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, 2007
OR
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from
to
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
Common
Stock, par value $0.50
Rights
to Purchase Series A Preferred Stock,
par
value $20.00
|
Name
of each exchange on which registered
New
York Stock Exchange
New
York Stock Exchange
|
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 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. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer x Accelerated
filer ¨ Non-accelerated
filer
¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes
¨
No x
The
aggregate market value of the registrant’s common stock held by non-affiliates
as of August 31, 2006, computed by reference to the closing price of the
registrant’s common stock on the New York Stock Exchange on that date, was $4.0
billion.
On
March
31, 2007, there were 216,045,438 outstanding shares of CarMax, Inc. common
stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the CarMax, Inc. Notice of 2007 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, 2007
TABLE
OF CONTENTS
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Page
No.
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Business
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4
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Risk
Factors
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11
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Unresolved
Staff Comments
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12
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Properties
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13
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Legal
Proceedings
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14
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Submission
of Matters to a Vote of Security Holders
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14
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Market
for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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15
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Selected
Financial Data
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17
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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18
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Quantitative
and Qualitative Disclosures about Market Risk
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34
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Consolidated
Financial Statements and Supplementary Data
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35
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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61
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Controls
and Procedures
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61
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Other
Information
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61
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Directors,
Executive Officers and Corporate Governance
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62
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Executive
Compensation
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63
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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63
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Certain
Relationships and Related Transactions, and Director
Independence
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63
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Principal
Accountant Fees and Services
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63
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Exhibits
and Financial Statement Schedules
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64
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65
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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:
| · |
Our
projected future sales growth, comparable store unit sales growth,
earnings, and earnings per share.
|
| · |
Our
expected future expenditures, cash needs, and financing
sources.
|
| · |
The
projected number, timing, and cost of new store
openings.
|
| · |
Our
sales and marketing plans.
|
| · |
Our
assessment of the potential outcome and financial impact of litigation
and
the potential impact of unasserted
claims.
|
| · |
Our
assessment of competitors and potential
competitors.
|
| · |
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 our 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.
Item
1. Business.
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, Va.
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, Va.
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 337,021 used vehicles
we retailed during the fiscal year ended February 28, 2007. As of the end of
fiscal 2007, we operated 77 used car superstores in 36 metropolitan markets.
In
addition, we sold 208,959 wholesale vehicles in fiscal 2007 through our on-site
auctions.
We
were
the first used vehicle retailer to offer a large selection of high quality
used
vehicles at competitively low, fixed prices using a customer-friendly sales
process in an attractive, modern sales facility. The CarMax consumer offer
provides our 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
core equities: low, no-haggle prices; a broad selection; high quality; and
customer-friendly service. 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 one to six years old with fewer than 60,000 miles. We also offer a selection
of used vehicles at each superstore that are more than six years old or have
more than 60,000 miles, but which meet similar quality standards.
We
also
sell new
vehicles at seven locations under franchise agreements with four new car
manufacturers. In fiscal 2007, new vehicles comprised 5% of our total retail
vehicle unit sales. As planned, new car sales have become a smaller part of
our
business mix over the past several fiscal years as we have divested 14 new
car
franchises while aggressively growing our used car business. We may divest
additional new car franchises in the future.
We
provide our 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 lenders; 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 based on a fixed
dollars-per-unit standard, allow our 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. We acquire 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. Those vehicles purchased
through our in-store appraisal process that do not meet our retail standards
are
sold at 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
sophisticated 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.
With
calendar year 2006 sales of approximately $340 billion, used vehicles comprise
nearly half of the U.S. auto retail market, the largest retail segment of the
economy. In calendar 2006, there were an estimated 42.6 million used vehicles
sold in the U.S. compared with approximately 16.6 million new vehicles. Our
primary focus, late-model vehicles that are 1 to 6 years old, are estimated
at
approximately $290 billion in annual sales and 20 million units per
year.
The
U.S.
used car marketplace is highly fragmented and competitive and includes
approximately 21,800 franchised new car dealers and 44,000 independent dealers,
as well as millions of private individuals. Our primary competitors are the
franchised new car dealers, who sell the majority of late-model used vehicles.
Independent dealers predominantly sell older, higher mileage cars than we do.
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 factors 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
location of our retail stores. Upon
request by a customer, we will transfer virtually any used vehicle in our
nationwide inventory to a local superstore. Transfers are free within a market;
longer distance transfers include a charge to cover transportation costs. In
fiscal 2007, more than 20% 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 factors include our ability to offer
or
arrange customer financing on 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 price or
gross margin on the vehicle being sold. The sales consultant 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 often receive higher commissions
for negotiating higher prices and for steering customers toward vehicles with
higher gross margins.
In
the
new vehicle market, we compete with other franchised dealers offering vehicles
produced by the same or other manufacturers. 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.
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,
the
Internet, and newspaper advertising. Television and radio broadcast
advertisements are designed to build consumer awareness of the CarMax name,
carmax.com, and key components of the CarMax offer. Newspaper advertisements
promote our broad selection of vehicles and price competitiveness, targeting
consumers with immediate purchase intentions. Broadcast, Internet, and newspaper
advertisements are designed to drive customers to our stores and to
carmax.com.
The
media
landscape is changing rapidly and we are changing our marketing programs in
response. We are customizing our marketing program based on awareness levels
in
each market. In selected markets, we have expanded our use of Internet-based
advertising while curtailing our 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 late model used vehicle buyers who use
the
Internet in their shopping process. Our advertising on the Internet also
includes banner and key-word 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 the more than 25,000 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 sorting and comparison features that allow consumers to easily
compare vehicles. The site also includes features such as detailed vehicle
reviews, payment calculators, and an option to estimate trade-in values via
a
link with Kelley Blue Book. 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
need
to visit the store only to sign the paperwork and pick up their
vehicle.
Suppliers
for Used Vehicles.
We
acquire our used vehicle inventory directly from consumers through our unique
in-store appraisal process and through other sources, including local and
regional auctions, wholesalers, franchised and independent dealers, and fleet
owners, such as leasing companies and rental companies. In calendar 2006,
approximately 22 million used vehicles were remarketed in the U.S., of which
nearly 10 million were sold at wholesale auction.
The
majority of our used vehicle inventory is acquired directly from consumers
through our appraisal process. The most popular makes and models are more
readily available directly from consumers than from other sources. This buying
strategy also helps provide an inventory of makes and models that reflects
the
tastes of each market. In May 2006, we began testing a stand-alone car buying
center in the Atlanta market. Our goal for the car buying center is
to
increase appraisal traffic and generate incremental vehicle purchases from
individual consumers. We plan to expand this test by opening three additional
car buying centers in fiscal 2008.
We
have
replaced the traditional “trade-in” transaction with a process in which a
CarMax-trained buyer appraises the vehicle and provides the vehicle’s owner with
a written, guaranteed offer that is good for 7 days. An
appraisal is available to every customer free of charge, whether or not the
individual 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 at our 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 on the basis
of their estimated wholesale value and reconditioning costs, and, for off-site
purchases, cost of delivery to the store where they will be reconditioned.
To
decide which inventory to purchase at off-site auctions, our buyers, in
collaboration with our home office staff, rely on the extensive inventory and
sales trend data available through the CarMax information system. 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 margin dollars per unit.
Based
on
consumer acceptance of the in-store appraisal process at existing CarMax stores,
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 our sources of used vehicles will continue to be sufficient to
meet
current needs and to support planned expansion.
Suppliers
for New Vehicles.
Our new
car operations are governed by the terms of the sales, service, and dealer
agreements with DaimlerChrysler, General Motors, Nissan, and Toyota. 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.
Our
business is seasonal. Most of our superstores experience their strongest traffic
and sales in the spring and summer quarters. Sales are typically lowest in
the
fall quarter, which coincides with the new vehicle model-year-changeover period.
In the fall, the new model year introductions and discounts on model year
closeouts generally can cause rapid depreciation in used car pricing,
particularly for late-model used cars. Customer traffic also tends to slow
in
the fall as the weather gets colder and as customers shift their spending
priorities toward holiday-related expenditures. Seasonal patterns for car buying
and selling may vary in different parts of the country and, as we expand
geographically, these differences could have an effect on the overall seasonal
pattern of our results.
Products
and Services
Merchandising.
We offer
our 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 DaimlerChrysler,
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 $11,500 to $30,000. 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 $8,000
to $22,000.
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. Over the past several years, we have performed an increasing
percentage of reconditioning services in-house, and, based on the cost savings
realized, we expect this trend to continue. Satellite superstores depend upon
nearby mega or standard superstores for reconditioning, which increases
efficiency and reduces overhead.
All
CarMax used car locations 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 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 at on-site wholesale auctions. At February 28, 2007,
wholesale auctions were conducted at 46 of our 77 superstores. Auctions are
generally not held at satellite superstores. Auctions are held on a weekly,
bi-weekly, or monthly 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 the company 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. These
policies result in an auction sales rate that is generally between 95% and
100%.
Dealers pay a fee to the company based on the sales price of the vehicles they
purchase.
Customer
Credit.
We offer
our 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 used vehicle unit sales in fiscal
2007. Customer credit applications are initially reviewed by CAF, and may also
be reviewed by Bank of America. Customers who are not approved by either CAF
or
Bank of America are evaluated by our core, second-tier finance partners,
including AmeriCredit Financial Services, Capital One Auto Finance,
CitiFinancial Auto, and Wells Fargo Auto Finance. Customers who are not approved
by any of these finance partners are evaluated by our third-tier lenders, which
include Triad Financial and Drive Financial Services ("Drive"). Having a
wide array of lenders not only expands the choices for our customers, but also
increases discrete approvals. To this end, we have tested and will continue
to
test other third-party finance companies.
Customers
applying for financing provide credit information that is electronically
submitted by sales consultants through our
proprietary information system. Responses
from CAF and Bank of America are generally received in less than five minutes.
The vehicle financings, or loans, are retail installment contracts secured
by
the vehicles financed. We have no recourse liability on retail installment
contracts arranged with third-party finance companies. Customers are permitted
to refinance or pay off their loans within three business days of a purchase
without incurring any finance or related charges. Our arrangements with
our
primary and second-tier, third-party finance companies generally provide
for
payment of a fee to CarMax at the time of financing, provided the loan
is not
paid in full within 90 days. Drive purchases customer loans at a
discount.
Extended
Service Plan Sales.
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 age and make. We offer these extended service
plans at low, fixed prices, which are based primarily on the repair record
of
the vehicle and the length of coverage selected. All extended service plans
that
we sell (other than manufacturers’ warranties) have been designed to our
specifications and are administered by the third parties through private-label
arrangements under which we receive a commission from the administrator at
the
time the extended service plan is sold. In fiscal 2007, 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 our vehicle repair service at
each CarMax store and to the third-party administrators’ nationwide network of
approximately 14,000 independent 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
each store’s vehicle inventory and print a detailed listing for any vehicle,
which includes the vehicle’s features and specifications, and a map showing its
specific 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.
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 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, 2007, we had a total of 13,736 employees, including 10,394 hourly
and salaried associates and 3,342 sales associates, who worked on a commission
basis. Sales associates include both full-time and part-time employees. We
employ additional associates during peak selling seasons. At February 28, 2007,
our location general managers averaged more than 8 years of CarMax experience,
in addition to prior retail management experience. Management believes that
the
company maintains good employee relations. No CarMax associate is subject to
a
collective bargaining agreement.
Training.
We place
special emphasis on attracting, developing, and retaining qualified associates
and believe that our favorable working conditions and compensation programs
allow us to attract and retain highly qualified individuals in each market
that
we enter. We accomplish this partly through our commitment to provide
exceptional training to associates. Store associates receive structured,
self-paced training programs that introduce 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. Most new store associates are also
assigned mentors who provide on-the-job guidance and support.
We
also
provide comprehensive, facilitated 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 one thousand 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 training 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
management-training program includes rotations through each functional area.
We
open new stores with an experienced management team drawn from existing
stores.
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 laws, installment finance laws, and usury
laws.
Claims
arising out of actual or alleged violations of law may be asserted against
us by
individuals or governmental authorities and may expose us to significant damages
or other penalties, including revocation or suspension of licenses necessary
to
conduct business and fines.
Environmental,
Health, and Safety Laws and Regulations.
We are
subject to a variety of federal, state, and local laws and requirements that
regulate the environment and public health and safety. Our
business involves the use, handling, and disposal of hazardous or toxic
substances, including motor oil, gasoline, transmission fluid, solvents,
lubricants, and other materials. We are subject to compliance with governmental
and environmental regulations concerning the past and current operation and/or
removal of aboveground and underground storage tanks containing these and other
substances.
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. The contents of our website are not,
however, part of this report.
In
addition, our Corporate Governance Guidelines and Code of 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 of 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 waivers of the Code of Conduct are promptly disclosed on our
website.
We
are
subject to various risks, including the risks described below. Our business,
operating results, and financial condition could be materially and adversely
affected by any of these risks. Additional risks not presently known or that
we
currently deem immaterial may also impair the business and our
operations.
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
resulting in lower profitability for the company.
Competition. Automotive
retailing is a highly competitive business. Our competition includes publicly
and privately owned franchised new car dealers and independent dealers, as
well
as millions of private individuals. Our competitors may 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. CAF
is
subject to competition from various financial institutions. Additionally,
competition on vehicle sales and related financing is increasing, as these
products are now being marketed and sold over the Internet. Customers are
increasingly using the Internet to compare pricing for cars and related
financing, which may further reduce our profitability.
Retail
Prices.
Any
significant changes in retail prices for used and new vehicles could reduce
our
sales and margins. 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
and profitability 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 the broader market trade-in offer trends,
or a failure to recognize those trends, could negatively impact our 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 profitability.
Real
Estate.
The
inability to acquire suitable real estate at favorable terms could limit the
expansion of our store base and could have a material adverse affect on our
future operating results.
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 results of operations.
In
addition, 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 may 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, impact sales and profitability, or expose us to customer or
third-party claims.
Capital.
Changes
in the availability or cost of capital and working capital financing, including
the availability of long-term financing to support our geographic expansion
and
the availability of securitization financing, 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.
Weather.
The
occurrence of severe weather events, such as rain, snow, wind, storms,
hurricanes, or other natural disasters, adversely affecting consumer traffic
at
our superstores could negatively impact our operating results.
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, the adverse effect on our revenues and operating profit
for the year could be disproportionately large.
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, Houston,
Dallas, 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 experience a
downturn in economic conditions, it could adversely affect our
business.
Regulatory
Environment. We
are
subject to a wide range of federal, state, and local laws and regulations,
such
as local licensing requirements and laws regarding advertising,
vehicle sales, financing, and employment practices.
Our
facilities and operations are also subject to federal, state, and local laws
and
regulations relating to environmental protection and human health and safety.
The violation of these laws and regulations could result in administrative,
civil, or criminal penalties, or in a cease and desist order against operations.
As a result, we have incurred, and will continue to incur, capital and operating
expenditures and other costs in complying 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, and finance 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.
Litigation.
We are
subject to various litigation matters, which, if the outcomes in any significant
matters are adverse, could negatively affect our business. Claims arising out
of
actual or alleged violations of law may 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 operations.
Accounting
Matters.
The
implementation of new accounting requirements or changes to U.S. generally
accepted accounting principles could adversely affect our reported financial
position or results of operations. Potential changes currently under
consideration by the Financial Accounting Standards Board include, but are
not
limited to, proposed rule changes relating to the accounting for securitization
transactions and potential changes in accounting for leases and pension
expense.
Other
Material Events.
The
occurrence of certain material events including natural disasters, acts of
terrorism, the outbreak of war, or other significant national or international
events could adversely affect our results.
None.
We
conduct our used vehicle operations in three basic retail formats - mega,
standard, and satellite superstores. Our current growth plan primarily includes
the construction of standard superstores and satellite superstores. Standard
superstores are generally 40,000 to 60,000 square feet on 10 to 25 acres.
Satellite superstores are generally 10,000 to 20,000 square feet on 4 to 10
acres. Mega superstores are approximately
70,000 to 95,000 square feet on 20 to 35 acres.
Stores
as of February 28, 2007
|
|
Used
Car Superstores
|
|
|
||
|
|
Mega
|
Standard
(2)
|
Satellite(2)
|
Co-Located
New
Car Stores (1)
|
Total
|
|
Alabama
|
—
|
1
|
—
|
—
|
1
|
|
California
|
1
|
4
|
3
|
1
|
9
|
|
Connecticut
|
—
|
1
|
1
|
—
|
2
|
|
Florida
|
3
|
4
|
3
|
1
|
11
|
|
Georgia
|
1
|
2
|
1
|
—
|
4
|
|
Illinois
|
3
|
1
|
2
|
—
|
6
|
|
Indiana
|
—
|
1
|
1
|
—
|
2
|
|
Kansas
|
—
|
2
|
—
|
—
|
2
|
|
Kentucky
|
—
|
1
|
—
|
—
|
1
|
|
Maryland
|
1
|
1
|
1
|
1
|
4
|
|
Missouri
|
—
|
—
|
1
|
—
|
1
|
|
Nevada
|
—
|
1
|
1
|
—
|
2
|
|
New
Mexico
|
—
|
1
|
—
|
—
|
1
|
|
North
Carolina
|
—
|
3
|
3
|
—
|
6
|
|
Ohio
|
—
|
1
|
1
|
—
|
2
|
|
Oklahoma
|
—
|
1
|
—
|
—
|
1
|
|
South
Carolina
|
—
|
2
|
—
|
—
|
2
|
|
Tennessee
|
—
|
3
|
1
|
—
|
4
|
|
Texas
|
4
|
4
|
3
|
—
|
11
|
|
Utah
|
—
|
1
|
—
|
—
|
1
|
|
Virginia
|
—
|
4
|
2
|
—
|
6
|
|
Wisconsin
|
—
|
1
|
—
|
1
|
2
|
|
Total
|
13
|
40
|
24
|
4
|
81
|
|
(1)
|
We
currently operate seven new car franchises. Two franchises are integrated
within used car superstores and do not operate as separate stores.
The
remaining five franchises are operated from four new car stores that
are
co-located with used car
superstores.
|
|
(2)
|
The
Kenosha, Wisc. superstore has been reclassified from a satellite
to a
standard superstore.
|
We
have
financed the majority of our stores through sale-leaseback transactions. As
of
February 28, 2007, we leased 61 of our 81 retail stores and owned the remaining
20 stores. We also own our home office building in Richmond, Va., and land
associated with planned future store openings.
Expansion
We
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. Specifically, we have enhanced
our ability to identify profitable markets and determine the appropriate store
formats to fit those markets.
We
plan
to open superstores at an annual rate of approximately 15% to 20% of our used
car superstore base. In fiscal 2008, we plan to open approximately 13
superstores, including 5 standard-sized superstores and 8 satellite superstores,
expanding our store base by 17%. Our fiscal 2008 expansion plans are largely
focused on opening standard superstores in new mid-sized markets and satellite
superstores in existing markets. We generally define
mid-sized
markets as those with television viewing populations of between 600,000 and
2.5
million people. Historically, mid-sized markets have been the easiest to enter
from a real estate and an advertising/awareness building perspective, and they
are where we have generally experienced the fastest ramp-up in store sales
and
profitability. We are also beginning to resume store growth in new large
markets.
For
additional details on fiscal 2008 planned store openings, please see “Operations
Outlook,” included in Part II, Item 7, of this Form 10-K.
On
August
29, 2006, Heather Herron, et al. filed a putative class action lawsuit against
numerous South Carolina automobile dealers, including CarMax Auto Superstores,
Inc., in the Court of Common Pleas in Aiken County, South Carolina. Subject
to
final judicial approval, we have settled this lawsuit, and we believe the
settlement will not materially affect our financial position or results of
operations.
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 position,
liquidity, or results of operations.
No
matters were submitted to a vote of security holders during the fourth quarter
of fiscal 2007.
Our
common stock is listed and traded on the New York Stock Exchange under the
ticker symbol KMX.
As
of
February 28, 2007, there were approximately 6,300 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 as adjusted for the effect of the 2-for-1 stock split
in
March 2007.
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
||||||||||
|
Fiscal
2007
|
|||||||||||||
|
High
|
$
|
18.20
|
$
|
18.95
|
$
|
23.99
|
$
|
29.44
|
|||||
|
Low
|
$
|
15.14
|
$
|
14.85
|
$
|
18.59
|
$
|
23.10
|
|||||
|
Fiscal
2006
|
|||||||||||||
|
High
|
$
|
17.00
|
$
|
17.12
|
$
|
16.00
|
$
|
15.92
|
|||||
|
Low
|
$
|
12.44
|
$
|
12.32
|
$
|
13.00
|
$
|
13.20
|
|||||
To
date,
we have not paid a cash dividend on the CarMax common stock. We presently intend
to retain our net earnings for use in our operations and for geographic
expansion and, therefore, we do not anticipate paying any cash dividends in
the
foreseeable future.
During
the fourth quarter of fiscal 2007, 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, 2002, and the reinvestment of dividends, if applicable.
We
separated from Circuit City on October 1, 2002. For dates preceding October
1,
2002, the graph reflects information for the Circuit City Stores, Inc.-CarMax
Group common stock.
|
As
of February 28 or 29
|
|||||||||||||||||||
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
||||||||||||||
|
CarMax
|
$
|
100.00
|
$
|
56.28
|
$
|
127.15
|
$
|
123.41
|
$
|
117.50
|
$
|
197.08
|
|||||||
|
S&P
500 Index
|
$
|
100.00
|
$
|
77.32
|
$
|
107.10
|
$
|
114.58
|
$
|
124.20
|
$
|
139.06
|
|||||||
|
S&P
500 Retailing Index
|
$
|
100.00
|
$
|
72.39
|
$
|
113.21
|
$
|
125.29
|
$
|
135.97
|
$
|
149.85
|
|||||||
|
FY07
|
FY06
|
FY05
|
FY04
|
FY03
|
FY02
|
||||||||||||||
|
Income
statement information
(In
millions)
|
|||||||||||||||||||
|
Used
vehicle sales
|
$
|
5,872.8
|
$
|
4,771.3
|
$
|
3,997.2
|
$
|
3,470.6
|
$
|
2,912.1
|
$
|
2,497.2
|
|||||||
|
New
vehicle sales
|
445.1
|
502.8
|
492.1
|
515.4
|
519.8
|
559.9
|
|||||||||||||
|
Wholesale
vehicle sales
|
918.4
|
778.3
|
589.7
|
440.6
|
366.6
|
325.6
|
|||||||||||||
|
Other
sales and revenues
|
229.3
|
207.6
|
181.3
|
171.1
|
171.4
|
151.1
|
|||||||||||||
|
Net
sales and operating revenues
|
7,465.7
|
6,260.0
|
5,260.3
|
4,597.7
|
3,969.9
|
3,533.8
|
|||||||||||||
|
Gross
profit
|
971.1
|
790.7
|
650.2
|
570.9
|
468.2
|
419.4
|
|||||||||||||
|
CarMax
Auto Finance income
|
132.6
|
104.3
|
82.7
|
85.0
|
82.4
|
66.5
|
|||||||||||||
|
SG&A
|
776.2
|
674.4
|
565.3
|
479.3
|
399.5
|
337.0
|
|||||||||||||
|
Earnings
before income taxes
|
323.3
|
217.6
|
165.8
|
178.4
|
149.6
|
143.9
|
|||||||||||||
|
Provision
for income taxes
|
124.8
|
83.4
|
64.5
|
68.9
|
59.2
|
54.9
|
|||||||||||||
|
Net
earnings
|
198.6
|
134.2
|
101.3
|
109.6
|
90.4
|
89.1
|
|||||||||||||
|
Share
and per share
information
(Shares
in millions)
|
|||||||||||||||||||
|
Weighted
average shares outstanding:
|
|||||||||||||||||||
|
Basic
|
212.5
|
209.3
|
208.1
|
207.0
|
206.0
|
204.1
|
|||||||||||||
|
Diluted
|
216.7
|
212.8
|
211.3
|
210.6
|
209.1
|
207.8
|
|||||||||||||
|
Net
earnings per share:
|
|||||||||||||||||||
|
Basic
|
$
|
0.93
|
$
|
0.64
|
$
|
0.49
|
$
|
0.53
|
$
|
0.44
|
$
|
0.44
|
|||||||
|
Diluted
|
$
|
0.92
|
$
|
0.63
|
$
|
0.48
|
$
|
0.52
|
$
|
0.43
|
$
|
0.43
|
|||||||
|
Balance
sheet information (In
millions)
|
|||||||||||||||||||
|
Total
current assets
|
$
|
1,150.5
|
$
|
941.7
|
$
|
853.0
|
$
|
760.5
|
$
|
697.3
|
$
|
577.7
|
|||||||
|
Total
assets
|
1,885.6
|
1,509.6
|
1,306.3
|
1,055.1
|
921.7
|
721.9
|
|||||||||||||
|
Total
current liabilities
|
512.0
|
344.9
|
317.8
|
232.2
|
237.7
|
221.1
|
|||||||||||||
|
Short-term
debt
|
3.3
|
0.5
|
65.2
|
4.4
|
56.1
|
9.8
|
|||||||||||||
|
Current
portion of long-term debt
|
148.4
|
59.8
|
0.3
|
—
|
—
|
78.6
|
|||||||||||||
|
Long-term
debt, excluding current portion
|
33.7
|
134.8
|
128.4
|
100.0
|
100.0
|
—
|
|||||||||||||
|
Total
shareholders’ equity
|
1,247.4
|
980.1
|
814.2
|
688.0
|
558.6
|
487.1
|
|||||||||||||
|
Unit
sales information
|
|||||||||||||||||||
|
Used
vehicle units sold
|
337,021
|
289,888
|
253,168
|
224,099
|
190,135
|
164,062
|
|||||||||||||
|
New
vehicle units sold
|
18,563
|
20,901
|
20,636
|
21,641
|
22,360
|
24,164
|
|||||||||||||
|
Wholesale
vehicle units sold
|
208,959
|
179,548
|
155,393
|
127,168
|
104,593
|
90,937
|
|||||||||||||
|
Percent
changes in
|
|||||||||||||||||||
|
Comparable
store used vehicle unit sales
|
9
|
4
|
1
|
6
|
8
|
24
|
|||||||||||||
|
Total
used vehicle unit sales
|
16
|
15
|
13
|
18
|
16
|
23
|
|||||||||||||
|
Total
net sales and operating revenues
|
19
|
19
|
14
|
16
|
12
|
28
|
|||||||||||||
|
Diluted
net earnings per share
|
46
|
31
|
(8
|
)
|
21
|
—
|
95
|
||||||||||||
|
Other
year-end information
|
|||||||||||||||||||
|
Used
car superstores
|
77
|
67
|
58
|
49
|
40
|
35
|
|||||||||||||
|
Retail
stores
|
81
|
71
|
61
|
52
|
44
|
40
|
|||||||||||||
|
Associates
|
13,736
|
11,712
|
10,815
|
9,355
|
8,263
|
7,196
|
|||||||||||||
All
share and per share amounts have been adjusted for the effect of the 2-for-1
stock split in March 2007. Certain prior year amounts have been reclassified
to
conform to the current year presentation. In fiscal 2007, we adopted SFAS
123(R), applying the modified retrospective method and restating prior period
amounts for the effect of the adoption. See Notes 2(A) and 10(C) to the
consolidated financial statements in Item 8 of this Form 10-K.
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.
We
adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised
2004), “Share-Based Payment” (“SFAS 123(R)”), effective March 1, 2006, applying
the modified retrospective method. As a result, prior period amounts have been
restated to reflect the adoption of this standard.
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 MD&A have been adjusted to reflect this stock split.
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. At February 28, 2007,
we
operated 77 used car superstores in 36 markets, including 26 mid-sized markets,
9 large markets, and 1 small market. We define mid-sized markets as those with
television viewing populations generally between 600,000 and 2.5 million people.
We also operated seven new car franchises, all of which are integrated or
co-located with our used car superstores. In fiscal 2007, we sold 337,021 used
cars, representing 95% of the total 355,584 vehicles we sold at retail.
We
believe the CarMax consumer offer is unique in the automobile retailing
marketplace. Our offer gives consumers a way to shop for cars in the same manner
that they shop for items at other “big box” retailers. Our consumer offer is
structured around our four core equities: low, no-haggle prices; a broad
selection; high quality; and customer-friendly service. Our website, carmax.com,
is a valuable tool for communicating the CarMax consumer offer, a sophisticated
search engine, and an efficient channel for customers who prefer to conduct
their shopping online. We generate revenues, income, and cash flows primarily
by
retailing used vehicles and associated items including vehicle financing,
extended service plans (“ESP”), and retail service. A majority of the used
vehicles we sell at retail are purchased directly from consumers.
We
also
generate revenues, income, and cash flows from the sale of vehicles purchased
through our appraisal process that do not meet our retail standards. These
vehicles are sold at our on-site wholesale auctions. Wholesale auctions are
conducted at the majority of our superstores and are held on a weekly,
bi-weekly, or monthly basis. In fiscal 2007, we sold 208,959 vehicles at our
wholesale auctions. On average, the vehicles we wholesale are approximately
10
years old and have more than 100,000 miles. Participation in our wholesale
auctions is restricted to licensed automobile dealers, the majority of whom
are
independent dealers and licensed wholesalers.
CarMax
provides financing to qualified customers through CarMax Auto Finance
(“CAF”), the company’s finance operation, and Bank of America, and
through several other third-party lenders. We collect fixed, prenegotiated
fees from the majority of our third-party lenders, and we periodically test
additional lenders. CarMax has no recourse liability for the loans provided
by
third-party lenders.
We
sell
ESPs on behalf of unrelated third parties who are the primary obligors. We
have
no contractual liability to the customer under these third-party service plans.
Extended service plan revenue represents commissions from the unrelated third
parties.
We
are
still at a relatively early stage in the national rollout of our retail concept.
We believe the primary driver for future earnings growth will be vehicle unit
sales growth from comparable stores and from geographic expansion.
We
target
a similar dollar amount of gross profit per used unit, regardless of retail
price. Used unit sales growth is our primary focus. We plan to open used car
superstores at a rate of approximately 15% to 20% of our used car superstore
base each year. In fiscal 2008, we plan to open 13 superstores, expanding our
store base by approximately 17%. Over the long term, we expect comparable store
used unit sales increases to average in the range of 4% to 8%, reflecting the
multi-year ramp in sales at newly opened stores as they mature, continued market
share gains at stores that have reached basic maturity sales levels, which
we
estimate occurs in a store’s fifth year of operation, and underlying industry
sales growth.
The
principal challenges we face in expanding our store base 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. We must therefore continually
recruit, train, and develop managers and associates to fill the pipeline
necessary to support future store openings. If at any time we believed that
the
rate of store growth was causing our performance to falter, we would consider
slowing the growth rate.
Fiscal
2007 Highlights
| · |
Net
sales and operating revenues increased 19% to $7.47 billion from
$6.26
billion in fiscal 2006, while net earnings increased 48% to $198.6
million, or $0.92 per share, from $134.2 million, or $0.63 per share.
|
| · |
Total
used vehicle unit sales increased 16%, reflecting the combination
of our
9% increase in comparable store used unit sales and the growth in
our
store base.
|
| · |
Total
wholesale vehicle unit sales increased 16%, consistent with our used
vehicle unit sales growth.
|
| · |
We
opened ten used car superstores in fiscal 2007, including five standard
superstores and five satellite superstores.
|
| · |
Our
total gross profit per unit increased to $2,731 from $2,544 in fiscal
2006. We realized improvements in gross profit per unit in all categories,
including used vehicles, new vehicles, wholesale vehicles, and other.
We
believe our used vehicle gross profit benefited from our strong,
consistent sales performance, which resulted in fewer pricing markdowns
being made, as well as a more stable underlying economic environment.
|
| · |
CAF
income increased 27% to $132.6 million from $104.3 million in fiscal
2006.
The improvement reflected the growth in retail vehicle sales and
managed
receivables, an improvement in the gain on loans originated and sold,
and
an increase in the average amount financed. CAF income included a
benefit
of $13.0 million, or $0.04 per share for favorable items, primarily
valuation adjustments of our retained interest, in fiscal 2007, compared
with a benefit of $15.2 million, or $0.04 per share in fiscal 2006.
|
| · |
Selling,
general, and administrative expenses as a percent of net sales and
operating revenues (the “SG&A ratio”) declined to 10.4% from 10.8% in
fiscal 2006. We benefited from the leverage of fixed expenses generated
by
our strong comparable store sales growth.
|
| · |
As
a result of adopting SFAS 123(R) in fiscal 2007, we recognized share-based
compensation expense of $0.09 per share in fiscal 2007 compared with
$0.07
per share in fiscal 2006, as restated. The fiscal 2007 expense includes
costs of $0.02 per share resulting from the retirement of our former
chief
executive officer.
|
| · |
Net
cash provided by operations increased to $136.8 million from $117.5
million in fiscal 2006, primarily reflecting the improved net earnings
offset by increased investment in working
capital.
|
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 automobile 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 expected residual
cash flows generated by the securitized receivables. The fair value of our
retained interest in securitization transactions includes the present value
of
the expected residual cash flows generated by the securitized receivables,
cash
reserve accounts, and an undivided ownership interest in the receivables.
The
present value of the expected residual cash flows generated by the securitized
receivables is determined by estimating the future cash flows using management’s
assumptions of key factors, such as finance charge income, loss rates,
prepayment rates, 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 may have a material
impact on the fair value of the retained interest. The fair value of the
retained interest may also be affected by external factors, such as changes
in
the behavior patterns of customers, changes in the economy, and developments
in
the interest rate 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. 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 these third parties are the primary obligors under these
programs, we recognize commission revenue on the ESPs at the time of the sale,
net of a reserve for returns. The reserve for ESP returns is recorded based
on
historical experience and trends, and it could be affected if future returns
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 of the 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.
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 future reversals of existing
temporary differences and future taxable income. We believe that all of our
recorded deferred tax assets as of February 28, 2007, 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.
Information
regarding income taxes is presented in Note 7.
Defined
Benefit Retirement Plan
The
plan
obligations and related assets of our defined benefit retirement plan are
presented in Note 8. 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 provided by the company. Key assumptions
used to measure the plan obligations include the discount rate, the
estimated
rate of salary increases, and the estimated future return on plan assets. In
determining the discount rate, we use the current yield on high-quality,
fixed-income investments that have maturities corresponding to the anticipated
timing of the benefit payments. Salary increase assumptions are 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. 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
|
|||||||||||||||||||
|
(In
millions)
|
2007
|
%
|
2006
|
%
|
2005
|
%
|
|||||||||||||
|
Used
vehicle sales
|
$
|
5,872.8
|
78.7
|
$
|
4,771.3
|
76.2
|
$
|
3,997.2
|
76.0
|
||||||||||
|
New
vehicle sales
|
445.1
|
6.0
|
502.8
|
8.0
|
492.1
|
9.4
|
|||||||||||||
|
Wholesale
vehicle sales
|
918.4
|
12.3
|
778.3
|
12.4
|
589.7
|
11.2
|
|||||||||||||
|
Other
sales and revenues:
|
|||||||||||||||||||
|
Extended
service plan revenues
|
114.4
|
1.5
|
97.9
|
1.6
|
84.6
|
1.6
|
|||||||||||||
|
Service
department sales
|
90.6
|
1.2
|
93.4
|
1.5
|
82.3
|
1.6
|
|||||||||||||
|
Third-party
finance fees, net
|
24.3
|
0.3
|
16.3
|
0.3
|
14.4
|
0.3
|
|||||||||||||
|
Total
other sales and revenues
|
229.3
|
3.1
|
207.6
|
3.3
|
181.3
|
3.4
|
|||||||||||||
|
Total
net sales and operating revenues
|
$
|
7,465.7
|
100.0
|
$
|
6,260.0
|
100.0
|
$
|
5,260.3
|
100.0
|
||||||||||
Retail
Vehicle Sales Changes
|
Years
Ended February 28
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Vehicle
units:
|
||||||||||
|
Used
vehicles
|
16
|
%
|
15
|
%
|
13
|
%
|
||||
|
New
vehicles
|
(11
|
)%
|
1
|
%
|
(5
|
)%
|
||||
|
Total
|
14
|
%
|
14
|
%
|
11
|
%
|
||||
|
Vehicle
dollars:
|
||||||||||
|
Used
vehicles
|
23
|
%
|
19
|
%
|
15
|
%
|
||||
|
New
vehicles
|
(11
|
)%
|
2
|
%
|
(5
|
)%
|
||||
|
Total
|
20
|
%
|
17
|
%
|
13
|
%
|
||||
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
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Vehicle
units:
|
||||||||||
|
Used
vehicles
|
9
|
%
|
4
|
%
|
1
|
%
|
||||
|
New
vehicles
|
(11
|
)%
|
1
|
%
|
8
|
%
|
||||
|
Total
|
8
|
%
|
4
|
%
|
1
|
%
|
||||
|
Vehicle
dollars:
|
||||||||||
|
Used
vehicles
|
16
|
%
|
8
|
%
|
3
|
%
|
||||
|
New
vehicles
|
(12
|
)%
|
1
|
%
|
8
|
%
|
||||
|
Total
|
13
|
%
|
8
|
%
|
3
|
%
|
||||
Change
in Used Car Superstore Base
|
Years
Ended February 28
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Used
car superstores, beginning of year
|
67
|
|
|
58
|
|
|
49
|
|||
|
Superstore
openings:
|
||||||||||
|
Standard
superstores
|
5
|
|
|
5
|
|
|
5
|
|||
|
Satellite
superstores
|
5
|
|
|
4
|
|
|
4
|
|||
|
Total
superstore openings
|
10
|
|
|
9
|
|
|
9
|
|||
|
Used
car superstores, end of year
|
77
|
67
|
58
|
|||||||
|
Openings
as a percent of the beginning-of-year store base
|
15
|
%
|
16
|
%
|
18
|
%
|
||||
Used
Vehicle Sales
Fiscal
2007 Versus Fiscal 2006.
The 23%
increase in used vehicle revenues in fiscal 2007 reflected a 16% increase in
unit sales and a 6% increase in average retail selling price. The unit sales
growth reflected a 9% increase in comparable store used units, together with
sales from newer superstores not yet in the comparable store base. Our
comparable store used unit sales growth benefited from strong store and Internet
traffic and continued strong execution by our store teams. The increase in
the
average retail selling price was primarily the result of a shift in vehicle
mix,
as we experienced a resurgence in the sales of SUVs and trucks, which we believe
had been adversely affected in the prior year by consumer reaction to higher
gasoline prices. The increase in average retail selling price also reflected
growth in the percentage of luxury vehicles in our sales mix.
Sales
financed by Drive Financial Services declined to less than 1% of our used
vehicle unit sales in fiscal 2007 from approximately 3% in fiscal 2006. In
the
fourth quarter of fiscal 2006, this lender implemented program changes in
certain states, narrowing the selection of vehicles it would finance, and making
this business less economically attractive to us. We chose to curtail our
business with Drive in these states to preserve margins and profits. The decline
in Drive-financed sales in fiscal 2007 was substantially offset, however, by
incremental sales financed by additional lenders added to our third-party
lender group in the second half of fiscal 2006.
Fiscal
2006 Versus Fiscal 2005.
The 19%
increase in used vehicle revenues in fiscal 2006 reflected a 15% increase in
unit sales and a 4% increase in average retail selling price. The unit sales
growth reflected sales from newer superstores not yet in the comparable store
base, together with a 4% increase in comparable store used units. The comparable
store used unit sales growth was driven by an increase in store traffic,
combined with continued strong execution by our store teams. Store traffic
and
comparable store sales increases were particularly strong during the period
from
June through September 2005, which coincided with the domestic new car
manufacturers’ employee pricing incentive programs. Under these programs, the
manufacturers established specific “employee” prices, available to all
consumers, for each make and model. These programs created greater clarity
on
new car pricing and increased traffic in the marketplace, both of which we
believe benefited CarMax. Our no-haggle consumer offer makes price comparing
easy, and we believe it gives us a unique advantage as consumers cross-shop.
Sales
financed by Drive, which was added to our third-party lender group in mid-fiscal
2005, remained approximately 3% of total used vehicle unit sales in fiscal
2006
and fiscal 2005. The full-year benefit of adding this lender was offset by
the
program curtailments made in the fourth quarter of fiscal 2006.
New
Vehicle Sales
Fiscal
2007 Versus Fiscal 2006.
The 11%
decline in new vehicle revenues in fiscal 2007 was substantially the result
of a
decline in unit sales, and in part reflects our strategic decision in fiscal
2007 to increase targeted gross profit dollars per unit on new vehicles. We
had
anticipated that this decision would result in some reduction in new vehicle
unit sales. The decline in new vehicle unit sales also reflects the effects
of
reduced industry new car sales for several of the brands we represent, including
Chevrolet, DaimlerChrysler, and Nissan.
Fiscal
2006 Versus Fiscal 2005.
The 2%
increase in new vehicle revenues in fiscal 2006 was due to a 1% increase in
unit
sales and a 1% increase in average retail selling price. New vehicle unit sales
were strong during the domestic new car manufacturers’ employee pricing programs
in June through September 2005; however, these increases were substantially
offset by the effects of softer industry new car sales in the months following
the end of these programs. New vehicle sales were generally in line with
industry performance for the core brands we
represent—Chevrolet,
DaimlerChrysler, Nissan, and Toyota. Our disposition of five new car franchises
in the second half of fiscal 2005 also affected the change in our new car unit
sales.
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 at our
on-site wholesale auctions.
Fiscal
2007 Versus Fiscal 2006.
The 18%
increase in wholesale vehicle revenues in fiscal 2007 resulted from a 16%
increase in wholesale unit sales and a 1% increase in average wholesale selling
price. Our wholesale unit sales benefited from a substantial increase in
appraisal traffic, primarily spurred by our strong comparable store unit sales
growth, and the expansion of our store base. In the first half of fiscal 2007,
our average wholesale selling price climbed 6% reflecting, we believe, the
residual effects of industry shortages of older, higher-mileage vehicles
experienced following Hurricanes Katrina, Rita, and Wilma in the fall of 2005.
In the second half of fiscal 2007, our average wholesale selling price was
4%
below the prior year level reflecting the challenging comparison with the
previous year.
Fiscal
2006 Versus Fiscal 2005.
The 32%
increase in wholesale vehicle revenues in fiscal 2006 reflected a 16% increase
in wholesale unit sales and a 14% increase in average wholesale selling price.
Our wholesale unit sales growth benefited from a strong increase in appraisal
traffic combined with the expansion of our store base. Appraisal traffic was
higher throughout fiscal 2006, but it was particularly strong in the second
quarter. We believe this increase was due, in part, to the domestic new car
manufacturers’ employee pricing programs. In these programs, franchised dealers
lost some ability to negotiate on trade-ins due to their inability to negotiate
on the published employee discount price on new cars. In addition, the employee
pricing programs coincided with a period of rapid decline in wholesale values
for SUVs and large trucks as the result of a spike in gasoline prices, making
some dealers reluctant to accept these vehicles in trade. These factors created
an influx of appraisal traffic at CarMax as we continued to make appraisal
purchase offers on all vehicles presented for appraisal. Appraisal traffic
also
benefited from our focused “We Buy Cars” advertising during fiscal 2006.
Our
on-site wholesale auctions exhibited unusual aggregate price strength in fiscal
2006, reflecting trends in the general wholesale market. We believe some of
the
factors that may have contributed to the unusually strong wholesale market
pricing environment during various portions of the year included reduced
supplies of off-lease and off-rental cars; the strong demand for smaller,
fuel-efficient cars in the face of rising gasoline prices; and hurricanes
Katrina, Rita, and Wilma, which destroyed an estimated 400,000 to 600,000
vehicles and created a short-term supply/demand imbalance. Wholesale industry
price increases were especially strong in older, higher mileage cars that make
up the majority of the vehicles we sell at wholesale. Our wholesale prices
also
benefited from a record level of dealer attendance at our auctions and a record
dealer-to-car ratio in fiscal 2006. We believe the high dealer attendance at
our
auctions reflected the industry shortage of older vehicles as well as our
continuing efforts to attract dealers to our auctions.
Other
Sales and Revenues
Fiscal
2007 Versus Fiscal 2006. Other
sales and revenues increased 10% in fiscal 2007. The increase was primarily
the
result of increased sales of ESPs and an increase in third-party finance fees.
The increase in ESP sales was consistent with our increase in used vehicle
unit
sales. The third-party finance fees benefited from the decline in Drive-financed
sales. We record the discount at which this lender purchases loans as an offset
to the third-party finance fee revenues. Service department sales declined
modestly in fiscal 2007, as the reconditioning activities required to support
our strong comparable store used vehicle sales growth limited the service
capacity available for customer pay work.
Fiscal
2006 Versus Fiscal 2005.
Other
sales and revenues increased 14% in fiscal 2006, as all components benefited
from the increase in retail vehicle sales and the expansion of our superstore
base.
Supplemental
Sales Information
Unit
Sales
|
Years
Ended February 28
|
||||||||||
|
2007
|
|
2006
|
|
2005
|
||||||
|
Used
vehicles
|
337,021
|
289,888
|
253,168
|
|||||||
|
New
vehicles
|
18,563
|
20,901
|
20,636
|
|||||||
|
Wholesale
vehicles
|
208,959
|
179,548
|
155,393
|
|||||||
Average
Selling Prices
|
Years
Ended February 28
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Used
vehicles
|
$
|
17,249
|
$
|
16,298
|
$
|
15,663
|
||||
|
New
vehicles
|
$
|
23,833
|
$
|
23,887
|
$
|
23,671
|
||||
|
Wholesale
vehicles
|
$
|
4,286
|
$
|
4,233
|
$
|
3,712
|
||||
Retail
Vehicle Sales Mix
|
Years
Ended February 28
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Vehicle
units:
|
||||||||||
|
Used
vehicles
|
95
|
%
|
93
|
%
|
92
|
%
|
||||
|
New
vehicles
|
5
|
7
|
8
|
|||||||
|
Total
|
100
|
%
|
100
|
%
|
100
|
%
|
||||
|
Vehicle
dollars:
|
||||||||||
|
Used
vehicles
|
93
|
%
|
90
|
%
|
89
|
%
|
||||
|
New
vehicles
|
7
|
10
|
11
|
|||||||
|
Total
|
100
|
%
|
100
|
%
|
100
|
%
|
||||
Retail
Stores
|
As
of February 28
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Mega
superstores (1)
|
13
|
13
|
13
|
|||||||
|
Standard
superstores (2)
(4)
|
40
|
35
|
30
|
|||||||
|
Satellite
superstores (3)
(4)
|
24
|
19
|
15
|
|||||||
|
Total
used car superstores
|
77
|
67
|
58
|
|||||||
|
Co-located
new car stores
|
4
|
4
|
3
|
|||||||
|
Total
|
81
|
71
|
61
|
|||||||
| (1) |
Generally
70,000 to 95,000 square feet on 20 to 35 acres.
|
| (2) |
Generally
40,000 to 60,000 square feet on 10 to 25
acres.
|
| (3) |
Generally
10,000 to 20,000 square feet on 4 to 10
acres.
|
|
(4)
|
The
Kenosha, Wisc. superstore has been reclassified from a satellite
to a
standard superstore.
|
We
have a
total of seven new car franchises. Two franchises are integrated within used
car
superstores, and the remaining five franchises are operated from four facilities
that are co-located with select used car superstores.
Gross
Profit
|
Years
Ended February 28
|
|||||||||||||||||||
|
2007
|
2006
|
2005
|
|||||||||||||||||
|
$
per unit (1)
|
%
(2)
|
$
per unit (1)
|
%
(2)
|
$
per unit (1)
|
%
(2)
|
||||||||||||||
|
Used
vehicle gross profit
|
$
|
1,903
|
10.9
|
$
|
1,808
|
11.0
|
$
|
1,817
|
11.5
|
||||||||||
|
New
vehicle gross profit
|
$
|
1,169
|
4.9
|
$
|
934
|
3.9
|
$
|
860
|
3.6
|
||||||||||
|
Wholesale
vehicle gross profit
|
$
|
742
|
16.9
|
$
|
700
|
16.1
|
$
|
464
|
12.2
|
||||||||||
|
Other
gross profit
|
$
|
431
|
66.8
|
$
|
391
|
58.5
|
$
|
366
|
55.3
|
||||||||||
|
Total
gross profit
|
$
|
2,731
|
13.0
|
$
|
2,544
|
12.6
|
$
|
2,375
|
12.4
|
||||||||||
| (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 percentageof its respective sales or
revenue.
|
Used
Vehicle Gross Profit
We
target
a similar dollar amount of gross profit per used unit, regardless of retail
price. Our ability to quickly adjust appraisal offers to be consistent with
the
broader market trade-in trends and our rapid inventory turns reduce our exposure
to the inherent continual depreciation in used vehicle values and contribute
to
our ability to manage our gross profit dollars per unit. In addition, over
the
past few years, we have continued to refine our car-buying strategies, which
we
believe has benefited our used vehicle gross profit per unit.
Fiscal
2007 Versus Fiscal 2006.
Our used
vehicle gross profit increased $95 per unit in fiscal 2007. This increase
reflected the benefit of our strong, consistent sales performance throughout
the
year. We believe several external factors contributed to a greater degree of
sales volatility in the prior year, including significant changes in gasoline
prices, new vehicle incentives, and interest rates. We did not experience
similar variability in these external factors in fiscal 2007, and therefore
benefited from a more stable business environment. We employ a volume-based
strategy, and we systematically mark down individual vehicle prices based on
our
proprietary pricing algorithms in order to appropriately balance sales growth,
inventory turns, and gross profit achievement. When customer traffic and our
sales are consistently strong, we generally take fewer pricing markdowns, which
in turn maximizes our gross profit dollars per unit. In addition, our used
vehicle gross profit in fiscal 2006 was adversely affected by slowing demand
for
SUVs and trucks that have lower gas mileage, which resulted in higher pricing
markdowns for these vehicles.
Fiscal
2006 Versus Fiscal 2005.
While
our used vehicle gross profit dollars per unit in fiscal 2006 was similar to
that achieved in fiscal 2005, our used vehicle gross profits remained under
some
pressure throughout fiscal 2006. The profit pressure was primarily the result
of
the combination of the strong wholesale industry pricing and our desire to
price
our retail cars at competitive levels for consumers comparing options in the
new
and used car markets. A strong wholesale industry pricing environment increases
our cost of acquiring vehicles both in our in-store purchases and at auction.
We
were able to offset some of the resulting profit pressure through successful
refinements in our in-store appraisal strategy. During portions of fiscal 2006,
we did not increase our appraisal offers at the same rate as the steep increase
in the major public wholesale auction market prices, as we did not believe
the
price trends at the major public wholesale auctions were reflective of the
broader market trade-in offer trends. This belief was reinforced by the fact
that we continued to experience strong increases in appraisal traffic while
maintaining our ratio of appraisal buys to appraisal offers. This strategy
allowed us to keep our retail prices more in line with underlying retail demand,
while maintaining gross profit dollars per unit.
New
Vehicle Gross Profit
Fiscal
2007 Versus Fiscal 2006. Our
new
vehicle gross profit increased $235 per unit in fiscal 2007. The increase
primarily reflected our strategic decision to increase targeted new vehicle
gross profit dollars per unit. While this decision contributed to a reduction
in
new vehicle unit sales, it resulted in an increase in the total gross profit
contribution from new vehicles.
Fiscal
2006 Versus Fiscal 2005.
Our new
vehicle gross profit increased $74 per unit in fiscal 2006. The increase was
primarily attributable to the higher profits realized during the domestic new
car manufacturers’ employee pricing programs. We were able to modestly increase
our new car prices during these programs, as our pricing had generally been
below the manufacturers’ specified employee discount prices.
Wholesale
Vehicle Gross Profit
Fiscal
2007 Versus Fiscal 2006. In
spite
of the challenging comparison with the prior year, our wholesale vehicle gross
profit increased $42 per unit in fiscal 2007. Our wholesale vehicle
profitability has steadily increased over the last several years, reflecting
the
benefits realized from improvements and refinements in our car-buying
strategies, our appraisal delivery processes, and our 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 our initiatives to increase average dealer attendance, which
we
believe has allowed us to achieve higher prices.
Fiscal
2006 Versus Fiscal 2005.
Our
wholesale vehicle gross profit increased $236 per unit in fiscal 2006. We
believe a portion of this increase resulted from the unusually strong wholesale
pricing environment in fiscal 2006. In addition, the refinements in our in-store
appraisal strategy benefited our wholesale operations, while allowing us to
maintain used vehicle gross profit dollars per unit levels in the face of rising
vehicle acquisition costs. While we did not increase our appraisal offers at
the
same rate as the steep increase in the major public wholesale auction market
prices, our own wholesale auctions generally reflected the pricing trends of
the
public wholesale auctions.
Our
wholesale gross profit was particularly strong in the second half of fiscal
2006
as the result of a combination of factors. The supply/demand imbalance for
older, higher mileage cars created by Hurricanes Katrina, Rita, and Wilma
resulted in unusually strong demand and price realizations for our wholesale
vehicles. In addition, as we normally do in the third quarter, we adjusted
our
appraisal offers to incorporate the anticipated seasonal drop in wholesale
pricing. Wholesale industry pricing typically declines during the fall due
to
pressure from model year closeout sales and from reduced demand at auction
as
dealers pare back inventories heading into the slower-volume winter months.
We
were particularly aggressive in our appraisals of SUVs where wholesale prices
had fallen dramatically through the summer following sharp increases in the
cost
of gasoline. Pricing in the overall wholesale marketplace did not decline as
much as anticipated, however, giving us unusually high third quarter wholesale
gross profits.
Other
Gross Profit
Fiscal
2007 Versus Fiscal 2006. Other
gross profit increased $40 per unit in fiscal 2007. The improvement was the
result of the growth in ESP sales and third-party finance fees, both of which
have no associated cost of sales, and an increase in service department margins.
Our service department reported higher profits, reflecting the greater overhead
expense absorption provided by the significant increase in used vehicles sales
and the associated reconditioning volumes.
Fiscal
2006 Versus Fiscal 2005.
Other
gross profit per unit increased $25 per unit in fiscal 2006. The improvement
was
primarily the result of improved penetration in sales of ESPs and the growth
in
service profits. The service department, which is the only category within
other
sales and revenues that has an associated cost of sales, reported higher profits
reflecting the greater overhead expense absorption provided by the higher
vehicle sales and reconditioning volumes.
Impact
of Inflation
Inflation
has not been a significant contributor to results. Profitability is based on
achieving targeted unit sales and gross profit dollars per vehicle rather than
on average retail prices. However, CAF income will benefit from an increase
in
the average amount financed.
CarMax
Auto Finance Income
CAF
provides automobile financing for our used and new car sales. Because the
purchase of an automobile is traditionally reliant on the consumer’s ability to
obtain on-the-spot financing, it is important to our business that financing
be
available to creditworthy customers. While financing can also be obtained from
third-party sources, we believe that total reliance on third parties can create
unacceptable volatility and business risk. Furthermore, we believe that our
processes and systems, the transparency of our pricing, and our vehicle quality
provide a unique and ideal environment in which to procure high-quality auto
finance receivables, both for CAF and for our third-party lenders. CAF provides
us the opportunity to capture additional profits and cash flows from auto loan
receivables while managing our reliance on third-party finance sources.
Components
of CAF Income
|
Years
Ended February 28
|
|||||||||||||||||||
|
(In
millions)
|
2007
|
%
|
2006
|
%
|
2005
|
%
|
|||||||||||||
|
Total
gain income (1)
|
$
|
99.7
|
4.3
|
$
|
77.1
|
4.1
|
$
|
58.3
|
3.8
|
||||||||||
|
Other
CAF income: (2)
|
|||||||||||||||||||
|
Servicing
fee income
|
32.4
|
1.1
|
27.6
|
1.0
|
24.7
|
1.0
|
|||||||||||||
|
Interest
income
|
26.6
|
0.9
|
21.4
|
0.8
|
19.0
|
0.8
|
|||||||||||||
|
Total
other CAF income
|
59.0
|
1.9
|
49.0
|
1.8
|
43.7
|
1.8
|
|||||||||||||
|
Direct
CAF expenses: (2)
|
|||||||||||||||||||
|
CAF
payroll and fringe benefit
expense
|
12.0
|
0.4
|
10.3
|
0.4
|
9.0
|
0.4
|
|||||||||||||
|
Other
direct CAF expenses
|
14.0
|
0.5
|
11.5
|
0.4
|
10.3
|
0.4
|
|||||||||||||
|
Total
direct CAF expenses
|
26.0
|
0.9
|
21.8
|
0.8
|
19.3
|
0.8
|
|||||||||||||
|
CarMax
Auto Finance income (3)
|
$
|
132.6
|
1.8
|
$
|
104.3
|
1.7
|
$
|
82.7
|
1.6
|
||||||||||
|
Total
loans sold
|
$
|
2,322.7
|
$
|
1,887.5
|
$
|
1,534.8
|
|||||||||||||
|
Average
managed receivables
|
$
|
3,071.1
|
$
|
2,657.7
|
$
|
2,383.6
|
|||||||||||||
|
Ending
managed receivables
|
$
|
3,311.0
|
$
|
2,772.5
|
$
|
2,494.9
|
|||||||||||||
|
Total
net sales and operating revenues
|
$
|
7,465.7
|
$
|
6,260.0
|
$
|
5,260.3
|
|||||||||||||
Percent
columns indicate:
| (1) |
Percent
of loans sold.
|
| (2) |
Percent
of average managed
receivables.
|
| (3) |
Percent
of net sales and operating
revenues.
|
CAF
income does not include any allocation of indirect costs or income. We present
this information on a direct basis to avoid making arbitrary decisions regarding
the indirect benefit or costs that could be attributed to this operation.
Examples of indirect costs not included are retail store expenses and corporate
expenses such as human resources, administrative services, marketing,
information systems, accounting, legal, treasury, and executive
payroll.
CAF
originates automobile loans to qualified customers at competitive market rates
of interest. The majority of the profit contribution from CAF is generated
by
the spread between the interest rates charged to customers and our 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.
In a
normalized environment, we expect the gains on loans originated and sold as
a
percent of loans originated and sold (the “gain percentage”) to be in the range
of 3.5% to 4.5%.
Total
gain income in fiscal 2007, 2006, and 2005 included the effects of retained
interest valuation adjustments, new public securitizations, and the repurchase
and resale of receivables in existing public securitizations. The following
table provides information on the aggregate effect of these items on gain
income, loans sold, and the gain percentage.
Gain
Income and Loans Sold
|
Years
Ended February 28
|
||||||||||
|
(In
millions)
|
2007
|
2006
|
2005
|
|||||||
|
Gains
on sales of loans originated and sold
|
$
|
86.7
|
$
|
61.9
|
$
|
54.9
|
||||
|
Other
gain income
|
13.0
|
15.2
|
3.3
|
|||||||
|
Total
gain income
|
$
|
99.7
|
$
|
77.1
|
$
|
58.3
|
||||
|
Loans
originated and sold
|
$
|
2,240.2
|
$
|
1,792.6
|
$
|
1,483.8
|
||||
|
Receivables
repurchased from public securitizations and
resold
|
82.5
|
94.8
|
51.0
|
|||||||
|
Total
loans sold
|
$
|
2,322.7
|
$
|
1,887.5
|
$
|
1,534.8
|
||||
|
Gain
percentage on loans originated and sold
|
3.9
|
%
|
3.5
|
%
|
3.7
|
%
|
||||
|
Total
gain income as a percentage of total loans sold
|
4.3
|
%
|
4.1
|
%
|
3.8
|
%
|
||||
Fiscal
2007 Versus Fiscal 2006. CAF
income rose 27% to $132.6 million in fiscal 2007. CAF income benefited from
the
growth in retail vehicle unit sales, and increases in the gain percentage,
average amount financed, and total managed receivables. The gain percentage
increased to 3.9% in fiscal 2007 from 3.5% in fiscal 2006, reflecting changes
in
the interest rate environment. In fiscal 2006, our funding costs were rising
faster than rates charged to consumers resulting in a lower gain percentage.
In
fiscal 2007, the relative stability in our funding cost allowed us to achieve
a
higher gain percentage. The increases in other CAF income and direct CAF
expenses in fiscal 2007 were proportionate to the growth in managed receivables
during the year.
We
recognized other gain income of $13.0 million, or $0.04 per share in fiscal
2007
compared with $15.2 million, or $0.04 per share, in fiscal 2006. In fiscal
2007,
substantially all of the other gain income resulted from favorable valuation
adjustments. In fiscal 2006, other gain income included $0.03 per share of
favorable valuation adjustments, $0.01 per share of favorable effects from
new
public securitizations, and a favorable effect of less than $0.01 per share
from
the repurchase and resale of receivables in existing public securitizations.
These items are discussed below:
| · |
Valuation
adjustments.
The net favorable valuation adjustments in both fiscal 2007 and fiscal
2006 primarily resulted from lowering loss rate assumptions, mostly
on
pools of receivables securitized in calendar years 2003, 2004, and
2005.
We believe these pools of receivables experienced lower-than-expected
loss
rates as a result of a combination of factors, including
better-than-expected performance of our new credit scorecard implemented
in calendar year 2002, favorable economic conditions, operating
efficiencies resulting from systems enhancements, and an improved
recovery
rate.
|
| · |
New
public securitizations.
CarMax periodically repurchases receivables from the warehouse facility
and refinances them in public securitizations. The impact of refinancing
receivables can be favorable or unfavorable depending on the relative
economics of funding structures at the time the receivables are
refinanced. These transactions did not have a material impact in
fiscal
2007. In fiscal 2006, we recognized a benefit of $0.01 per share
as we
refinanced balances from the warehouse facility into new public
securitizations.
|
| · |
Repurchase
and resale of receivables.
Our securitizations typically contain an option to repurchase the
securitized receivables when the outstanding balance in a pool of
automobile loan receivables falls below 10% of the original pool
balance.
This option was exercised two times in each of fiscal 2007 and 2006.
In
each case, the remaining eligible automobile loan receivables were
subsequently resold into the warehouse facility. These transactions
did
not have a material impact in fiscal 2007. In fiscal 2006, the spread
between the APR on the loans and the then-current funding cost in
the
warehouse facility resulted in an earnings benefit.
|
In
future
years, the effect of refinancing, repurchase, and resale activity could be
favorable or unfavorable depending on the securitization structure and market
conditions at the transaction date.
Fiscal
2006 Versus Fiscal 2005. CAF
income rose 26% to $104.3 million in fiscal 2006. The fiscal 2006 total gain
income benefited from the growth in retail vehicle sales and a substantial
increase in other gain income, partially offset by a modest decline in the
gain
percentage to 3.5% from 3.7% in fiscal 2005. The increases in other CAF income
and direct CAF expenses in fiscal 2006 were proportionate to the growth in
managed receivables during the year.
Other
gain income was $15.2 million in fiscal 2006 compared with $3.3 million in
fiscal 2005. In fiscal 2005, approximately half of the other gain income related
to favorable valuation adjustments, and the remainder primarily resulted from
the repurchase and resale of receivables in existing public securitizations.
Past
Due Account Information
|
As
of February 28
|
||||||||||
|
(In
millions)
|
2007
|
2006
|
2005
|
|||||||
|
Loans
securitized
|
$
|
3,242.1
|
$
|
2,710.4
|
$
|
2,427.2
|
||||
|
Loans
held for sale or investment
|
68.9
|
62.0
|
67.7
|
|||||||
|
Total
managed receivables
|
$
|
3,311.0
|
$
|
2,772.5
|
$
|
2,494.9
|
||||
|
Accounts
31+ days past due
|
$
|
56.9
|
$
|
37.4
|
$
|
31.1
|
||||
|
Past
due accounts as a percentage of total managed
receivables
|
1.72
|
%
|
1.35
|
%
|
1.24
|
%
|
||||
Credit
Loss Information
|
Years
Ended February 28
|
||||||||||
|
(In
millions)
|
2007
|
2006
|
2005
|
|||||||
|
Net
credit losses on managed receivables
|
$
|
20.7
|
$
|
18.4
|
$
|
19.5
|
||||
|
Average
managed receivables
|
$
|
3,071.1
|
$
|
2,657.7
|
$
|
2,383.6
|
||||
|
Net
credit losses as a percentage of average managed
receivables
|
0.67
|
%
|
0.69
|
%
|
0.82
|
%
|
||||
|
Recovery
rate
|
51
|
%
|
51
|
%
|
46
|
%
|
||||
We
are at
risk for the performance of the managed securitized receivables to the extent
of
our retained interest in the receivables. If the managed receivables do not
perform in accordance with the assumptions used in determining the fair value
of
the retained interest, earnings could be impacted. Past due accounts as a
percentage of total managed receivables increased moderately in fiscal 2007.
While credit losses as a percentage of averaged managed receivables decreased
slightly in fiscal 2007, the decrease was attributable to favorability in the
first half of the year, offset by higher losses in the second half of the year.
We believe the increase in losses during the second half of the year was the
result of a combination of factors, including a gradual shift in credit mix
of
the portfolio as well as less favorable general economic and industry trends.
Receivables originated in calendar years 2003, 2004, and early 2005 have
experienced loss rates well below both CAF’s historical averages and our
targeted loss rates. We believe this favorability was due, in part, to the
credit scorecard 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 2006 have been experiencing higher loss and
delinquency rates than receivables originated in those prior years. The changes
in loss and delinquency rates were largely anticipated and were incorporated
in
our initial loss assumptions for these pools.
The
recovery rate represents the average percentage of the outstanding principal
balance we receive when a vehicle is repossessed and liquidated at wholesale
auction. We believe the improvement in the recovery rate in fiscal 2006
reflected the stronger wholesale market pricing environment.
Selling,
General, and Administrative Expenses
Fiscal
2007 Versus Fiscal 2006. The
SG&A ratio declined to 10.4% from 10.8% in fiscal 2006. We benefited from
the leverage of fixed expenses generated by our strong comparable store sales
growth. The improvement in the fiscal 2007 SG&A ratio was partially offset
by an increase in share-based compensation costs and by the recognition of
an
impairment loss totaling $4.9 million, or $0.01 per share. The impairment loss
related to the write down of intangible assets associated with one of our new
car franchises.
We
recognized $32.7 million, or $0.09 per share, of share-based compensation costs
in fiscal 2007, $30.4 million of which was included in SG&A, compared with
$22.4 million, or $0.07 per share, in fiscal 2006, all of which was included
in
SG&A. The increase in share-based compensation cost was driven, in large
part, by the accelerated vesting of stock options upon the retirement of our
former chief executive officer in August 2006.
Fiscal
2006 Versus Fiscal 2005. The
SG&A ratio increased slightly to 10.8% from 10.7% in fiscal 2005. The
moderate rate of increase in comparable store used unit sales in fiscal 2006
was
not sufficient to provide SG&A leverage. The increase in the percentage of
our store base that is comprised of newer stores not yet at basic maturity,
which generally occurs in the fifth year of operation, also was a contributing
factor. Newer stores typically experience higher SG&A ratios during their
first four years of operation. On average, 45% of our stores were less than
four
years old in fiscal 2006 compared with 37% in fiscal 2005. Costs associated
with
the launch of market-wide television advertising in Los Angeles in fiscal 2006
and the lower-than-normal corporate bonus expense in fiscal 2005 also precluded
SG&A leverage.
Income
Taxes
The
effective income tax rate was 38.6% in fiscal 2007, 38.3% in fiscal 2006, and
38.9% in fiscal 2005. The fiscal 2006 decrease resulted primarily from a legal
entity reorganization in the fourth quarter of fiscal 2005. We created a
centralized corporate management entity in an effort to obtain operational,
legal, and other benefits that also resulted in state tax efficiencies.
OPERATIONS
OUTLOOK
Store
Openings and Capital Expenditures
During
the fiscal year ending February 29, 2008, we plan to expand our used car
superstore base by approximately 17%, opening an estimated 13 used car
superstores.
Fiscal
2008 Planned Superstore Openings
|
Location
|
Television
Market
|
Market
Status
|
Standard
Superstores
|
Satellite
Superstores
|
|
Tucson,
Ariz.
|
Tucson
|
New
market
|
1
|
-
|
|
Milwaukee,
Wis.
|
Milwaukee
|
New
market
|
-
|
2
|
|
Torrance,
Calif.
|
Los
Angeles
|
Existing
market
|
-
|
1
|
|
Roswell,
Ga.
|
Atlanta
|
Existing
market
|
-
|
1
|
|
Newport
News, Va.
|
Norfolk
/ Virginia Beach
|
Existing
market
|
-
|
1
|
|
Gastonia,
N.C.
|
Charlotte
|
Existing
market
|
1
|
-
|
|
Kearney
Mesa, Calif.
|
San
Diego
|
New
market
|
-
|
1
|
|
Modesto,
Calif.
|
Sacramento
|
Existing
market
|
1
|
-
|
|
Riverside,
Calif.
|
Los
Angeles
|
Existing
market
|
-
|
1
|
|
Omaha,
Neb.
|
Omaha
|
New
market
|
1
|
-
|
|
Jackson,
Miss.
|
Jackson
|
New
market
|
1
|
-
|
|
Ellicott
City, Md.
|
DC
/ Baltimore
|
Existing
market
|
-
|
1
|
|
Total
planned openings
|
5
|
8
|
||
We
expect
to enter five new markets and expand our presence in six existing markets in
fiscal 2008. We currently expect to open approximately four superstores in
the
first half of fiscal 2008 and nine superstores in the second half of the year.
However, normal construction, permitting, or other scheduling delays could
shift
opening dates of stores into the following fiscal year.
In
fiscal
2008, we also plan to open three additional car buying centers, with one each
in
the Raleigh, Dallas, and Tampa markets. These sites will expand a test begun
in
fiscal 2007, when we opened our first car buying center in the Atlanta market.
We only conduct appraisals and purchase cars at these sites and do not sell
cars. These test stores are part of our long-term program to increase both
appraisal traffic and retail vehicle sourcing self-sufficiency.
We
currently estimate gross capital expenditures will total approximately $300
million in fiscal 2008. Planned expenditures primarily relate to new store
construction and land purchases associated with future year store openings.
Compared with the approximately $192 million spent in fiscal 2007, the fiscal
2008 capital spending
estimate
reflects more real estate purchases for future development in larger,
multi-store markets. In addition, the fiscal 2007 capital spending amount was
lower than originally projected, due in part to the acquisition of some store
sites pursuant to ground leases.
Fiscal
2008 Expectations
The
fiscal 2008 expectations discussed below are based on historical and current
trends in our business and should be read in conjunction with “Risk Factors,” in
Part I, Item 1A of this Form 10-K.
Fiscal
2008 Sales.
We
currently anticipate comparable store used unit growth for fiscal 2008 in the
range of 3% to 9%. We also expect wholesale unit sales growth to be consistent
with our total used unit sales increase. Total revenues are expected to climb
by
between 14% and 20%, reflecting our expectations for comparable store used
unit
growth, new store openings, a modest increase in used vehicle average selling
price, and a continued decline in our new vehicle sales.
Fiscal
2008 Earnings Per Share.
We
currently anticipate fiscal 2008 earnings per share in the range of $1.03 to
$1.14, representing EPS growth in the range of 12% to 24%. We expect modest
improvement in both used vehicle and wholesale gross profits per unit in fiscal
2008, as we continue to refine and improve our car-buying
processes.
We
expect
CAF income to increase modestly, but at a pace slower than anticipated sales
growth, primarily reflecting the challenging comparison created by the $13.0
million of favorable CAF items reported in fiscal 2007. The CAF gain percentage
is anticipated to be slightly above the midpoint of our normalized 3.5% to
4.5%
range in fiscal 2008, assuming no significant change in the interest rate
environment.
Our
effective tax rate for fiscal 2008 is expected to be similar to the fiscal
2007
rate. However, our diluted share count is expected to increase by approximately
3%, reflecting the effects of the recent increase in our stock price and option
exercises on the weighted average share calculation. The diluted share count
for
the fourth quarter of fiscal 2007 was 1.4% higher than the average for the
full
year, accounting for approximately one-half of the anticipated 3%
increase.
RECENT
ACCOUNTING PRONOUNCEMENTS
For
a
discussion of recent accounting pronouncements applicable to the company, see
Note 15.
FINANCIAL
CONDITION
Operating
Activities
We
generated net cash from operating activities of $136.8 million in fiscal 2007,
$117.5 million in fiscal 2006, and $41.8 million in fiscal 2005. Cash generated
from operating activities was $19.3 million higher in fiscal 2007 compared
with
fiscal 2006. The $64.4 million increase in net earnings in fiscal 2007 was
more
than offset by the increased growth in inventories. Inventories increased by
$166.4 million in fiscal 2007 compared with a $93.1 million increase in fiscal
2006. The fiscal 2007 inventory increase related to store openings during fiscal
2007 and shortly after the end of the fiscal year, as well as to added vehicle
inventory required to support our strong increase in fourth quarter comparable
store used unit sales.
Cash
generated from operating activities was $75.7 million higher in fiscal 2006
compared with fiscal 2005. The increase reflected the $32.9 million increase
in
net earnings in fiscal 2006 and a $44.6 million reduction in the year-over-year
growth in working capital.
The
aggregate principal amount of automobile loan receivables funded through
securitizations, which are discussed in Notes 3 and 4 totaled $3.24 billion
at
February 28, 2007, $2.71 billion at February 28, 2006, and $2.43 billion at
February 28, 2005. During fiscal 2007, we completed three public automobile
securitizations totaling $1.87 billion. At February 28, 2007, the warehouse
facility limit was $825.0 million and unused warehouse capacity totaled $227.0
million. The warehouse facility matures in July 2007. Note 4 includes a
discussion of the warehouse facility. We anticipate that we will be able to
renew, expand, or enter into new securitization arrangements to meet CAF’s
future needs.
Investing
Activities
Net
cash
used in investing activities was $187.2 million in fiscal 2007, $116.1 million
in fiscal 2006, and $141.1 million in fiscal 2005. Capital expenditures were
$191.8 million in fiscal 2007, $194.4 million in fiscal 2006, and $230.1 million
in fiscal 2005. In addition to store construction costs, capital expenditures
for all three years included the cost of land acquired for future year store
openings. In fiscal 2006 and fiscal 2005, capital expenditures also included
costs associated with our new home office, which was completed in October 2005.
Historically,
capital expenditures have been funded with internally generated funds, short-
and long-term debt, and sale-leaseback transactions. Net proceeds from the
sales
of assets totaled $4.6 million in fiscal 2007, $78.3 million in fiscal 2006,
and
$89.0 million in fiscal 2005. The majority of the sale proceeds in fiscal 2006
and fiscal 2005 related to sale-leaseback transactions. In fiscal 2006, we
entered into sale-leaseback transactions involving five superstores valued
at
$72.7 million. In fiscal 2005, we entered into sale-leaseback transactions
involving seven superstores valued at approximately $84.0 million. These
transactions were structured with initial lease terms of either 15 or 20 years
with four, five-year renewal options. At February 28, 2007, we owned 20
superstores currently in operation, as well as the company’s home office in
Richmond, Virginia. In addition, six store facilities were accounted for as
capital leases.
Financing
Activities
Net
cash
provided by financing activities was $48.1 million in fiscal 2007, $3.2 million
in fiscal 2006, and $67.7 million in fiscal 2005. We used cash generated from
operations to reduce total debt by $9.5 million in fiscal 2007 and $6.8 million
in fiscal 2006. In fiscal 2005, we increased total debt by $60.2 million
primarily to fund increased inventory.
In
December 2006, we amended our revolving credit facility. The term of the
agreement was extended from August 2009 to December 2011, and the aggregate
borrowings available under the agreement were increased from $450 million to
$500 million. Borrowings under this credit facility are available for working
capital and general corporate purposes, and are secured by our vehicle
inventory.
As
of
February 28, 2007, $150.7 million was outstanding under the credit facility,
with the remainder fully available to us. The outstanding balance included
$3.3
million classified as short-term debt, and $147.4 million classified as current
portion of long-term debt. We classified the outstanding balance at February
28,
2007, 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, increased to $35.4 million in fiscal 2007 compared with $6.0 million
in fiscal 2006 and $4.3 million in fiscal 2005. The increase reflected exercises
by the former chief executive officer in connection with his retirement, and
other exercises prompted by the significant increase in our stock price in
fiscal 2007.
We
expect
that cash generated by operations; proceeds from securitization transactions;
and, if needed, additional debt and sale-leaseback transactions will be
sufficient to fund capital expenditures and working capital for the foreseeable
future.
Contractual
Obligations
|
As
of February 28, 2007
|
||||||||||||||||
|
Total
|
Less
Than
1
Year
|
1
to 3
Years
|
3
to 5
Years
|
More
Than
5
Years
|
||||||||||||
|
Revolving
credit agreement (1)
|
$
|
150.7
|
$ |
—
|
$ |
—
|
$
|
150.7
|
$
|
—
|
||||||
|
Capital
leases (2)
|
67.0
|
|
4.5
|
|
9.1
|
9.5
|
|
43.9
|
||||||||
|
Operating
leases (2)
|
963.7
|
71.0
|
144.2
|
145.5
|
603.0
|
|||||||||||
|
Purchase
obligations (3)
|
79.0
|
38.5
|
30.8
|
9.7
|
—
|
|||||||||||
|
Asset
retirement obligations (4)
|
1.1
|
—
|
—
|
—
|
1.1
|
|||||||||||
|
Total
|
$
|
1,261.5
|
$
|
114.0
|
$
|
184.1
|
$
|
315.4
|
$
|
648.0
|
||||||
| (1) |
See
Note 9 to the consolidated financial
statements.
|
| (2) |
See
Note 12 to the consolidated financial
statements.
|
| (3) |
Includes
certain enforceable and legally binding obligations related to
the
purchase of real property and third-party outsourcing
services.
|
| (4) |
Represents
the present value of costs to retire signage, fixtures, and other
assets
at certain leased
locations.
|
Off-Balance
Sheet Arrangements
CAF
provides financing for our used and new car sales. We use a securitization
program to fund substantially all of the automobile loan receivables originated
by CAF. We sell the automobile loan receivables to a wholly owned,
bankruptcy-remote, special purpose entity that transfers an undivided interest
in the receivables to a group of third-party investors. This program is referred
to as the warehouse facility.
We
periodically use public securitizations to refinance the receivables previously
securitized through the warehouse facility. In a public securitization, a pool
of automobile loan receivables is sold to a bankruptcy-remote, special purpose
entity that in turn transfers the receivables to a special purpose
securitization trust.
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 this MD&A, as well as in Notes 3 and 4.
Automobile
Installment Loan Receivables
At
February 28, 2007, and February 28, 2006, all loans in our portfolio of
automobile loan receivables were fixed-rate installment loans. Financing for
these automobile loan receivables is achieved through asset securitization
programs that, in turn, issue both fixed- and floating-rate securities. We
manage the interest rate exposure relating to floating-rate securitizations
through the use of interest rate swaps. Receivables held for investment or
sale
are financed with working capital. Generally, changes in interest rates
associated with underlying swaps will not have a material impact on earnings.
However, changes in interest rates associated with underlying swaps may have
a
material impact on cash and cash flows.
Credit
risk is the exposure to nonperformance of another party to an agreement. We
mitigate credit risk by dealing with highly rated bank counterparties. The
market and credit risks associated with financial derivatives are similar to
those relating to other types of financial instruments. Refer to Note 5 for
a
description of these items.
Composition
of Automobile Loan Receivables
|
As
of February 28
|
|||||||
|
(In
millions)
|
2007
|
2006
|
|||||
|
Principal
amount of:
|
|||||||
|
Fixed-rate
securitizations
|
$
|
2,644.1
|
$
|
2,126.4
|
|||
|
Floating-rate
securitizations synthetically altered to fixed
|
597.5
|
584.0
|
|||||
|
Floating-rate
securitizations
|
0.6
|
—
|
|||||
|
Loans
held for investment (1)
|
62.7
|
57.9
|
|||||
|
Loans
held for sale (2)
|
6.2
|
4.1
|
|||||
|
Total
|
$
|
3,311.0
|
$
|
2,772.5
|
|||
| (1) |
The
majority is held by a bankruptcy-remote special purpose
entity.
|
| (2) |
Held
by a bankruptcy-remote special purpose
entity.
|
Interest
Rate Exposure
We
also
have interest rate risk from changing interest rates related to our outstanding
debt. Substantially all of our debt is floating-rate debt based on LIBOR. A
100-basis point increase in market interest rates would have decreased our
fiscal 2007 net earnings per share by less than $0.01.
Item
8. Consolidated Financial Statements and Supplementary
Data.
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
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, 2007.
KPMG
LLP,
the company's independent registered public accounting firm, has issued a report
on our management's assessment of 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 PUBLIC
ACCOUNTING FIRM
The
Board
of Directors and Shareholders
CarMax,
Inc.:
We
have
audited management's assessment, included in the accompanying Management's
Annual Report on Internal Control Over Financial Reporting, that CarMax, Inc.
and subsidiaries (the “Company”) maintained effective internal control over
financial reporting as of February 28, 2007, 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 maintaining effective internal
control over financial reporting and for its assessment of the effectiveness
of
internal control over financial reporting. Our responsibility is to express
an
opinion on management's assessment and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
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 U.S. 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 U.S. 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 consolidated
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, management's assessment that CarMax, Inc. and subsidiaries maintained
effective internal control over financial reporting as of February 28, 2007,
is
fairly stated, in all material respects, based on criteria established in
Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Also, in our opinion, CarMax, Inc. and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of February
28,
2007, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of CarMax,
Inc.
and subsidiaries as of February 28, 2007 and 2006, 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, 2007, and our report
dated April 25, 2007 expressed an unqualified opinion on those consolidated
financial statements.
/s/KPMG
LLP
Richmond,
Virginia
April
25,
2007
REPORT
OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
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, 2007 and 2006, 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, 2007. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement Schedule
II -
valuation and qualifying accounts as of and for each of the fiscal years in
the
three-year period ended February 28, 2007. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule 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 audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of CarMax, Inc. and
subsidiaries as of February 28, 2007 and 2006, and the results of their
operations and their cash flows for each of the fiscal years in the three-year
period ended February 28, 2007, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As
discussed in Notes 2(A) and 10(C) to the consolidated financial statements,
the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 123 (revised 2004) (Statement 123(R)), Share-Based
Payment,
effective March 1, 2006, using the modified retrospective transition method.
As
discussed in Note 8(A) to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 158,
Employers’
Accounting for Defined Pension and Other Postretirement Plans,
effective February 28, 2007.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of February 28, 2007, based on criteria
established in Internal
Control-Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated April 25, 2007, expressed an unqualified opinion on
management’s assessment of, and the effective operation of, internal control
over financial reporting.
/s/KPMG
LLP
Richmond,
Virginia
April
25,
2007
CONSOLIDATED
STATEMENTS OF EARNINGS
|
Years
Ended February 28
|
|||||||||||||||||||
|
(In
thousands except per share data)
|
2007
|
|
%(1)
|
|
2006
|
|
%(1)
|
|
2005
|
|
%(1)
|
||||||||
|
Restated (2)
|
Restated (2)
|
||||||||||||||||||
|
SALES
AND OPERATING REVENUES:
|
|||||||||||||||||||
|
Used
vehicle sales
|
$
|
5,872,816
|
78.7
|
$
|
4,771,325
|
76.2
|
$
|
3,997,218
|
76.0
|
||||||||||
|
New
vehicle sales
|
445,144
|
6.0
|
502,805
|
8.0
|
492,054
|
9.4
|
|||||||||||||
|
Wholesale
vehicle sales
|
918,408
|
12.3
|
778,268
|
12.4
|
589,704
|
11.2
|
|||||||||||||
|
Other
sales and revenues
|
229,288
|
3.1
|
207,569
|
3.3
|
181,286
|
3.4
|
|||||||||||||
|
NET
SALES AND OPERATING REVENUES
|
7,465,656
|
100.0
|
6,259,967
|
100.0
|
5,260,262
|
100.0
|
|||||||||||||
|
Cost
of sales
|
6,494,594
|
87.0
|
5,469,253
|
87.4
|
4,610,066
|
87.6
|
|||||||||||||
|
GROSS
PROFIT
|
971,062
|
13.0
|
790,714
|
12.6
|
650,196
|
12.4
|
|||||||||||||
|
CARMAX
AUTO FINANCE INCOME
|
132,625
|
1.8
|
104,327
|
1.7
|
82,656
|
1.6
|
|||||||||||||
|
Selling,
general, and administrative expenses
|
776,168
|
10.4
|
674,370
|
10.8
|
565,279
|
10.7
|
|||||||||||||
|
Gain
on franchise dispositions, net
|
—
|
—
|
—
|
—
|
633
|
—
|
|||||||||||||
|
Interest
expense
|
5,373
|
0.1
|
4,093
|
0.1
|
2,806
|
0.1
|
|||||||||||||
|
Interest
income
|
1,203
|
—
|
1,023
|
—
|
421
|
—
|
|||||||||||||
|
Earnings
before income taxes
|
323,349
|
4.3
|
217,601
|
3.5
|
165,821
|
3.2
|
|||||||||||||
|
Provision
for income taxes
|
124,752
|
1.7
|
83,381
|
1.3
|
64,506
|
1.2
|
|||||||||||||
|
NET
EARNINGS
|
$
|
198,597
|
2.7
|
$
|
134,220
|
2.1
|
$
|
101,315
|
1.9
|
||||||||||
|
Weighted
average common shares(3):
|
|||||||||||||||||||
|
Basic
|
212,454
|
209,270
|
208,072
|
||||||||||||||||
|
Diluted
|
216,739
|
212,846
|
211,294
|
||||||||||||||||
|
NET
EARNINGS PER SHARE (3):
|
|||||||||||||||||||
|
Basic
|
$
|
0.93
|
$
|
0.64
|
$
|
0.49
|
|||||||||||||
|
Diluted
|
$
|
0.92
|
$
|
0.63
|
$
|
0.48
|
|||||||||||||
| (1) |
Percents
are calculated as a percentage of net sales and operating revenues
and may
not equal totals due to
rounding.
|
| (2) |
Restated
to reflect the impact of adopting SFAS 123(R). See Notes 2(A) and
10(C)
for additional information.
|
| (3) |
Share
and per share amounts
have been adjusted for the effect of the 2-for-1 stock split in March
2007. See Note 2(A) for additional
information.
|
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
BALANCE SHEETS
|
At
February 28
|
|||||||
|
(In
thousands except share data)
|
2007
|
2006
|
|||||
|
Restated (1)
|
|||||||
|
ASSETS
|
|||||||
|
CURRENT
ASSETS:
|
|||||||
|
Cash
and cash equivalents
|
$
|
19,455
|
$
|
21,759
|
|||
|
Accounts
receivable, net
|
71,413
|
76,621
|
|||||
|
Automobile
loan receivables held for sale
|
6,162
|
4,139
|
|||||
|
Retained
interest in securitized receivables
|
202,302
|
158,308
|
|||||
|
Inventory
|
836,116
|
669,700
|
|||||
|
Prepaid
expenses and other current assets
|
15,068
|
11,211
|
|||||
|
TOTAL
CURRENT ASSETS
|
1,150,516
|
941,738
|
|||||
|
Property
and equipment, net
|
651,850
|
499,298
|
|||||
|
Deferred
income taxes
|
40,174
|
24,576
|
|||||
|
Other
assets
|
43,033
|
44,000
|
|||||
|
TOTAL
ASSETS
|
$
|
1,885,573
|
$
|
1,509,612
|
|||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||
|
CURRENT
LIABILITIES:
|
|||||||
|
Accounts
payable
|
$
|
254,895
|
$
|
188,614
|
|||
|
Accrued
expenses and other current liabilities
|
68,885
|
66,871
|
|||||
|
Accrued
income taxes
|
23,377
|
5,598
|
|||||
|
Deferred
income taxes
|
13,132
|
23,562
|
|||||
|
Short-term
debt
|
3,290
|
463
|
|||||
|
Current
portion of long-term debt
|
148,443
|
59,762
|
|||||
|
TOTAL
CURRENT LIABILITIES
|
512,022
|
344,870
|
|||||
|
Long-term
debt, excluding current portion
|
33,744
|
134,787
|
|||||
|
Deferred
revenue and other liabilities
|
92,432
|
49,852
|
|||||
|
TOTAL
LIABILITIES
|
638,198
|
529,509
|
|||||
|
Commitments
and contingent liabilities
|
—
|
—
|
|||||
|
SHAREHOLDERS’
EQUITY (2):
|
|||||||
|
Common
stock, $0.50 par value; 350,000,000 shares authorized;
|
|||||||
|
216,028,166
and 209,909,966 shares issued and outstanding at
|
|||||||
|
February
28, 2007 and 2006, respectively
|
108,014
|
104,954
|
|||||
|
Capital
in excess of par value
|
587,546
|
501,599
|
|||||
|
Accumulated
other comprehensive loss
|
(20,332
|
)
|
—
|
||||
|
Retained
earnings
|
572,147
|
373,550
|
|||||
|
TOTAL
SHAREHOLDERS’ EQUITY
|
1,247,375
|
980,103
|
|||||
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$
|
1,885,573
|
$
|
1,509,612
|
|||
| (1) |
Restated
to reflect the impact of adopting SFAS 123(R). See Notes 2(A) and
10(C)
for additional information.
|
| (2) |
Share
amounts have been adjusted for the effect of the 2-for-1 stock split
in
March 2007. See Note 2(A) for additional
information.
|
See
accompanying notes to consolidated financial statements.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Years
Ended February 28
|
||||||||||
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||
|
Restated (1)
|
Restated (1)
|
|||||||||
|
OPERATING
ACTIVITIES:
|
||||||||||
|
Net
earnings
|
$
|
198,597
|
$
|
134,220
|
$
|
101,315
|
||||
|
Adjustments
to reconcile net earnings to net cash provided by operating
activities:
|
||||||||||
|
Depreciation
and amortization
|
34,551
|
26,692
|
20,145
|
|||||||
|
Share-based
compensation expense
|
31,826
|
21,632
|
18,063
|
|||||||
|
Loss
(gain) on disposition of assets
|
88
|
(764
|
)
|
(1,486
|
)
|
|||||
|
Deferred
income tax benefit
|
(14,169
|
)
|
(19,088
|
)
|
(7,251
|
)
|
||||
|
Impairment
of long-lived assets
|
4,891
|
—
|
—
|
|||||||
|
Net
decrease (increase) in:
|
||||||||||
|
Accounts
receivable, net
|
5,208
|
(454
|
)
|
(3,809
|
)
|
|||||
|
Automobile
loan receivables held for sale, net
|
(2,023
|
)
|
18,013
|
(3,371
|
)
|
|||||
|
Retained
interest in securitized receivables
|
(43,994
|
)
|
(10,345
|
)
|
(1,975
|
)
|
||||
|
Inventory
|
(166,416
|
)
|
(93,133
|
)
|
(110,506
|
)
|
||||
|
Prepaid
expenses and other current assets
|
(3,857
|
)
|
1,797
|
(4,358
|
)
|
|||||
|
Other
assets
|
(3,924
|
)
|
(5,975
|
)
|
1,042
|
|||||
|
Net
increase in:
|
||||||||||
|
Accounts
payable, accrued expenses and other current liabilities, and accrued
income taxes
|
85,633
|
35,133
|
30,382
|
|||||||
|
Deferred
revenue and other liabilities
|
10,389
|
9,785
|
3,655
|
|||||||
|
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
136,800
|
117,513
|
41,846
|
|||||||
|
INVESTING
ACTIVITIES:
|
||||||||||
|
Capital
expenditures
|
(191,760
|
)
|
(194,433
|
)
|
(230,080
|
)
|
||||
|
Proceeds
from sales of assets
|
4,569
|
78,340
|
88,999
|
|||||||
|
Sales
of money market securities
|
16,765
|
—
|
—
|
|||||||
|
Purchases
of investment securities available-for-sale
|
(16,765
|
)
|
—
|
—
|
||||||
|
NET
CASH USED IN INVESTING ACTIVITIES
|
(187,191
|
)
|
(116,093
|
)
|
(141,081
|
)
|
||||
|
FINANCING
ACTIVITIES:
|
||||||||||
|
Increase
(decrease) in short-term debt, net
|
2,827
|
(64,734
|
)
|
60,751
|
||||||
|
Issuance
of long-term debt
|
64,000
|
174,929
|
—
|
|||||||
|
Payments
on long-term debt
|
(76,362
|
)
|
(116,993
|
)
|
(509
|
)
|
||||
|
Equity
issuances, net
|
35,411
|
6,035
|
4,306
|
|||||||
|
Excess
tax benefits from share-based payment arrangements
|
22,211
|
3,978
|
3,143
|
|||||||
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
48,087
|
3,215
|
67,691
|
|||||||
|
(Decrease)
increase in cash and cash equivalents
|
(2,304
|
)
|
4,635
|
(31,544
|
)
|
|||||
|
Cash
and cash equivalents at beginning of year
|
21,759
|
17,124
|
48,668
|
|||||||
|
CASH
AND CASH EQUIVALENTS AT END OF YEAR
|
$
|
19,455
|
$
|
21,759
|
$
|
17,124
|
||||
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
||||||||||
|
Cash
paid during the year for:
|
||||||||||
|
Interest
|
$
|
9,768
|
$
|
7,928
|
$
|
5,726
|
||||
|
Income
taxes
|
$
|
99,380
|
$
|
94,112
|
$
|
72,022
|
||||
|
Non-cash
investing and financing activities:
|
||||||||||
|
Asset
acquisitions from capitalization of leases
|
$
|
—
|
$
|
7,864
|
$
|
29,258
|
||||
|
Long-term
debt obligations from capitalization of leases
|
$
|
—
|
$
|
7,864
|
$
|
29,258
|
||||
|
Adjustment
to initially apply SFAS 158, net of tax
|
$
|
20,332
|
$
|
—
|
$
|
—
|
||||
(1)
Restated to reflect the impact of adopting SFAS 123(R). See Notes 2(A) and
10(C)
for additional information.
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
AT FEBRUARY 29, 2004, previously reported
|
103,778
|
$
|
51,889
|
$
|
482,132
|
$
|
146,732
|
$
|
680,753
|
||||||||||
|
Restatement
for adoption of SFAS 123(R) (1)
|
—
|
—
|
15,918
|
(8,717
|
)
|
7,201
|
|||||||||||||
|
Common
stock issued in March 2007 2-for-1 stock split
(1)
|
103,778
|
51,889
|
(51,889
|
)
|
—
|
—
|
|||||||||||||
|
BALANCE
AT FEBRUARY 29, 2004, Restated (1)
|
207,556
|
103,778
|
446,161
|
138,015
|
687,954
|
||||||||||||||
|
Net
earnings
|
—
|
—
|
—
|
101,315
|
101,315
|
||||||||||||||
|
Share-based
compensation expense for stock options and restricted
stock
|
—
|
—
|
18,063
|
—
|
18,063
|
||||||||||||||
|
Exercise
of common stock options
|
1,044
|
524
|
3,693
|
—
|
4,217
|
||||||||||||||
|
Shares
issued under stock incentive plans
|
8
|
4
|
102
|
—
|
106
|
||||||||||||||
|
Shares
cancelled upon reacquisition
|
(2
|
)
|
(2
|
)
|
(15
|
)
|
—
|
(17
|
)
|
||||||||||
|
Tax
benefit from the exercise of stock options
|
—
|
—
|
2,606
|
—
|
2,606
|
||||||||||||||
|
BALANCE
AT FEBRUARY 28, 2005, Restated (1)
|
208,606
|
104,304
|
470,610
|
239,330
|
814,244
|
||||||||||||||
|
Net
earnings
|
—
|
—
|
—
|
134,220
|
134,220
|
||||||||||||||
|
Share-based
compensation expense for stock options and restricted
stock
|
—
|
—
|
21,632
|
—
|
21,632
|
||||||||||||||
|
Exercise
of common stock options
|
1,302
|
650
|
5,295
|
—
|
5,945
|
||||||||||||||
|
Shares
issued under stock incentive plans
|
6
|
2
|
101
|
—
|
103
|
||||||||||||||
|
Shares
cancelled upon reacquisition
|
(4
|
)
|
(2
|
)
|
(11
|
)
|
—
|
(13
|
)
|
||||||||||
|
Tax
benefit from the exercise of common stock options
|
—
|
—
|
3,972
|
—
|
3,972
|
||||||||||||||
|
BALANCE
AT FEBRUARY 28, 2006, Restated (1)
|
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
AT FEBRUARY 28, 2007
|
216,028
|
$
|
108,014
|
$
|
587,546
|
$
|
572,147
|
$
|
(20,332
|
)
|
$
|
1,247,375
|
|||||||
| (1) |
Restated
to reflect the impact of adopting SFAS 123(R) and adjusted for
the March
2007 stock split, as applicable. See Notes 2(A) and 10(C) for additional
information.
|
See
accompanying notes to consolidated financial statements.
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
quality used vehicles at low, “no-haggle” prices using a customer-friendly sales
process in an attractive, modern sales facility. We also sell new vehicles
under
various franchise agreements. We provide our customers with a full range of
related services, including the financing of vehicle purchases through our
own
finance operation, CarMax Auto Finance (“CAF”), and third-party lenders; the
sale of extended service plans; the appraisal and purchase of vehicles directly
from consumers; and vehicle repair service. Vehicles purchased through the
appraisal process that do not meet our retail standards are sold at 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.
We
adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised
2004), “Share-Based Payment” (“SFAS 123(R)”), effective March 1, 2006, applying
the modified retrospective method. As a result, we have restated prior period
amounts to reflect the adoption of this standard. The impact of the adoption
of
SFAS 123(R) on net income for fiscal 2006 and fiscal 2005 is consistent with
the
pro forma amounts disclosed in our previous annual reports to shareholders.
See
Note 10(C) for further discussion.
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 have been
adjusted to reflect this stock split.
(B)
Cash and Cash Equivalents
Cash
equivalents of $1.5 million at February 28, 2007, and $6.0 million at February
28, 2006, consisted of highly liquid investments with original maturities of
three months or less.
(C)
Securitizations
The
transfers of receivables associated with our automobile loan securitization
program are accounted for as sales. We retain an interest in the automobile
loan
receivables that we securitize. The retained interest presented on our
consolidated balance sheets includes the present value of the expected residual
cash flows generated by the securitized receivables, various reserve accounts,
and an undivided ownership interest in the securitized receivables. 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 automobile loan receivables, accounts payable, short-term debt, and
long-term debt approximates fair value. Our retained interest in securitized
receivables and derivative financial instruments are recorded on the
consolidated balance sheets at fair value.
(E)
Trade Accounts Receivable
Trade
accounts receivable, net of an allowance for doubtful accounts, include certain
amounts due from finance companies and customers, as well as from manufacturers
for incentives and from third parties for warranty reimbursements, and for
other
miscellaneous receivables. The estimate for doubtful accounts is based on
historical experience and trends.
(F)
Inventory
Inventory
is comprised primarily of vehicles held for sale or 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 category when the store opens.
Estimated
Useful Lives
|
Life
|
|
|
Buildings
|
25
- 40 years
|
|
Capital
leases
|
10
- 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.
(H)
Other Assets
Computer
Software Costs
We
capitalize external direct costs of materials and services used in the
development of internal-use software and payroll and payroll-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
Cash Deposits
At
February 28, 2007, and February 28, 2006, other assets included restricted
cash
deposits of $21.7 million and $17.7 million, respectively, associated with
certain insurance programs.
(I)
Defined Benefit Plan Obligations
Defined
benefit retirement plan obligations are included in accrued expenses and other
current liabilities and deferred revenue and other liabilities on our
consolidated balance sheets. The current portion represents benefits expected
to
be paid over the next 12 months from our benefit restoration plan. We previously
reported defined benefit retirement plan obligations entirely in accrued
expenses and other current liabilities. The defined benefit retirement plan
obligations are determined by independent actuaries using a number of
assumptions provided by the company. Key
assumptions used in measuring the plan obligations include the discount rate,
the estimated long-term return on plan assets, the estimated rate of
compensation increases, and the mortality rate.
On
February 28, 2007, we adopted SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
No. 87, 88, 106 and 132(R),” (“SFAS 158”). See Note 8(A) for additional
discussion.
(J)
Insurance Liabilities
Insurance
liabilities are included in accrued expenses and other current liabilities
on
our consolidated balance sheets. 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)
Store Opening Expenses
Costs
related to store openings, including preopening costs, are expensed as incurred.
(L)
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.
(M)
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 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 the third parties
are the primary obligors 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.
(N)
Advertising Expenses
Advertising
costs are expensed as incurred. Advertising expenses are included in selling,
general, and administrative expenses in our consolidated statements of earnings.
(O)
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.
(P)
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
as either assets or liabilities on the consolidated balance sheets at fair
value
with changes in fair value included in earnings as a component of CAF income.
(Q)
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 reduces the risk
that near term changes in our customer base, sources of supply, or competition
will have a severe impact on our business. However, management cannot assure
that unanticipated events will not have a negative impact on the company.
(R)
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current year’s
presentation. The consolidated balance sheets and consolidated statements of
cash flows reflect the reclassification of retirement plan liabilities of
$18,445 at February 28, 2006, and $11,545 at February 28, 2005, from accrued
expenses and other current liabilities to deferred revenue and other
liabilities.
| 3. |
CARMAX
AUTO FINANCE INCOME
|
|
Years
Ended February 28
|
||||||||||
|
(In
millions)
|
2007
|
2006
|
2005
|
|||||||
|
Total
gain income
|
$
|
99.7
|
$
|
77.1
|
$
|
58.3
|
||||
|
Other
CAF income:
|
||||||||||
|
Servicing fee income
|
32.4
|
27.6
|
24.7
|
|||||||
|
Interest income
|
26.6
|
21.4
|
19.0
|
|||||||
|
Total
other CAF income
|
59.0
|
49.0
|
43.7
|
|||||||
|
|
||||||||||
|
Direct
CAF expenses:
|
||||||||||
|
CAF payroll and fringe benefit expense
|
12.0
|
10.3
|
9.0
|
|||||||
|
Other direct CAF expenses
|
14.0
|
11.5
|
10.3
|
|||||||
|
Total
direct CAF expenses
|
26.0
|
21.8
|
19.3
|
|||||||
|
CarMax
Auto Finance income
|
$
|
132.6
|
$
|
104.3
|
$
|
82.7
|
||||
Our
finance operation, CAF, provides financing for qualified customers at
competitive market rates of interest. Throughout each month, we sell
substantially all of the loans originated by CAF in securitization transactions
as discussed in Note 4. The majority of CAF income is generated by the spread
between the interest rates charged to customers and the related cost of funds.
A
gain, recorded at the time of securitization, results from recording a
receivable approximately equal to the present value of the expected residual
cash flows generated by the securitized receivables. The cash flows are
calculated taking into account expected prepayments and losses.
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.
| 4. |
SECURITIZATIONS
|
We
use a
securitization program to fund substantially all of the automobile loan
receivables originated by CAF. We sell the automobile loan receivables to a
wholly owned, bankruptcy-remote, special purpose entity that transfers an
undivided interest in the receivables to a group of third-party investors.
The
special purpose entity and investors have no recourse to our assets. Our risk
is
limited to the retained interest on our consolidated balance sheets. The
investors issue commercial paper supported by the transferred receivables,
and
the proceeds from the sale of the commercial paper are used to pay for the
securitized receivables. This program is referred to as the warehouse
facility.
We
routinely use public securitizations to refinance the receivables previously
securitized through the warehouse facility. In a public securitization, a pool
of automobile loan receivables is sold to a bankruptcy-remote, special purpose
entity that in turn transfers the receivables to a special purpose
securitization trust. The securitization trust issues asset-backed securities,
secured or otherwise supported by the transferred receivables, and the proceeds
from the sale of the securities are used to pay for the securitized receivables.
Depending on the securitization structure and market conditions, refinancing
receivables in a public securitization may or may not have a significant impact
on our results. The impact of refinancing activity will depend upon the
particular securitization structures and market conditions at the refinancing
date.
All
transfers of receivables are accounted for as sales. When the receivables are
securitized, we recognize a gain or loss on the sale of the receivables as
described in Note 3.
|
Years
Ended February 28
|
||||||||||
|
(In
millions)
|
2007
|
2006
|
2005
|
|||||||
|
Net
loans originated
|
$
|
2,242.3
|
$
|
1,774.6
|
$
|
1,490.3
|
||||
|
Total
loans sold
|
$
|
2,322.7
|
$
|
1,887.5
|
$
|
1,534.8
|
||||
|
Total
gain income(1)
|
$
|
99.7
|
$
|
77.1
|
$
|
58.3
|
||||
|
Total
gain income as a percentage of total loans sold (1)
|
4.3
|
%
|
4.1
|
%
|
3.8
|
%
|
||||
| (1) |
Includes
the effects of valuation adjustments, new public securitizations,
and the
repurchase and resale of receivables in existing public securitizations,
as applicable.
|
Retained
Interest
We
retain
an interest in the automobile loan receivables that we securitize. The retained
interest, presented as a current asset on our consolidated balance sheets,
serves as a credit enhancement for the benefit of the investors in the
securitized receivables. The retained interest includes the present value of
the
expected residual cash flows generated by the securitized receivables, or
“interest-only strip receivables,” various reserve accounts, and an undivided
ownership interest in the securitized receivables, or “required excess
receivables,” as described below. On a combined basis, the reserve accounts and
required excess receivables are generally 2% to 4% of managed receivables.
The
special purpose entities and the investors have no recourse to our
assets.
The
fair
value of the retained interest was $202.3 million as of February 28, 2007,
and
$158.3 million as of February 28, 2006. The retained interest had a weighted
average life of 1.5 years as of February 28, 2007, and February 28, 2006.
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, and discount rates appropriate for the type of asset and
risk.
The value of interest-only strip receivables may be affected by external
factors, such as changes in the behavior patterns of customers, changes in
the
strength of the economy, and developments in the interest rate markets;
therefore, actual performance may differ from these assumptions. We evaluate
the
performance of the receivables relative to these assumptions on a regular basis.
Any financial impact resulting from a change in performance is recognized in
earnings in the period in which it occurs.
Reserve
accounts.
We are
required to fund various reserve accounts established for the benefit of the
securitization investors. In the event that the cash generated by the
securitized receivables in a given period was insufficient to pay the interest,
principal, and other required payments, the balances on deposit in the reserve
accounts would be used to pay those amounts. In general, each of our
securitizations requires that an amount equal to a specified percentage of
the
original balance of the securitized receivables be deposited in a reserve
account on the closing date and that any excess cash generated by the
receivables be used to fund the reserve account to the extent necessary to
maintain the required amount. If the amount on deposit in the reserve account
exceeds the required amount, the excess is released through the special purpose
entity to the company. In the public securitizations, the amount required to
be
on deposit in the reserve account must equal or exceed a specified floor amount.
The reserve account remains funded until the investors are paid in full, at
which time the remaining balance is released through the special purpose entity
to the company. The amount on deposit in reserve accounts was $31.5 million
as
of February 28, 2007, and $29.0 million as of February 28, 2006.
Required
excess receivables.
The
total value of the securitized receivables must exceed, by a specified
amount, the principal amount owed to the investors. The required excess
receivables balance represents this specified amount. Any cash flows generated
by the required excess receivables are used, if needed, to make payments to
the
investors. Any remaining cash flows from the required excess receivables are
released through the special purpose entity to the company. The unpaid principal
balance related to the required excess receivables was $57.0 million as of
February 28, 2007, and $52.2 million as of February 28, 2006.
Key
Assumptions Used in Measuring the Retained Interest and Sensitivity
Analysis.
The
following table shows the key economic assumptions used in measuring the fair
value of the retained interest at February 28, 2007, and a sensitivity analysis
showing the hypothetical effect on the retained interest if there were
unfavorable variations from the assumptions used. These sensitivity analyses
are
hypothetical and should be used with caution. In this table, the effect of
a
variation in a particular assumption on the fair value of the retained interest
is calculated without changing any other assumption; in actual circumstances,
changes in one factor may result in changes in another, which might magnify
or
counteract the sensitivities.
Key
Assumptions
|
(In
millions)
|
Assumptions
Used
|
Impact
on Fair Value of 10% Adverse Change
|
Impact
on Fair Value of 20% Adverse Change
|
|||||||
|
Prepayment
rate
|
1.40%-1.52
|
%
|
$
|
7.7
|
$
|
14.8
|
||||
|
Cumulative
loss rate
|
1.25%-2.45
|
%
|
$
|
5.9
|
$
|
11.7
|
||||
|
Annual
discount rate
|
12.0
|
%
|
$
|
3.0
|
$
|
5.9
|
||||
Prepayment
rate.
We use
the Absolute Prepayment Model or “ABS” to estimate prepayments. This model
assumes a rate of prepayment each month relative to the original number of
receivables in a pool of receivables. ABS further assumes that all the
receivables are the same size and amortize at the same rate and that each
receivable in each month of its life will either be paid as scheduled or prepaid
in full. For example, in a pool of receivables originally containing 10,000
receivables, a 1% ABS rate means that 100 receivables prepay each
month.
Cumulative
loss rate.
The
cumulative loss rate, or “static pool” net losses, is calculated by dividing the
total projected credit losses of a pool of receivables by the original pool
balance. Projected credit losses are estimated using the losses experienced
to
date, the credit quality of the receivables, economic factors, and the
performance history of similar receivables.
Continuing
Involvement with Securitized Receivables.
We
continue to manage the automobile loan receivables that we securitize. We
receive servicing fees of approximately 1% of the outstanding principal balance
of the securitized receivables. We believe that the servicing fees specified
in
the securitization agreements adequately compensate us for servicing the
securitized receivables. No servicing asset or liability has been recorded.
We
are at risk for the retained interest in the securitized receivables and, if
the
securitized receivables do not perform as originally projected, the value of
the
retained interest would be impacted.
Past
Due Account Information
|
As
of February 28
|
||||||||||
|
(In
millions)
|
2007
|
2006
|
2005
|
|||||||
|
Accounts
31+ days past due
|
$
|
56.9
|
$
|
37.4
|
$
|
31.1
|
||||
|
Ending
managed receivables
|
$
|
3,311.0
|
$
|
2,772.5
|
$
|
2,494.9
|
||||
|
Past
due accounts as a percentage of ending managed receivables
|
1.72
|
%
|
1.35
|
%
|
1.24
|
%
|
||||
Credit
Loss Information
|
Years
Ended February 28
|
||||||||||
|
(In
millions)
|
2007
|
2006
|
2005
|
|||||||
|
Net
credit losses on managed receivables
|
$
|
20.7
|
$
|
18.4
|
$
|
19.5
|
||||
|
Average
managed receivables
|
$
|
3,071.1
|
$
|
2,657.7
|
$
|
2,383.6
|
||||
|
Net
credit losses as a percentage of average managed
receivables
|
0.67
|
%
|
0.69
|
%
|
0.82
|
%
|
||||
|
Recovery
rate
|
51
|
%
|
51
|
%
|
46
|
%
|
||||
Selected
Cash Flows from Securitized Receivables
|
Years
Ended February 28
|
||||||||||
|
(In
millions)
|
2007
|
2006
|
2005
|
|||||||
|
Proceeds
from new securitizations
|
$
|
1,867.5
|
$
|
1,513.5
|
$
|
1,260.0
|
||||
|
Proceeds
from collections reinvested in revolving period
securitizations
|
$
|
1,011.8
|
$
|
757.5
|
$
|
590.8
|
||||
|
Servicing
fees received
|
$
|
32.0
|
$
|
27.3
|
$
|
24.5
|
||||
|
Other
cash flows received from the retained interest:
|
||||||||||
|
Interest-only
strip receivables
|
$
|
88.4
|
$
|
82.1
|
$
|
79.8
|
||||
|
Reserve
account releases
|
$
|
15.2
|
$
|
19.7
|
$
|
14.1
|
||||
Proceeds
from new securitizations.
Proceeds from new securitizations include proceeds from receivables that are
newly securitized in or refinanced through the warehouse facility during the
indicated period. Balances previously outstanding in public securitizations
that
were refinanced through the warehouse facility totaled $82.5 million in
fiscal
2007, $94.8 million in fiscal 2006, and $51.0 million in fiscal 2005.
Proceeds received when we refinance receivables in public securitizations are
excluded from this table as they are not considered new securitizations.
Proceeds
from collections.
Proceeds from collections reinvested in revolving period securitizations
represent principal amounts collected on receivables securitized through the
warehouse facility that are used to fund new originations.
Servicing
fees.
Servicing fees received represent cash fees paid to CarMax to service the
securitized receivables.
Other
cash flows received from the retained interest.
Other
cash flows received from the retained interest 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.
Certain
of the securitization agreements include various financial covenants and
performance triggers. These agreements require us to meet financial covenants
related to maintaining minimum tangible net worth, maximum total liabilities
to
tangible net worth ratio, minimum current ratio, and minimum fixed
charge coverage ratio. Performance triggers require certain pools of securitized
receivables to achieve specified thresholds related to portfolio yields, loss
rates, and delinquency rates. If these financial covenants and/or thresholds
are
not met, in addition to other consequences, we may be unable to continue to
securitize receivables through the warehouse facility. At February 28, 2007,
we
were in compliance with the financial covenants, and the securitized receivables
were in compliance with the performance triggers.
| 5. |
FINANCIAL
DERIVATIVES
|
We
enter
into amortizing fixed-pay interest rate swaps relating to our automobile loan
receivable securitizations. Swaps are used to better match funding costs to
the
fixed-rate receivables being securitized by converting variable-rate financing
costs in the warehouse facility to fixed-rate obligations. We entered into
two
17-month and forty 40-month amortizing interest rate swaps with initial notional
amounts totaling approximately $2.05 billion in fiscal 2007, and two 17-month
and twenty-five 40-month amortizing interest rate swaps with initial notional
amounts totaling approximately $1.57 billion in fiscal 2006. The amortized
notional amount of all outstanding swaps related to the automobile loan
receivable securitizations was approximately $597.5 million at February 28,
2007, and $584.0 million at February 28, 2006. The fair value of swaps included
in accounts payable totaled a net liability of $1.0 million at February 28,
2007, and the fair value of swaps included in prepaid expenses and other current
assets totaled a net asset of $1.6 million at February 28, 2006.
The
market and credit risks associated with interest rate swaps are similar to
those
relating to other types of financial instruments. Market risk is the exposure
created by potential fluctuations in interest rates. We do not anticipate
significant market risk from swaps as they are used on a monthly basis to match
funding costs to the use of the funding. Credit risk is the exposure to
nonperformance of another party to an agreement. We mitigate credit risk by
dealing with highly rated bank counterparties.
| 6. |
PROPERTY
AND EQUIPMENT
|
|
As
of February 28
|
|||||||
|
(In
thousands)
|
2007
|
2006
|
|||||
|
Land
|
$
|
138,211
|
$
|
85,814
|
|||
|
Land
held for sale
|
918
|
1,515
|
|||||
|
Land
held for development
|
14,461
|
6,084
|
|||||
|
Buildings
|
265,159
|
146,738
|
|||||
|
Capital
leases
|
37,122
|
37,122
|
|||||
|
Leasehold
improvements
|
53,696
|
47,513
|
|||||
|
Furniture,
fixtures, and equipment
|
174,884
|
154,378
|
|||||
|
Construction
in progress
|
104,771
|
124,381
|
|||||
|
Total
property and equipment
|
789,222
|
603,545
|
|||||
|
Less
accumulated depreciation and amortization
|
137,372
|
104,247
|
|||||
|
Property
and equipment, net
|
$
|
651,850
|
$
|
499,298
|
|||
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 $6.0 million as of February 28, 2007, and $3.6
million as of February 28, 2006.
| 7. |
INCOME
TAXES
|
Provision
for Income Taxes
|
Years
Ended February 28
|
||||||||||
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||
|
Current:
|
||||||||||
|
Federal
|
$
|
116,125
|
$
|
92,488
|
$
|
62,662
|
||||
|
State
|
18,031
|
11,431
|
10,117
|
|||||||
|
Total
|
134,156
|
103,919
|
72,779
|
|||||||
|
Deferred:
|
||||||||||
|
Federal
|
(9,024
|
)
|
(18,764
|
)
|
(7,463
|
)
|
||||
|
State
|
(380
|
)
|
(1,774
|
)
|
(810
|
)
|
||||
|
Total
|
(9,404
|
)
|
(20,538
|
)
|
(8,273
|
)
|
||||
|
Provision
for income taxes
|
$
|
124,752
|
$
|
83,381
|
$
|
64,506
|
||||
Effective
Income Tax Rate Reconciliation
|
Years
Ended February 28
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Federal
statutory income tax rate
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
||||
|
State
and local income taxes, net of federal benefit
|
3.5
|
3.0
|
3.6
|
|||||||
|
Nondeductible
items
|
0.1
|
0.3
|
0.3
|
|||||||
|
Effective
income tax rate
|
38.6
|
%
|
38.3
|
%
|
38.9
|
%
|
||||
Temporary
Differences Resulting in Deferred Tax Assets and
Liabilities
|
As
of February 28
|
|||||||
|
(In
thousands)
|
2007
|
2006
|
|||||
|
Deferred
tax assets:
|
|||||||
|
Accrued
expenses
|
$
|
20,954
|
$
|
16,887
|
|||
|
Partnership
basis
|
6,138
|
6,229
|
|||||
|
Inventory
|
2,036
|
—
|
|||||
|
Stock
compensation
|
24,282
|
20,365
|
|||||
|
Total
gross deferred tax assets
|
53,410
|
43,481
|
|||||
|
Deferred
tax liabilities:
|
|||||||
|
Securitized
receivables
|
18,540
|
19,699
|
|||||
|
Prepaid
expenses
|
7,295
|
10,757
|
|||||
|
Inventory
|
—
|
7,476
|
|||||
|
Depreciation
and amortization
|
504
|
4,508
|
|||||
|
Other
|
29
|
27
|
|||||
|
Total
gross deferred tax liabilities
|
26,368
|
42,467
|
|||||
|
Net
deferred tax asset
|
$
|
27,042
|
$
|
1,014
|
|||
Based
on
our historical and current pretax earnings, management believes the amount
of
gross deferred tax assets will more likely than not be realized through future
taxable income and future reversals of existing temporary differences;
therefore, no valuation allowance is necessary.
| 8. |
BENEFIT
PLANS
|
(A)
Retirement 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.
We
adopted SFAS 158 as of February 28, 2007. SFAS 158 was required to be adopted
on
a prospective basis, and prior year financial statements and related disclosures
were not permitted to be restated. SFAS 158 requires us to:
| · |
Recognize
the funded status of postretirement benefit plans - measured as the
difference between the fair value of plan assets and the projected
benefit
obligation - on our balance sheet.
|
| · |
Recognize
changes in the funded status in accumulated other comprehensive loss
(a
component of shareholders’ equity) in the year in which the change occurs.
|
| · |
Measure
postretirement benefit plan assets and obligations as of the date
of our
fiscal year end. We had already been using our fiscal year end as
our
measurement date.
|
The
amounts initially recorded in accumulated other comprehensive loss will be
subsequently recognized as net pension expense in our consolidated statement
of
earnings. In addition, actuarial gains and losses that arise in subsequent
periods and are not recognized as net pension expense in the same periods will
be recognized as a component of accumulated other comprehensive loss. Those
amounts will be subsequently recognized as a component of net pension expense
on
the same basis as the amounts recognized in accumulated other comprehensive
loss
upon adoption of SFAS 158.
The
following table summarizes the incremental effects of the adoption of SFAS
158
on our consolidated balance sheet at February 28, 2007. SFAS 158 did not change
the existing criteria for measurement of periodic benefit costs, plan assets,
or
benefit obligations, and the adoption of this statement had no effect on our
consolidated statement of earnings for any period.
Effect
of SFAS 158 Adoption
|
At
February 28, 2007
|
||||||||||
|
Prior
to
|
Effect
of
|
As
|
||||||||
|
(In
thousands)
|
SFAS
158
|
SFAS
158
|
Reported
|
|||||||
|
Deferred
income tax asset (partnership basis)
|
$
|
—
|
$
|
11,858
|
$
|
11,858
|
||||
|
Accrued
expenses and other current liabilities
|
$
|
173
|
$
|
89
|
$
|
262
|
||||
|
Deferred
revenue and other liabilities
|
$
|
23,593
|
$
|
32,101
|
$
|
55,694
|
||||
|
Accumulated
other comprehensive loss
|
$
|
—
|
$
|
20,332
|
$
|
20,332
|
||||
Benefit
Plan Information
|
Years
Ended February 28
|
|||||||||||||||||||
|
Pension
Plan
|
Restoration
Plan
|
Total
|
|||||||||||||||||
|
(In
thousands)
|
2007
|
2006
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Change
in projected benefit obligation:
|
|||||||||||||||||||
|
Obligation
at beginning of year
|
$
|
71,352
|
$
|
48,674
|
$
|
6,864
|
$
|
4,508
|
$
|
78,216
|
$
|
53,182
|
|||||||
|
Service
cost
|
12,048
|
8,780
|
411
|
480
|
12,459
|
9,260
|
|||||||||||||
|
Interest
cost
|
4,096
|
2,794
|
393
|
259
|
4,489
|
3,053
|
|||||||||||||
|
Actuarial
loss (gain)
|
7,624
|
11,317
|
(459
|
)
|
1,617
|
7,165
|
12,934
|
||||||||||||
|
Benefits
paid
|
(467
|
)
|
(213
|
)
|
(14
|
)
|
—
|
(481
|
)
|
(213
|
)
|
||||||||
|
Obligation
at end of year
|
94,653
|
71,352
|
7,195
|
6,864
|
101,848
|
78,216
|
|||||||||||||
|
Change
in fair value of plan assets:
|
|||||||||||||||||||
|
Plan
assets at beginning of year
|
31,960
|
25,316
|
—
|
—
|
31,960
|
25,316
|
|||||||||||||
|
Actual
return on plan assets
|
3,670
|
2,357
|
—
|
—
|
3,670
|
2,357
|
|||||||||||||
|
Employer
contributions
|
10,729
|
4,500
|
14
|
—
|
10,743
|
4,500
|
|||||||||||||
|
Benefits
paid
|
(467
|
)
|
(213
|
)
|
(14
|
)
|
—
|
(481
|
)
|
(213
|
)
|
||||||||
|
Plan
assets at end of year
|
45,892
|
31,960
|
—
|
—
|
45,892
|
31,960
|
|||||||||||||
|
Funded
status:
|
|||||||||||||||||||
|
Benefit
obligation in excess of plan assets
|
(48,761
|
)
|
(39,392
|
)
|
(7,195
|
)
|
(6,864
|
)
|
(55,956
|
)
|
(46,256
|
)
|
|||||||
|
Unrecognized
actuarial loss
|
—
|
23,947
|
—
|
3,427
|
—
|
27,374
|
|||||||||||||
|
Unrecognized
prior service cost
|
—
|
220
|
—
|
217
|
—
|
437
|
|||||||||||||
|
Net
amount recognized
|
$
|
(48,761
|
)
|
$
|
(15,225
|
)
|
$
|
(7,195
|
)
|
$
|
(3,220
|
)
|
$
|
(55,956
|
)
|
$
|
(18,445
|
)
|
|
|
Amounts
recognized in the consolidated balance sheets:
|
|||||||||||||||||||
|
Deferred
income tax asset
|
$
|
10,785
|
$
|
—
|
$
|
1,073
|
$
|
—
|
$
|
11,858
|
$
|
—
|
|||||||
|
Current
liability (funded status)
|
—
|
—
|
(262
|
)
|
—
|
(262
|
)
|
—
|
|||||||||||
|
Noncurrent
liability (funded status)
|
(48,761
|
)
|
(15,225
|
)
|
(6,933
|
)
|
(3,220
|
)
|
(55,694
|
)
|
(18,445
|
)
|
|||||||
|
Shareholders’
equity (accumulated
other
comprehensive loss):
|
|||||||||||||||||||
|
Unrecognized
actuarial losses
|
29,095
|
—
|
2,719
|
—
|
31,814
|
—
|
|||||||||||||
|
Unrecognized
prior service cost
|
183
|
—
|
193
|
—
|
376
|
—
|
|||||||||||||
|
Related
deferred tax benefit
|
(10,785
|
)
|
—
|
(1,073
|
)
|
—
|
(11,858
|
)
|
—
|
||||||||||
|
Net
shareholders’ equity
|
18,493
|
—
|
1,839
|
—
|
20,332
|
—
|
|||||||||||||
|
Net
amount recognized
|
$
|
(19,483
|
)
|
$
|
(15,225
|
)
|
$
|
(4,283
|
)
|
$
|
(3,220
|
)
|
$
|
(23,766
|
)
|
$
|
(18,445
|
)
|
|
|
Accumulated
benefit obligation
|
$
|
60,560
|
$
|
45,151
|
$
|
4,832
|
$
|
3,805
|
$
|
65,392
|
$
|
48,956
|
|||||||
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.
Assumptions
Used To Determine Benefit Obligations
|
As
of February 28
|
|||||||||||||
|
Pension
Plan
|
Restoration
Plan
|
||||||||||||
|
2007
|
2006
|
2007
|
2006
|
||||||||||
|
Discount
rate
|
5.75
|
%
|
5.75
|
%
|
5.75
|
%
|
5.75
|
%
|
|||||
|
Rate
of compensation increase
|
5.00
|
%
|
5.00
|
%
|
7.00
|
%
|
7.00
|
%
|
|||||
Plan
Assets.
The
fair value of plan assets are measured using current market values. No plan
assets are expected to be returned to us during the fiscal year-ended February
29, 2008.
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 $10 million to the pension plan in fiscal 2008. 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
2008
|
$
|
326
|
$
|
262
|
|||
|
Fiscal
2009
|
$
|
484
|
$
|
299
|
|||
|
Fiscal
2010
|
$
|
703
|
$
|
322
|
|||
|
Fiscal
2011
|
$
|
999
|
$
|
334
|
|||
|
Fiscal
2012
|
$
|
1,314
|
$
|
350
|
|||
|
Fiscal
2013 to 2017
|
$
|
14,359
|
$
|
2,011
|
|||
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
|
|||||||||||||
|
2007
|
2006
|
||||||||||||
|
Target
|
Actual
|
Target
|
Actual
|
||||||||||
|
Allocation
|
Allocation
|
Allocation
|
Allocation
|
||||||||||
|
Equity
securities
|
75
|
%
|
78
|
%
|
75
|
%
|
78
|
%
|
|||||
|
Fixed
income securities
|
25
|
22
|
25
|
22
|
|||||||||
|
Total
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
|||||
Components
of Net Pension Expense
|
Years
Ended February 28
|
||||||||||||||||||||||||||||
|
Pension
Plan
|
Restoration
Plan
|
Total
|
||||||||||||||||||||||||||
|
(In
thousands)
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
|||||||||||||||||||
|
Service
cost
|
$
|
12,048
|
$
|
8,780
|
$
|
6,557
|
$
|
411
|
$
|
480
|
$
|
343
|
$
|
12,459
|
$
|
9,260
|
$
|
6,900
|
||||||||||
|
Interest
cost
|
4,096
|
2,794
|
2,152
|
393
|
259
|
232
|
4,489
|
3,053
|
2,384
|
|||||||||||||||||||
|
Expected
return on plan assets
|
(2,949
|
)
|
(2,071
|
)
|
(1,523
|
)
|
—
|
—
|
—
|
(2,949
|
)
|
(2,071
|
)
|
(1,523
|
)
|
|||||||||||||
|
Amortization
of prior service cost
|
37
|
37
|
37
|
24
|
24
|
24
|
61
|
61
|
61
|
|||||||||||||||||||
|
Recognized
actuarial loss
|
1,754
|
961
|
736
|
249
|
136
|
149
|
2,003
|
1,097
|
885
|
|||||||||||||||||||
|
Net
pension expense
|
$
|
14,986
|
$
|
10,501
|
$
|
7,959
|
$
|
1,077
|
$
|
899
|
$
|
748
|
$
|
16,063
|
$
|
11,400
|
$
|
8,707
|
||||||||||
The
estimated actuarial loss and prior service cost for the pension plan that will
be amortized from accumulated other comprehensive loss over the next fiscal
year
are $2.1 million and $37,000, respectively. The estimated actuarial loss and
prior service cost for the restoration plan that will be amortized from
accumulated other comprehensive loss over the next fiscal year are $182,000
and
$24,000, respectively.
Assumptions
Used to Determine Net Pension Expense
|
Years
Ended February 28
|
|||||||||||||||||||
|
Pension
Plan
|
Restoration
Plan
|
||||||||||||||||||
|
2007
|
2006
|
2005
|
2007
|
2006
|
2005
|
||||||||||||||
|
Discount
rate
|
5.75
|
%
|
5.75
|
%
|
6.00
|
%
|
5.75
|
%
|
5.75
|
%
|
6.00
|
%
|
|||||||
|
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
|
%
|
|||||||
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,
expected 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 expected asset allocations, as well as historical and expected returns
on
various categories of plan assets. We apply the expected 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 may 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
such increases. Mortality rate assumptions are based on the life expectancy
of
the population and were updated as of February 28, 2006, to account for recent
increases in life expectancy.
(B)
401(k) Plan
We
sponsor a 401(k) plan for all associates meeting certain eligibility criteria.
Under the plan, eligible associates can contribute up to 40% of their salaries,
and we match a portion of those contributions. The total cost for matching
contributions was $2.7 million in fiscal 2007, $2.0 million in fiscal 2006,
and
$1.5 million in fiscal 2005.
| 9. |
DEBT
|
|
As
of February 28
|
|||||||
|
(In
thousands)
|
2007
|
2006
|
|||||
|
Revolving
credit agreement
|
$
|
150,690
|
$
|
159,263
|
|||
|
Obligations
under capital leases
|
34,787
|
35,749
|
|||||
|
Total
debt
|
185,477
|
195,012
|
|||||
|
Less
current portion:
|
|||||||
|
Revolving
credit agreement
|
150,690
|
59,263
|
|||||
|
Obligations
under capital leases
|
1,043
|
962
|
|||||
|
Total
long-term debt, excluding current portion
|
$
|
33,744
|
$
|
134,787
|
|||
CarMax
has a $500 million, five year revolving credit facility (the “credit agreement”)
with Bank of America, N.A. and various other financial institutions. The credit
agreement is secured by vehicle inventory and contains customary representations
and warranties, conditions, and covenants. 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, 2007, $150.7 million was outstanding under the credit agreement,
with the remainder fully available to us. The outstanding balance included
$3.3
million of loans classified as short-term debt, and $147.4 million classified
as
current portion of long-term debt. We classified the outstanding balance at
February 28, 2007 as current portion of long-term debt based on our expectation
that this balance will not remain outstanding for more than one
year.
We
have
recorded six 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 10 to 20 years
with
payments made monthly. The present value of future minimum lease payments
totaled $34.8 million at February 28, 2007, and $35.7 million at February 28,
2006.
The
weighted average interest rate on outstanding short-term debt was 6.4% during
fiscal 2007, 5.5% during fiscal 2006, and 4.3% during fiscal 2005.
We
capitalize interest in connection with the construction of certain facilities.
Capitalized interest totaled $4.5 million in fiscal 2007, $6.0 million in fiscal
2006, and $3.5 million in fiscal 2005.
| 10. |
STOCK
AND STOCK-BASED INCENTIVE
PLANS
|
(A)
Shareholder Right Plan and Undesignated Preferred Stock
In
conjunction with the company’s 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 the 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.
In
fiscal
2006 and prior years, we primarily awarded stock options to employees that
received share-based compensation. Beginning in fiscal 2007, the substantial
majority of employees receiving awards now receive restricted stock instead
of
stock options. Senior management continues to receive awards of 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 awards
vest annually in equal amounts over periods of three to four years. These
options generally expire no later than ten years after the date of the grant.
Restricted stock awards are subject to specified restrictions and a risk of
forfeiture. The restrictions typically lapse three years from the grant
date.
As
of
February 28, 2007, a total of 34,000,000 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 10,117,116 at February 28, 2007.
(C)
Share-Based
Compensation
Effective
March 1, 2006, we adopted the provisions of SFAS 123(R), which established
accounting for share-based awards exchanged for employee services. Under the
provisions of SFAS 123(R), share-based compensation cost is measured at the
grant date, based on the estimated fair value of the award. We recognize the
compensation cost as an expense on a straight-line basis over the requisite
service period of the entire award, which is generally the vesting period of
the
equity grant. Prior to March 1, 2006, we applied Accounting Principles
Board (APB) Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related interpretations for share-based awards, and provided the
pro forma disclosures required by SFAS 123, “Accounting for Stock-Based
Compensation.” We elected to apply the modified retrospective application method
as provided by SFAS 123(R), and, accordingly, financial statement amounts for
the prior periods presented in this report have been restated to report the
fair
value method of expensing share-based compensation on a basis consistent with
the pro forma disclosures required for those periods by SFAS 123.
In
accordance with SFAS 123(R), we are required to base initial compensation cost
on the estimated number of awards expected to vest. Historically, and as
permitted under SFAS 123, we chose to reduce pro forma compensation expense
in
the periods the awards were forfeited. The cumulative effect on prior periods
of
the change to an estimated number of awards expected to vest was a $0.6 million
reduction of selling, general, and administrative expenses recorded in fiscal
2007.
Composition
of Share Based
Compensation Expense
|
|
Years
Ended February 28
|
|||||||||
|
(In
thousands)
|
2007
|
2006
|
2005
|
|||||||
|
Cost
of sales
|
$
|
1,392
|
||||||||
|
CarMax
Auto Finance income
|
917
|
|||||||||
|
Selling,
general, and administrative expenses
|
30,379
|
$
|
22,436
|
$
|
18,810
|
|||||
|
Share-based
compensation expense, before income taxes
|
$
|
32,688
|
$
|
22,436
|
$
|
18,810
|
||||
For
periods prior to fiscal 2007, all share-based compensation expense has been
presented in selling, general, and administrative expenses, because amounts
that
would have been presented in cost of sales and CAF were immaterial. We recognize
compensation expense for stock options and restricted stock on a straight-line
basis over the requisite service period. Consistent with the provisions of
SFAS
123, our employee stock purchase plan is considered a liability-classified
compensatory plan under SFAS 123(R); the associated costs of $0.9 million in
fiscal 2007, $0.8 million in fiscal 2006, and $0.7 million in fiscal 2005 are
included in share-based compensation expense. There were no capitalized
share-based compensation costs at February 28, 2007, 2006, or 2005.
Impact
of SFAS 123(R) on Fiscal 2006 and 2005
Consolidated
Financial Statements
|
Years
Ended February 28
|
|||||||||||||
|
2006
|
2005
|
||||||||||||
|
(In
thousands, except per share data)
|
As
Restated
|
Previously
Reported
|
As
Restated
|
Previously
Reported
|
|||||||||
|
Selling,
general, and administrative expenses
|
$
|
674,370
|
$
|
651,988
|
$
|
565,279
|
$
|
546,577
|
|||||
|
Earnings
before income taxes
|
$
|
217,601
|
$
|
239,983
|
$
|
165,821
|
$
|
184,523
|
|||||
|
Net
earnings
|
$
|
134,220
|
$
|
148,055
|
$
|
101,315
|
$
|
112,928
|
|||||
|
Basic
earnings per share
|
$
|
0.64
|
$
|
0.71
|
$
|
0.49
|
$
|
0.54
|
|||||
|
Diluted
earnings per share
|
$
|
0.63
|
$
|
0.70
|
$
|
0.48
|
$
|
0.53
|
|||||
|
Net
cash provided by operating activities
|
$
|
117,513
|
$
|
122,295
|
$
|
41,846
|
$
|
45,736
|
|||||
|
Net
cash provided by (used in) financing activities
|
$
|
3,215
|
$
|
(1,567
|
)
|
$
|
67,691
|
$
|
63,801
|
||||
|
|
As
of February 28, 2006
|
||||||
|
(In
thousands)
|
As
Restated
|
Previously
Reported
|
|||||
|
Deferred
income taxes
|
$
|
24,576
|
$
|
4,211
|
|||
|
Total
assets
|
$
|
1,509,612
|
$
|
1,489,247
|
|||
|
Capital
in excess of par value
|
$
|
501,599
|
$
|
447,069
|
|||
|
Retained
earnings
|
$
|
373,550
|
$
|
407,715
|
|||
|
Total
shareholders’ equity
|
$
|
980,103
|
$
|
959,738
|
|||
|
Total
liabilities and shareholders’ equity
|
$
|
1,509,612
|
$
|
1,489,247
|
|||
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, 2006
|
17,538
|
$
|
10.28
|
||||||||||
|
Options
granted
|
1,905
|
$
|
17.14
|
||||||||||
|
Options
exercised
|
(5,281
|
)
|
$
|
7.01
|
|||||||||
|
Options
forfeited or expired
|
(387
|
)
|
$
|
13.18
|
|||||||||
|
Outstanding
as of February 28, 2007
|
13,775
|
$
|
12.39
|
6.3
|
$
|
195,134
|
|||||||
|
Exercisable
as of February 28, 2007
|
6,301
|
$
|
10.60
|
5.2
|
$
|
100,545
|
|||||||
We
granted our employees nonqualified options to purchase 1,837,200 shares of
common stock in fiscal 2007 and 5,210,954 shares of common stock in fiscal
2006.
We granted our nonemployee directors nonqualified options to purchase 68,040
shares of common stock in fiscal 2007 and 68,382 shares of common stock in
fiscal 2006.
The
total
cash received from employees as a result of employee stock option exercises
was
$35.4 million in fiscal 2007, $5.9 million in fiscal 2006, and $4.4
million in fiscal 2005. We settle employee stock option exercises with
authorized but unissued shares of CarMax common stock. The total intrinsic
value
of options exercised was $74.7 million for fiscal 2007, $13.0 million
for fiscal 2006, and $10.2 million for fiscal 2005. We realized related tax
benefits of $28.7 million for fiscal 2007, $5.2 million for fiscal 2006,
and $4.0 million for fiscal 2005.
Outstanding
Stock Options
|
As
of February 28, 2007
|
Options
Outstanding
|
Options
Exercisable
|
||||||||||||||
|
(Shares
in thousands)
Range
of Exercise Prices
|
Number
of Shares
|
Weighted
Average Remaining Contractual Life (Years)
|
Weighted
Average
Exercise
Price
|
Number
of Shares
|
Weighted
Average
Exercise
Price
|
|||||||||||
|
$0.81
to $2.44
|
679
|
1.0
|
$
|
2.43
|
679
|
$
|
2.43
|
|||||||||
|
$6.62
to $9.30
|
2,692
|
6.0
|
$
|
7.16
|
1,916
|
$
|
7.16
|
|||||||||
|
$10.00
to $13.42
|
5,231
|
6.8
|
$
|
13.21
|
2,060
|
$
|
13.27
|
|||||||||
|
$14.13
to $15.72
|
3,278
|
7.1
|
$
|
14.71
|
1,639
|
$
|
14.62
|
|||||||||
|
$16.33
to $22.29
|
1,895
|
6.2
|
$
|
17.15
|
7
|
$
|
19.19
|
|||||||||
|
Total
|
13,775
|
6.3
|
$
|
12.39
|
6,301
|
$
|
10.60
|
|||||||||
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. Similar to the Black-Scholes model,
the binomial model takes into account variables such as expected volatility,
dividend yield, and risk-free interest rate. However, in addition, the binomial
model considers the contractual term of the option, the probability that the
option will be exercised prior to the end of its contractual life, and the
probability of termination or retirement of the option holder. For these
reasons, we believe that the fair value provided by the binomial model is more
representative of actual experience and future expected experience than the
value calculated using the Black-Scholes model. For grants to nonemployee
directors, we will continue to use the Black-Scholes model to estimate the
fair
value of stock option awards due to the comparatively small population of
recipients of these awards. Estimates of fair value are not intended to predict
actual future events or the value ultimately realized by the recipients of
share-based awards.
The
weighted average fair values at the date of grant for options granted were
$7.08
per share in fiscal 2007, $6.34 per share in fiscal 2006, and $8.75 per share
in
fiscal 2005. The unrecognized compensation costs related to all nonvested
options totaled $30.6 million at February 28, 2007. These costs are
expected to be recognized over a weighted average period of 1.9
years.
Assumptions
Used to Estimate Option Values
|
|
Years
Ended February 28
|
|||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Dividend
yield
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
||||
|
Expected
volatility factor(1)
|
29.8%-63.4
|
%
|
51.6
|
%
|
73.0
|
%
|
||||
|
Weighted
average expected volatility
|
47.4
|
%
|
51.6
|
%
|
73.0
|
%
|
||||
|
Risk-free
interest rate(2)
|
4.5%-5.1
|
%
|
3.7
|
%
|
2.8
|
%
|
||||
|
Expected
term (in years)(3)
|
4.5-4.6
|
4.8
|
4.6
|
|||||||
|
(1)
|
Measured
using historical daily price changes of our stock for a period
corresponding to the term of the
option.
|
|
(2)
|
Based
on the U.S. Treasury yield curve in effect at the time of
grant.
|
|
(3)
|
Representsthe
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, 2006
|
-
|
$
-
|
||||||||
|
Restricted
stock granted
|
984
|
$17.20
|
||||||||
|
Restricted
stock vested or cancelled
|
(64
|
)
|
$17.20
|
|||||||
|
Outstanding
as of February 28, 2007
|
920
|
$17.20
|
||||||||
We
granted 984,500 shares of restricted stock to our employees in fiscal 2007.
There were no restricted stock grants in fiscal 2006. The fair value of a
restricted stock award is determined and fixed based on the price of our stock
on the grant date.
The
unrecognized compensation costs related to nonvested restricted stock awards
totaled $10.5 million at February 28, 2007. These costs are expected to be
recognized over a weighted average period of 2.1 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. The source of
the
shares available for purchase by associates may, at our option, be open market
purchases or authorized but unissued shares.
At
February 28, 2007, a total of 2,267,143 shares remained available under the
plan. Shares purchased on the open market on behalf of associates were 337,311
during fiscal 2007; 427,318 during fiscal 2006; and 451,922 during fiscal 2005.
The average price per share purchased under the plan was $19.32 in fiscal 2007,
$14.42 in fiscal 2006, and $12.98 in fiscal 2005. The total cost for matching
contributions was $862,300 in fiscal 2007; $803,600 in fiscal 2006; and $746,700
in fiscal 2005. These costs are included in share-based compensation
costs.
| 11. |
NET
EARNINGS PER SHARE
|
Basic
and Dilutive Net Earnings per Share Reconciliations
|
Years
Ended February 28
|
||||||||||
|
(In
thousands except per share data)
|
2007
|
2006
|
2005
|
|||||||
|
Net
earnings available to common shareholders
|
$
|
198,597
|
$
|
134,220
|
$
|
101,315
|
||||
|
Weighted
average common shares outstanding
|
212,454
|
209,270
|
208,072
|
|||||||
|
Dilutive
potential common shares:
|
||||||||||
|
Stock
options
|
4,111
|
3,555
|
3,192
|
|||||||
|
Restricted
stock
|
174
|
21
|
30
|
|||||||
|
Weighted
average common shares and dilutive potential common shares
|
216,739
|
212,846
|
211,294
|
|||||||
|
Basic
net earnings per share
|
$
|
0.93
|
$
|
0.64
|
$
|
0.49
|
||||
|
Diluted
net earnings per share
|
$
|
0.92
|
$
|
0.63
|
$
|
0.48
|
||||
Certain
options were outstanding and not included in the calculation of diluted net
earnings per share because the options exercise prices were greater than the
average market price of the common shares. As of February 28, 2007, options
to
purchase 9,000 shares of common stock with an exercise price of $22.29 per
share
were outstanding and not included in the calculation. As of February 28, 2006,
options to purchase 8,923,968 shares with exercise prices ranging from $13.19
to
$21.72 per share were outstanding and not included in the calculation. As of
February 28, 2005, options to purchase 4,211,612 shares with exercise prices
ranging from $10.75 to $21.72 per share were outstanding and not included in
the
calculation.
| 12. |
LEASE
COMMITMENTS
|
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
$75.4 million in fiscal 2007, $72.6 million in fiscal 2006, and $61.5 million
in
fiscal 2005.
Future
Minimum Lease Obligations
|
As
of February 28, 2007
|
|||||||
|
Capital
|
Operating
Lease
|
||||||
|
(In
thousands)
|
Leases(1)
|
Commitments(1)
|
|||||
|
Fiscal
2008
|
$
|
4,453
|
$
|
71,041
|
|||
|
Fiscal
2009
|
4,462
|
71,784
|
|||||
|
Fiscal
2010
|
4,627
|
72,418
|
|||||
|
Fiscal
2011
|
4,777
|
72,705
|
|||||
|
Fiscal
2012
|
4,777
|
72,821
|
|||||
|
Fiscal
2013 and thereafter
|
43,914
|
602,955
|
|||||
|
Total
minimum lease payments
|
$
|
67,010
|
$
|
963,725
|
|||
|
Less
amounts representing interest
|
(32,223
|
)
|
|||||
|
Present
value of net minimum capital lease payments [Note
9]
|
$
|
34,787
|
|||||
| (1) |
Excludes
taxes, insurance, and other costs payable directly by the
company.
|
We
entered into no sale-leaseback transactions in fiscal 2007. We entered into
sale-leaseback transactions involving five superstores valued at approximately
$72.7 million in fiscal 2006, and transactions for seven superstores valued
at
$84.0 million in fiscal 2005. 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, 2007.
| 13. |
SUPPLEMENTAL
FINANCIAL STATEMENT
INFORMATION
|
(A)
Goodwill and Other Intangibles
Other
assets on the consolidated balance sheets included goodwill and other
intangibles with a carrying value of $10.1 million as of February 28, 2007,
and
$15.0 million as of February 28, 2006. We recognized an impairment charge of
$4.9 million, included in selling, general, and administrative expenses, related
to goodwill and franchise rights associated with one of our new car franchises
in fiscal 2007. No impairment of goodwill or intangible assets resulted from
our
annual impairment tests in fiscal 2006 or fiscal 2005.
(B)
Accrued Compensation and Benefits
Accrued
expenses and other current liabilities on the consolidated balance sheets
included accrued compensation and benefits of $60.1 million as of February
28,
2007, and $57.4 million as of February 28, 2006.
(C)
Advertising Expense
Selling,
general, and administrative expenses on the consolidated statements of earnings
included advertising expense of $97.8 million in fiscal 2007, $86.7 million
in
fiscal 2006, and $73.6 million in fiscal 2005. Advertising expenses were 1.3%
of
net sales and operating revenues for fiscal 2007 and 1.4% of net sales and
operating revenues for fiscal 2006 and fiscal 2005.
| 14. |
CONTINGENT
LIABILITIES
|
(A)
Litigation
On
August
29, 2006, Heather Herron, et al. filed a putative class action lawsuit against
numerous South Carolina automobile dealers, including CarMax Auto Superstores,
Inc., in the Court of Common Pleas in Aiken County, South Carolina. Subject
to
final judicial approval, we have settled this lawsuit, and we believe the
settlement will not materially affect our financial position or results of
operations.
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 position,
liquidity, or results of operations.
(B)
Other Matters
In
accordance with the terms of real estate lease agreements, CarMax generally
agrees 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 $2.4
million at February 28, 2007, and $1.9 million at February 28, 2006, and is
included in accrued expenses and other current liabilities in the consolidated
balance sheets.
| 15. |
RECENT
ACCOUNTING PRONOUNCEMENTS
|
In July 2006,
the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”) which establishes a
consistent framework to use to determine 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 wherein a tax benefit is
recognized if a position is more likely than not to be sustained. The amount
of
the benefit is then measured as the highest tax benefit that is greater than
fifty percent likely to be realized. FIN 48 also establishes new disclosure
requirements related to tax reserves. We will be required to adopt FIN 48 as
of
March 1, 2007. We do not expect the adoption of FIN 48 to have a material impact
on our financial position, results of operations, or cash flows.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS
157”) which defines fair value, establishes a framework for measuring fair value
in U.S. generally accepted accounting principles, and expands disclosures about
fair value measurements. The statement does not require new fair value
measurements, but is applied to the extent that other accounting pronouncements
require or permit fair value measurements. Companies will be required to
disclose the extent to which fair value is used to measure assets and
liabilities, the inputs used to develop the measurements, and the effect of
certain of the measurements on earnings (or changes in net assets) for the
period. CarMax will be required to adopt SFAS 157 as of March 1, 2008. We are
currently evaluating the impact of adopting SFAS 157 on our financial position,
results of operations, and cash flows.
In
September 2006, the SEC staff published Staff Accounting Bulletin No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements” (“SAB 108”). The bulletin
addresses quantifying the financial statement effects of misstatements,
specifically, how the effects of prior year uncorrected errors must be
considered in quantifying misstatements in the current year financial
statements. The bulletin offers a special “one-time” transition provision for
correcting certain prior year misstatements that were
uncorrected
as of the beginning of the fiscal year of adoption. SAB 108 was effective for
the current fiscal year ending February 28, 2007. The adoption of this statement
did not have a material impact on our financial position, results of operations,
or cash flows.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115,” (“SFAS 159”) which permits all entities to choose to measure
many financial instruments and certain other items at fair value and
consequently report unrealized gains and losses on these items in earnings.
SFAS
159 will be effective for our fiscal year beginning March 1, 2008. We are
currently evaluating the impact of adopting SFAS 159 on our financial position,
results of operations, and cash flows.
| 16. |
SELECTED
QUARTERLY FINANCIAL DATA
(UNAUDITED)
|
|
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Fiscal
Year
|
|
(In
thousands except per share data)
|
2007
|
2007
|
2007
|
2007
|
2007
|
|||||||||||
|
Net
sales and operating revenues
|
$
|
1,885,139
|
$
|
1,929,542
|
$
|
1,768,147
|
$
|
1,882,828
|
$
|
7,465,656
|
||||||
|
Gross
profit
|
$
|
248,255
|
$
|
253,365
|
$
|
228,609
|
$
|
240,833
|
$
|
971,062
|
||||||
|
CarMax
Auto Finance income
|
$
|
32,394
|
$
|
36,512
|
$
|
31,974
|
$
|
31,745
|
$
|
132,625
|
||||||
|
Selling,
general, and
administrative
expenses
|
$
|
186,966
|
$
|
200,049
|
$
|
187,318
|
$
|
201,835
|
$
|
776,168
|
||||||
|
Net
earnings
|
$
|
56,776
|
$
|
54,264
|
$
|
45,419
|
$
|
42,138
|
$
|
198,597
|
||||||
|
Net
earnings per share:
|
||||||||||||||||
|
Basic
|
$
|
0.27
|
$
|
0.26
|
$
|
0.21
|
$
|
0.20
|
$
|
0.93
|
||||||
|
Diluted
|
$
|
0.27
|
$
|
0.25
|
$
|
0.21
|
$
|
0.19
|
$
|
0.92
|
|
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
Fiscal
Year
|
|
(In
thousands except per share data)
|
2006
|
2006
|
2006
|
2006
|
2006
|
|
Net
sales and operating revenues
|
$
|
1,578,360
|
$
|
1,633,853
|
$
|
1,423,980
|
$
|
1,623,774
|
$
|
6,259,967
|
||||||
|
Gross
profit
|
$
|
197,759
|
$
|
208,584
|
$
|
177,173
|
$
|
207,198
|
$
|
790,714
|
||||||
|
CarMax
Auto Finance income
|
$
|
27,071
|
$
|
23,824
|
$
|
27,971
|
$
|
25,461
|
$
|
104,327
|
||||||
|
Selling,
general, and
administrative
expenses
|
$
|
163,765
|
$
|
171,401
|
$
|
167,351
|
$
|
171,853
|
$
|
674,370
|
||||||
|
Net
earnings
|
$
|
36,980
|
$
|
37,636
|
$
|
22,931
|
$
|
36,673
|
$
|
134,220
|
||||||
|
Net
earnings per share:
|
||||||||||||||||
|
Basic
|
$
|
0.18
|
$
|
0.18
|
$
|
0.11
|
$
|
0.17
|
$
|
0.64
|
||||||
|
Diluted
|
$
|
0.17
|
$
|
0.18
|
$
|
0.11
|
$
|
0.17
|
$
|
0.63
|
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, 2007, 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, Financial Statements and Supplementary Data, of this Form 10-K, and is
incorporated herein by reference.
Item
9B. Other Information.
None.
With
the
exception of the information incorporated by reference from the company’s 2007
Proxy Statement in Items 10, 11, 12, 13, and 14 of Part III of this Annual
Report on Form 10-K, the company’s 2007 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, 2007.
We
are not aware of any family relationships among any of our executive officers
or
between any of our executive officer 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 2007.
|
Name
|
Age
|
Office
|
|
Thomas
J. Folliard
|
42
|
President,
Chief Executive Officer, and Director
|
|
Keith
D. Browning
|
54
|
Executive
Vice President, Chief Financial Officer, Corporate Secretary, and
Director
|
|
Michael
K. Dolan
|
57
|
Executive
Vice President and Chief Administrative Officer
|
|
Joseph
S. Kunkel
|
44
|
Senior
Vice President, Marketing and Strategy
|
|
Richard
M. Smith
|
49
|
Senior
Vice President and Chief Information
Officer
|
Mr.
Folliard joined CarMax in 1993 as senior buyer and became director of purchasing
in 1994. Mr. Folliard was promoted to vice president of merchandising in 1996,
senior vice president of store operations in July 2000, and executive vice
president of store operations in April 2001. Mr. Folliard became president
and
chief executive officer, and a director of CarMax in June 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 January
1997 and as the company’s corporate secretary since July 2005.
Mr.
Dolan
joined CarMax in 1997 as vice president and chief information officer. He was
named senior vice president in April 2001, and was promoted to executive vice
president and chief administrative officer in November 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 April 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 April 2005. He was promoted
to senior vice president and chief information officer in November
2006.
The
information concerning our directors required by this Item is incorporated
by
reference to the section titled “Proposal One - Election of Directors” in
our
2007
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 2007
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
2007
Proxy Statement.
The
information concerning our code of ethics (“Code of Conduct”) for senior
management required by this Item is incorporated by reference to the sub-section
titled “Corporate Governance Policies and Practices” in our 2007 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
2007
Proxy Statement. Additional information required by this Item is incorporated
by
reference to the sub-section titled “Non-Employee Director Compensation in
Fiscal 2007” in our
2007
Proxy Statement.
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
2007
Proxy Statement.
The
information required by this Item is incorporated by reference to the section
titled “Certain Relationships and Related Transactions” in our
2007
Proxy Statement.
The
information required by this Item concerning director independence is
incorporated by reference to the sub-section titled “Director Independence” in
our 2007 Proxy Statement.
The
information required by this Item is incorporated by reference to the
sub-section titled “Auditor Information” in
our 2007
Proxy Statement.
(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, 2007,
2006, and 2005, 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.
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
25, 2007
|
|
|
By:
|
/s/ KEITH
D.
BROWNING
Keith D. Browning Executive
Vice President and Chief Financial Officer
April
25, 2007
|
||
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
25, 2007
|
|
|
/s/ HUGH
G.
ROBINSON*
Hugh
G. Robinson
Director
April
25, 2007
|
|
/s/ KEITH
D.
BROWNING
Keith
D. Browning
Executive
Vice President, Chief Financial Officer,
Chief
Accounting Officer, and Director
April
25, 2007
|
|
|
/s/ RICHARD
L.
SHARP
*
Richard
L. Sharp
Director
April
25, 2007
|
|
/s/ JAMES
F.
CLINGMAN,
JR.*
James
F. Clingman, Jr.
Director
April
25, 2007
|
|
|
/s/ THOMAS
G.
STEMBERG
*
Thomas
G. Stemberg
Director
April
25, 2007
|
|
/s/ JEFFREY
E.
GARTEN
*
Jeffrey
E. Garten
Director
April
25, 2007
|
|
|
/s/ VIVIAN
M.
STEPHENSON*
Vivian
M. Stephenson
Director
April
25, 2007
|
|
/s/ W.
ROBERT
GRAFTON
*
W.
Robert Grafton
Director
April
25, 2007
|
|
|
/s/ BETH
A.
STEWART*
Beth
A. Stewart
Director
April
25, 2007
|
|
/s/ EDGAR
H.
GRUBB
*
Edgar H. Grubb Director
April
25, 2007
|
|
/s/ WILLIAM
R.
TIEFEL*
William R. Tiefel Director
April
25, 2007
|
|
|
/s/ WILLIAM
S.
KELLOGG
*
William
S. Kellogg
Director
April
25, 2007
|
|
|
*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, 2005:
|
|||||||||||||
|
Allowance
for doubtful accounts
|
$
|
2,149
|
$
|
3,903
|
$
|
(2,472
|
)
|
$
|
3,580
|
||||
|
Year
ended February 28, 2006:
|
|||||||||||||
|
Allowance
for doubtful accounts
|
$
|
3,580
|
$
|
5,854
|
$
|
(3,802
|
)
|
$
|
5,632
|
||||
|
Year
ended February 28, 2007:
|
|||||||||||||
|
Allowance
for doubtful accounts
|
$
|
5,632
|
$
|
5,856
|
$
|
(4,405
|
)
|
$
|
7,083
|
||||
INDEX
TO EXHIBITS
|
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 January 22, 2007, filed as Exhibit
3.1 to CarMax’s Current Report on Form 8-K, filed January 26, 2007 (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.
|
|
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
|
|
CarMax,
Inc. Benefit Restoration Plan, as amended and restated October 19,
2004,
filed as Exhibit 10.2 to CarMax’s Annual Report on Form 10-K, filed May
13, 2005 (File No. 1-31420), is incorporated by this reference.
*
|
|
10.7
|
|
CarMax,
Inc. 2002 Non-Employee Directors Stock Incentive Plan, as amended
and
restated April 24, 2006, filed as Exhibit 10.4 to CarMax’s Current Report
on Form 8-K, filed April 28, 2006 (File No. 1-31420), is incorporated
by
this reference. *
|
|
10.8
|
|
CarMax,
Inc. 2002 Stock Incentive Plan, as amended and restated April 24,
2006,
filed as Exhibit 10.2 to CarMax’s Current Report on Form 8-K, filed April
28, 2006 (File No. 1-31420), is incorporated by this reference.
*
|
|
10.9
|
|
CarMax,
Inc. Annual Performance-Based Bonus Plan, as amended and restated
April
24, 2006, filed as Exhibit 10.1 to CarMax’s Current Report on Form 8-K,
filed April 28, 2006 (File No. 1-31420), is incorporated by this
reference. *
|
|
10.10
|
|
CarMax,
Inc. 2002 Employee Stock Purchase Plan, as amended and restated July
1,
2006, filed as Exhibit 10.1 to CarMax's Current Report on Form 8-K,
filed
June 22, 2006 (File No. 1-31420), is incorporated by this
reference.
|
|
10.11
|
|
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.
|
|
10.12
|
|
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.
|
|
10.13
|
|
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.
|
|
10.14
|
|
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.
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10.15
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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.
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10.16
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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.
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10.17
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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.
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10.18
|
Form
of Notice of Stock Option Grant between CarMax, Inc. and certain
named and
other executive officers, filed as Exhibit 10.2 to CarMax’s Current Report
on Form 8-K, filed October 20, 2006 (File No. 1-31420), is incorporated
by
this reference. *
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10.19
|
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 10.5 to CarMax’s Current Report on Form 8-K, filed April 28, 2006
(File No. 1-31420), is incorporated by this reference.
*
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10.20
|
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. *
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21.1
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CarMax,
Inc. Subsidiaries, filed herewith.
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23.1
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Consent
of KPMG LLP, filed herewith.
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24.1
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Powers
of Attorney, filed herewith.
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31.1
|
Certification
of the Chief Executive Officer Pursuant to Rule 13a-14(a), filed
herewith.
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31.2
|
Certification
of the Chief Financial Officer Pursuant to Rule 13a-14(a), filed
herewith.
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32.1
|
Certification
of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,
filed
herewith.
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32.2
|
Certification
of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
filed
herewith.
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* Indicates
management contracts, compensatory plans, or arrangements of the company
required to be filed as an exhibit.
69