with McKinsey and Company.
Mr. Smith
was the first full-time associate of CarMax, having worked on the original
CarMax concept while at Circuit City in 1991. He has held various
positions in technology and operations throughout his tenure with CarMax and was
promoted to vice president, management information systems, in
2005. He was promoted to senior vice president and chief information
officer in 2006.
Mr.
Margolin joined CarMax in 2007 as senior vice president, general counsel and
corporate secretary. Prior to joining CarMax, he was senior vice president,
general counsel and corporate secretary with Advance Auto Parts, Inc. and vice
president, general counsel and corporate secretary with Tire Kingdom,
Inc.
The
information concerning our directors required by this Item is incorporated by
reference to the section titled “Proposal One - Election of Directors” in our
2009 Proxy Statement.
The
information concerning the audit committee of our board of directors and the
audit committee financial expert required by this Item is incorporated by
reference to the information included in the sub-section titled “Committees of
the Board – Audit Committee” in our 2009 Proxy Statement.
The
information concerning compliance with Section 16(a) of the Securities Exchange
Act of 1934 required by this Item is incorporated by reference to the
sub-section titled “Section 16(a) Beneficial Ownership Reporting Compliance” in
our 2009 Proxy Statement.
The
information concerning our code of ethics (“Code of Business Conduct”) for
senior management required by this Item is incorporated by reference to the
sub-section titled “Corporate Governance Policies and Practices” in our 2009
Proxy Statement.
We have
not made any material change to the procedures by which our shareholders may
recommend nominees to our board of directors.
The
information required by this Item is incorporated by reference to the section
titled “Executive Compensation” appearing in our 2009 Proxy
Statement. Additional information required by this Item is
incorporated by reference to the sub-section titled “Non-Employee Director
Compensation in Fiscal 2009” in our 2009 Proxy Statement.
Item
12. Security Ownership of Certain Beneficial Owners and
Management and
Related Stockholder Matters.
The
information required by this Item is incorporated by reference to the section
titled “CarMax Share Ownership” and the sub-section titled “Equity Compensation
Plan Information” in our 2009 Proxy Statement.
Item
13. Certain Relationships and Related Transactions and Director
Independence.
The
information required by this Item is incorporated by reference to the section
titled “Certain Relationships and Related Transactions” in our 2009 Proxy
Statement.
The
information required by this Item concerning director independence is
incorporated by reference to the sub-section titled “Director Independence” in
our 2009 Proxy Statement.
The
information required by this Item is incorporated by reference to the
sub-section titled “Auditor Information” in our 2009 Proxy
Statement.
Part
IV
Item
15. Exhibits and Financial Statement Schedules.
(a) The
following documents are filed as part of this report:
|
1.
|
|
Financial
Statements. All financial statements as set forth under Item 8
of this Form 10-K.
|
|
2.
|
|
Financial Statement
Schedules. “Schedule II – Valuation and Qualifying
Accounts and Reserves” and the accompanying Report of Independent
Registered Public Accounting Firm on CarMax, Inc. Financial Statement
Schedule for the fiscal years ended February 28 or 29, 2009, 2008 and
2007, are filed as part of this Form 10-K and should be read in
conjunction with the Consolidated Financial Statements of CarMax, Inc. and
Notes thereto, included in Item 8 of this Form
10-K.
|
|
|
|
Schedules
not listed above have been omitted because they are not applicable, are
not required or the information required to be set forth therein is
included in the Consolidated Financial Statements and Notes
thereto.
|
|
3.
|
|
Exhibits. The Exhibits
listed on the accompanying Index to Exhibits immediately following the
financial statement schedule are filed as part of, or incorporated by
reference into, this Form 10-K.
|
(b)
Exhibits
See Item
15(a)(3) above.
(c)
Financial Statement Schedules
See Item
15(a)(2) above.
Signatures
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CARMAX, INC.
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ THOMAS J. FOLLIARD
Thomas
J. Folliard
President
and Chief Executive Officer
April
24, 2009
|
|
|
By:
|
/s/ KEITH D. BROWNING
Keith
D. Browning
Executive
Vice President and Chief Financial Officer
April
24, 2009
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
/s/ THOMAS J. FOLLIARD
Thomas
J. Folliard
President,
Chief Executive Officer and Director
April
24, 2009
|
|
|
/s/ EDGAR H. GRUBB
*
Edgar
H. Grubb
Director
April
24, 2009
|
/s/ KEITH D. BROWNING
Keith
D. Browning
Executive
Vice President, Chief Financial Officer,
Chief
Accounting Officer and Director
April
24, 2009
|
|
|
/s/ HUGH G. ROBINSON*
Hugh
G. Robinson
Director
April
24, 2009
|
/s/ RONALD E. BLAYLOCK *
Ronald
E. Blaylock
Director
April
24, 2009
|
|
|
/s/ THOMAS G. STEMBERG *
Thomas
G. Stemberg
Director
April
24, 2009
|
/s/ JAMES F. CLINGMAN, JR.*
James
F. Clingman, Jr.
Director
April
24, 2009
|
|
|
/s/ VIVIAN M. STEPHENSON*
Vivian
M. Stephenson
Director
April
24, 2009
|
/s/ JEFFREY E. GARTEN
*
Jeffrey
E. Garten
Director
April
24, 2009
|
|
|
/s/ BETH A. STEWART*
Beth
A. Stewart
Director
April
24, 2009
|
/s/ SHIRA D. GOODMAN
*
Shira
D. Goodman
Director
April
24, 2009
|
|
|
William
R. Tiefel
Director
April
24, 2009
|
W.
Robert Grafton
Director
April
24, 2009
|
|
|
|
*By:
|
|
/s/ THOMAS J. FOLLIARD
Thomas
J. Folliard
Attorney-In-Fact
|
The
original powers of attorney authorizing Thomas J. Folliard and Keith D.
Browning, or either of them, to sign this annual report on behalf of certain
directors and officers of the company are included as Exhibit 24.1.
Schedule
II
CARMAX,
INC. AND SUBSIDIARIES
Valuation
and Qualifying Accounts and Reserves
(In
thousands)
|
|
Balance
at Beginning of
Fiscal
Year
|
|
|
Charged
to
Income
|
|
|
Charge-offs
Less
Recoveries
|
|
|
Balance
at
End
of
Fiscal
Year
|
|
Year
ended February 28, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$ |
5,632 |
|
|
$ |
5,856 |
|
|
$ |
(4,405 |
) |
|
$ |
7,083 |
|
Year
ended February 29, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$ |
7,083 |
|
|
$ |
4,336 |
|
|
$ |
(2,738 |
) |
|
$ |
8,681 |
|
Year
ended February 28, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$ |
8,681 |
|
|
$ |
4,908 |
|
|
$ |
(3,641 |
) |
|
$ |
9,948 |
|
2.1
|
|
Separation
Agreement, dated May 21, 2002, between Circuit City Stores, Inc. and
CarMax, Inc., filed as Exhibit 2.1 to CarMax’s Registration Statement on
Form S-4/A, filed June 6, 2002 (File No. 333-85240), is incorporated by
this reference.
|
|
|
|
3.1
|
|
CarMax,
Inc. Amended and Restated Articles of Incorporation, effective June 6,
2002, filed as Exhibit 3.1 to CarMax’s Current Report on Form 8-K, filed
October 3, 2002 (File No. 1-31420), is incorporated by this
reference.
|
|
|
|
3.2
|
|
CarMax,
Inc. Articles of Amendment to the Amended and Restated Articles of
Incorporation, effective June 6, 2002, filed as Exhibit 3.2 to CarMax’s
Current Report on Form 8-K, filed October 3, 2002 (File No. 1-31420), is
incorporated by this reference.
|
|
|
|
3.3
|
|
CarMax,
Inc. Bylaws, as amended and restated April 20, 2009, filed as Exhibit 3.1
to CarMax’s Current Report on Form 8-K, filed April 22, 2009 (File No.
1-31420), is incorporated by this reference.
|
|
|
|
4.1
|
|
Rights
Agreement, dated as of May 21, 2002, between CarMax, Inc. and Wells Fargo
Bank Minnesota, N.A., as Rights Agent, filed as Exhibit 4.1 to CarMax’s
Registration Statement on Form S-4/A, filed June 6, 2002 (File No.
333-85240), is incorporated by this reference.
|
|
|
|
4.2
|
|
Appointment,
Assignment and Assumption Agreement, dated as of November 28, 2008,
between CarMax, Inc. and American Stock Transfer & Trust Company, LLC,
as Rights Agent, filed as Exhibit 4.2 to CarMax’s Quarterly Report on Form
10-Q, filed January 8, 2009 (File No. 1-31420), is incorporated by this
reference.
|
|
|
|
10.1
|
|
Employment
Agreement between CarMax, Inc. and Thomas J. Folliard, filed as Exhibit
10.1 to CarMax’s Current Report on Form 8-K/A, filed October 23, 2006
(File No. 1-31420) is incorporated by this reference. *
|
|
|
|
10.2
|
|
Severance
Agreement between CarMax, Inc. and Keith D. Browning, filed as Exhibit
10.1 to CarMax’s Current Report on Form 8-K, filed February 21, 2007 (File
No. 1-31420) is incorporated by this reference. *
|
|
|
|
10.3
|
|
Severance
Agreement between CarMax, Inc. and Michael K. Dolan, filed as Exhibit 10.2
to CarMax’s Current Report on Form 8-K, filed February 21, 2007 (File No.
1-31420) is incorporated by this reference. *
|
|
|
|
10.4
|
|
Severance
Agreement between CarMax, Inc. and Joseph S. Kunkel, filed as Exhibit 10.3
to CarMax’s Current Report on Form 8-K, filed February 21, 2007 (File No.
1-31420) is incorporated by this reference. *
|
|
|
|
10.5
|
|
Severance
Agreement between CarMax, Inc. and Richard M. Smith, filed as Exhibit 10.4
to CarMax’s Current Report on Form 8-K, filed February 21, 2007 (File No.
1-31420) is incorporated by this reference. *
|
|
|
|
10.6
|
|
Form
Amendment to CarMax, Inc. Employment/Severance Agreement for Executive
Officer, dated as of November 3, 2008, filed as Exhibit 10.3 to CarMax’s
Quarterly Report on Form 10-Q, filed January 8, 2009 (File No. 1-31420),
is incorporated by this reference. *
|
|
|
|
10.7
|
|
CarMax,
Inc. Benefit Restoration Plan, as amended and restated effective as of
January 1, 2008, filed as Exhibit 10.2 to CarMax’s Quarterly Report on
Form 10-Q, filed July 10, 2008 (File No. 1-31420), is incorporated by this
reference. *
|
|
|
|
10.8
|
|
CarMax,
Inc. Retirement Restoration Plan, effective as of January 1, 2009, filed
as Exhibit 10.2 to CarMax’s Current Report on Form 8-K, filed October 23,
2008 (File No. 1-31420), is incorporated by this reference.
*
|
|
|
|
10.9
|
|
Amendment
to CarMax, Inc. Benefit Restoration Plan, effective as of January 1, 2009,
filed as Exhibit 10.1 to CarMax’s Current Report on Form 8-K, filed
October 23, 2008 (File No. 1-31420), is incorporated by this
reference. *
|
|
|
|
10.10
|
|
CarMax,
Inc. Non-Employee Directors Stock Incentive Plan, as amended and restated
June 24, 2008, filed as Exhibit 10.1 to CarMax’s Quarterly Report on Form
10-Q, filed July 10, 2008 (File No. 1-31420), is incorporated by this
reference. *
|
|
|
|
10.11
|
|
CarMax,
Inc. 2002 Stock Incentive Plan, as amended and restated March 27, 2009,
filed as Exhibit 10.1 to CarMax’s Current Report on Form 8-K, filed April
2, 2009 (File No. 1-31420), is incorporated by this reference.
* |
|
|
|
10.12
|
|
CarMax,
Inc. Annual Performance-Based Bonus Plan, as amended and restated June 26,
2007, filed as Exhibit 10.1 to CarMax’s Current Report on Form 8-K, filed
June 29, 2007 (File No. 1-31420), is incorporated by this reference.
* |
|
|
|
10.13
|
|
CarMax,
Inc. 2002 Employee Stock Purchase Plan, as amended and restated January
19, 2009, filed herewith.
|
|
|
|
10.14
|
|
Credit
Agreement, dated August 24, 2005, among CarMax Auto Superstores, Inc.,
CarMax, Inc., various subsidiaries of CarMax, various Lenders named
therein and Bank of America N.A., as Administrative Agent, filed as
Exhibit 10.1 to CarMax’s Quarterly Report on Form 10-Q, filed October 7,
2005 (File No. 1-31420), is incorporated by this
reference. Certain non-material schedules and exhibits have
been omitted from the Credit Agreement as filed. CarMax agrees
to furnish supplementally to the Commission upon request a copy of such
schedules and exhibits.
|
|
|
|
10.15
|
|
Security
Agreement, dated August 24, 2005, among CarMax, Inc., CarMax Auto
Superstores, Inc., various subsidiaries of CarMax named therein and Bank
of America N.A., as Administrative Agent, filed as Exhibit 10.2 to
CarMax’s Quarterly Report on Form 10-Q, filed October 7, 2005 (File No.
1-31420), is incorporated by this reference.
|
|
|
|
10.16
|
|
Company
Guaranty Agreement, dated August 24, 2005, between CarMax, Inc. and Bank
of America N.A., as Administrative Agent, filed as Exhibit 10.3 to
CarMax’s Quarterly Report on Form 10-Q, filed October 7, 2005 (File No.
1-31420), is incorporated by this reference.
|
|
|
|
10.17
|
|
Amendment
No. 1 to Credit Agreement and Joinder Agreement, dated December 8, 2006,
among CarMax Auto Superstores, Inc., CarMax, Inc, various subsidiaries of
CarMax, various Lenders named therein and Bank of America N.A., as
Administrative Agent, filed as Exhibit 10.1 to CarMax’s Current Report on
Form 8-K, filed December 14, 2006 (File No. 1-31420), is incorporated by
this reference. Certain non-material schedules and exhibits
have been omitted from Amendment No.1 as filed. CarMax agrees
to furnish supplementally to the Commission upon request a copy of such
schedules and exhibits.
|
|
|
|
10.18
|
|
Amendment
No. 2 to Credit Agreement and Joinder Agreement, dated as of July 17,
2008, among CarMax Auto Superstores, Inc., CarMax, Inc, various
subsidiaries of CarMax, various Lenders named therein and Bank of America
N.A., as Administrative Agent, filed as Exhibit 10.1 to CarMax’s Current
Report on Form 8-K, filed July 22, 2008 (File No. 1-31420), is
incorporated by this reference. Certain non-material schedules
and exhibits have been omitted from Amendment No. 2 as
filed. CarMax agrees to furnish supplementally to the
Commission upon request a copy of such schedules and
exhibits.
|
|
|
|
10.19
|
|
Amended
and Restated Tax Allocation Agreement between Circuit City Stores, Inc.
and CarMax, Inc., dated October 1, 2002, filed as Exhibit 99.2 to CarMax’s
Current Report on Form 8-K, filed October 3, 2002 (File No. 1-31420), is
incorporated by this
reference.
|
|
|
|
10.20
|
|
Employee
Benefits Agreement between Circuit City Stores, Inc. and CarMax, Inc.,
dated October 1, 2002, filed as Exhibit 99.4 to CarMax’s Current Report on
Form 8-K, filed October 3, 2002 (File No. 1-31420), is incorporated by
this reference.
|
|
|
|
10.21
|
|
Confidentiality
Agreement between Circuit City Stores, Inc. and CarMax, Inc., dated
October 1, 2002, filed as Exhibit 99.5 to CarMax’s Current Report on Form
8-K, filed October 3, 2002 (File No. 1-31420), is incorporated by this
reference.
|
|
|
|
10.22
|
|
Form
of Notice of Stock Option Grant between CarMax, Inc. and certain named and
other executive officers, effective as of January 1, 2009, filed as
Exhibit 10.1 to CarMax’s Quarterly Report on Form 10-Q, filed January 8,
2009 (File No. 1-31420), is incorporated by this reference.
*
|
|
|
|
10.23
|
|
Form
of Notice of Restricted Stock Grant between CarMax, Inc. and certain
executive officers, effective as of January 1, 2009, filed as Exhibit 10.2
to CarMax’s Quarterly Report on Form 10-Q,
filed January 8, 2009 (File No. 1-31420), is incorporated by this
reference. *
|
|
|
|
10.24
|
|
Form
of Notice of Market Stock Unit Grant between CarMax, Inc. and certain
named and other executive officers, effective as of March 27, 2009, filed
as Exhibit 10.2 to CarMax’s Current Report on Form 8-K, filed April 2,
2009 (File No. 1-31420), is incorporated by this reference.
*
|
|
|
|
10.25
|
|
Form
of Notice of Restricted Stock Unit Grant between CarMax, Inc. and certain
executive officers, effective as of March 27, 2009, filed as Exhibit 10.3
to CarMax’s Current Report on Form 8-K, filed April 2, 2009 (File No.
1-31420), is incorporated by this reference. *
|
|
|
|
10.26
|
|
Form
of Directors Stock Option Grant Agreement between CarMax, Inc. and certain
non-employee directors of the CarMax, Inc. board of directors, filed as
Exhibit 10.3 to CarMax’s Quarterly Report on Form 10-Q, filed July 10,
2008 (File No. 1-31420), is incorporated by this reference.
*
|
|
|
|
10.27
|
|
Form
of Stock Grant Notice Letter from CarMax, Inc. to certain non-employee
directors of the CarMax, Inc. board of directors, filed as Exhibit 10.20
to CarMax’s Annual Report on Form 10-K, filed May 13, 2005 (File
No. 1-31420), is incorporated by this reference. *
|
|
|
|
21.1
|
|
CarMax,
Inc. Subsidiaries, filed herewith.
|
|
|
|
23.1
|
|
Consent
of KPMG LLP, filed herewith.
|
|
|
|
24.1
|
|
Powers
of Attorney, filed herewith.
|
|
|
|
31.1
|
|
Certification
of the Chief Executive Officer Pursuant to Rule 13a-14(a), filed
herewith.
|
|
|
|
31.2
|
|
Certification
of the Chief Financial Officer Pursuant to Rule 13a-14(a), filed
herewith.
|
|
|
|
32.1
|
|
Certification
of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, filed
herewith.
|
|
|
|
32.2
|
|
Certification
of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, filed
herewith.
|
|
|
|
* |
|
Indicates
management contracts, compensatory plans or arrangements of the company
required to be filed as an
exhibit.
|
77