Carmax Inc 10-Q for FY2021 Q1

Carmax Inc (KMX)

10-Q 2020-07-01 For: 2020-05-31

Added on April 07, 2026

About this 10-Q

Carmax Inc filed this 10-Q on July 1, 2020, covering the quarter ended May 31, 2020 (FY2021 Q1).

Headline figures

Quarter ended May 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.

Revenue: $3.23B; down 39.8% from $5.37B a year earlier
Net income: $4.98M; down 98.1% from net income of $266.74M a year earlier
Diluted EPS: $0.03; down 98.1% from $1.59 a year earlier

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Virginia		54-1821055
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification No.)

12800 Tuckahoe Creek Parkway		23238
Richmond,	Virginia
(Address of Principal Executive Offices)		(Zip Code)



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	KMX	New York Stock Exchange



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐



Class		Outstanding as of June 29, 2020
Common Stock, par value $0.50		163,077,762



			Page No.
PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements:

		Consolidated Statements of Earnings (Unaudited) –
		Three Months Ended May 31, 2020 and 2019	3

		Consolidated Statements of Comprehensive Income (Unaudited) –
		Three Months Ended May 31, 2020 and 2019	4

		Consolidated Balance Sheets (Unaudited) –
		May 31, 2020 and February 29, 2020	5

		Consolidated Statements of Cash Flows (Unaudited) –
		Three Months Ended May 31, 2020 and 2019	6

		Consolidated Statements of Shareholders’ Equity (Unaudited) –
		Three Months Ended May 31, 2020 and 2019	7

		Notes to Consolidated Financial Statements (Unaudited)	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition and
		Results of Operations	29

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46

	Item 4.	Controls and Procedures	46

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	47

	Item 1A.	Risk Factors	47

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

	Item 6.	Exhibits	48

SIGNATURES			49



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



	Three Months Ended May 31
(In thousands except per share data)	2020			%⁽¹⁾	2019			%⁽¹⁾
SALES AND OPERATING REVENUES:
Used vehicle sales	$	2,786,202		86.3	$	4,540,657		84.6
Wholesale vehicle sales	342,852			10.6	662,449			12.3
Other sales and revenues	99,728			3.1	163,212			3.0
NET SALES AND OPERATING REVENUES	3,228,782			100.0	5,366,318			100.0
COST OF SALES:
Used vehicle cost of sales	2,524,676			78.2	4,043,824			75.4
Wholesale vehicle cost of sales	280,922			8.7	536,490			10.0
Other cost of sales	69,001			2.1	43,621			0.8
TOTAL COST OF SALES	2,874,599			89.0	4,623,935			86.2
GROSS PROFIT	354,183			11.0	742,383			13.8
CARMAX AUTO FINANCE INCOME	50,950			1.6	115,959			2.2
Selling, general and administrative expenses	373,716			11.6	489,660			9.1
Interest expense	23,958			0.7	17,784			0.3
Other expense (income)	3,295			0.1	(359		)	—
Earnings before income taxes	4,164			0.1	351,257			6.5
Income tax provision	(814		)	—	84,513			1.6
NET EARNINGS	$	4,978		0.2	$	266,744		5.0
WEIGHTED AVERAGE COMMON SHARES:
Basic	162,673				166,324
Diluted	163,537				167,643
NET EARNINGS PER SHARE:
Basic	$	0.03			$	1.60
Diluted	$	0.03			$	1.59



	Three Months Ended May 31
(In thousands)	2020			2019
NET EARNINGS	$	4,978		$	266,744
Other comprehensive loss, net of taxes:
Net change in retirement benefit plan unrecognized actuarial losses	728			355
Net change in cash flow hedge unrecognized losses	(16,062		)	(13,551		)
Other comprehensive loss, net of taxes	(15,334		)	(13,196		)
TOTAL COMPREHENSIVE (LOSS) INCOME	$	(10,356	)	$	253,548



	As of May 31			As of February 29
(In thousands except share data)	2020			2020
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	658,022		$	58,211
Restricted cash from collections on auto loans receivable	480,565			481,043
Accounts receivable, net	145,018			191,090
Inventory	1,899,430			2,846,416
Other current assets	100,696			86,927
TOTAL CURRENT ASSETS	3,283,731			3,663,687
Auto loans receivable, net of allowance for loan losses of $437,213 and $157,796 as of May 31, 2020 and February 29, 2020, respectively	12,794,622			13,551,711
Property and equipment, net of accumulated depreciation of $1,298,536 and $1,266,920 as of May 31, 2020 and February 29, 2020, respectively	3,064,738			3,069,102
Deferred income taxes	119,066			89,842
Operating lease assets	443,678			449,094
Other assets	266,697			258,746
TOTAL ASSETS	$	19,972,532		$	21,082,182

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	390,160		$	737,144
Accrued expenses and other current liabilities	290,080			331,738
Accrued income taxes	—			1,389
Current portion of operating lease liabilities	30,881			30,980
Short-term debt	86			40
Current portion of long-term debt	9,744			9,251
Current portion of non-recourse notes payable	430,055			424,165
TOTAL CURRENT LIABILITIES	1,151,006			1,534,707
Long-term debt, excluding current portion	1,693,888			1,778,672
Non-recourse notes payable, excluding current portion	12,722,292			13,165,384
Operating lease liabilities, excluding current portion	435,325			440,671
Other liabilities	391,711			393,873
TOTAL LIABILITIES	16,394,222			17,313,307

Commitments and contingent liabilities
SHAREHOLDERS’ EQUITY:
Common stock, $0.50 par value; 350,000,000 shares authorized; 162,755,339 and 163,081,376 shares issued and outstanding as of May 31, 2020 and February 29, 2020, respectively	81,378			81,541
Capital in excess of par value	1,358,428			1,348,988
Accumulated other comprehensive loss	(165,405		)	(150,071		)
Retained earnings	2,303,909			2,488,417
TOTAL SHAREHOLDERS’ EQUITY	3,578,310			3,768,875
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	19,972,532		$	21,082,182



	Three Months Ended May 31, 2020
												Accumulated
	Common					Capital in						Other
	Shares		Common			Excess of			Retained			Comprehensive
(In thousands)	Outstanding		Stock			Par Value			Earnings			Loss			Total
Balance as of February 29, 2020	163,081		$	81,541		$	1,348,988		$	2,488,417		$	(150,071	)	$	3,768,875
Net earnings	—		—			—			4,978			—			4,978
Other comprehensive loss	—		—			—			—			(15,334		)	(15,334		)
Share-based compensation expense	—		—			17,652			—			—			17,652
Repurchases of common stock	(515	)	(258		)	(4,271		)	(36,180		)	—			(40,709		)
Exercise of common stock options	35		18			1,688			—			—			1,706
Stock incentive plans, net shares issued	154		77			(5,629		)	—			—			(5,552		)
Adoption of CECL	—		—			—			(153,306		)	—			(153,306		)
Balance as of May 31, 2020	162,755		$	81,378		$	1,358,428		$	2,303,909		$	(165,405	)	$	3,578,310



	Three Months Ended May 31, 2019
												Accumulated
	Common					Capital in						Other
	Shares		Common			Excess of			Retained			Comprehensive
(In thousands)	Outstanding		Stock			Par Value			Earnings			Loss			Total
Balance as of February 28, 2019	167,479		$	83,739		$	1,237,153		$	2,104,146		$	(68,010	)	$	3,357,028
Net earnings	—		—			—			266,744			—			266,744
Other comprehensive loss	—		—			—			—			(13,196		)	(13,196		)
Share-based compensation expense	—		—			18,912			—			—			18,912
Repurchases of common stock	(2,953	)	(1,476		)	(21,991		)	(181,368		)	—			(204,835		)
Exercise of common stock options	727		363			32,888			—			—			33,251
Stock incentive plans, net shares issued	142		71			(5,220		)	—			—			(5,149		)
Balance as of May 31, 2019	165,395		$	82,697		$	1,261,742		$	2,189,522		$	(81,206	)	$	3,452,755



	Three Months Ended May 31
(In millions)	2020			2019
Used vehicle sales	$	2,786.2		$	4,540.7
Wholesale vehicle sales	342.9			662.4
Other sales and revenues:
Extended protection plan revenues	73.4			111.3
Third-party finance fees, net	(10.7		)	(15.5		)
Service revenues	19.5			34.0
Other	17.5			33.4
Total other sales and revenues	99.7			163.2
Total net sales and operating revenues	$	3,228.8		$	5,366.3


⁽¹⁾	Annualized percentage of total average managed receivables.


⁽¹⁾	Represents receivables restricted as excess collateral for the non-recourse funding vehicles.



	Three Months Ended May 31
(In thousands)	2020			2019
OPERATING ACTIVITIES:
Net earnings	$	4,978		$	266,744
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	58,340			51,506
Share-based compensation expense	25,057			45,025
Provision for loan losses	122,018			38,152
Provision for cancellation reserves	13,552			25,465
Deferred income tax provision	25,041			9,392
Other	5,386			1,736
Net decrease (increase) in:
Accounts receivable, net	46,072			5,971
Inventory	946,986			(31,688		)
Other current assets	(13,769		)	(10,387		)
Auto loans receivable, net	433,044			(386,922		)
Other assets	(3,247		)	(6,349		)
Net (decrease) increase in:
Accounts Payable, accrued expenses and other
current liabilities and accrued income taxes	(382,102		)	81,886
Other liabilities	(31,797		)	(47,330		)
NET CASH PROVIDED BY OPERATING ACTIVITIES	1,249,559			43,201
INVESTING ACTIVITIES:
Capital expenditures	(62,871		)	(78,970		)
Proceeds from disposal of property and equipment	—			2
Purchases of investments	(2,369		)	(7,224		)
Sales of investments	168			81
NET CASH USED IN INVESTING ACTIVITIES	(65,072		)	(86,111		)
FINANCING ACTIVITIES:
Increase (decrease) in short-term debt, net	46			(458		)
Proceeds from issuances of long-term debt	977,500			1,715,200
Payments on long-term debt	(1,062,578		)	(1,809,179		)
Cash paid for debt issuance costs	(2,610		)	(3,416		)
Payments on finance lease obligations	(1,370		)	(745		)
Issuances of non-recourse notes payable	1,982,000			2,851,000
Payments on non-recourse notes payable	(2,420,291		)	(2,492,809		)
Repurchase and retirement of common stock	(54,140		)	(211,961		)
Equity issuances	1,706			33,251



	Three Months Ended May 31
(In millions)	2020			% ⁽¹⁾		2019			% ⁽¹⁾
Interest margin:
Interest and fee income	$	282.5		8.4		$	266.2		8.4
Interest expense	(84.6		)	(2.5	)	(87.4		)	(2.8	)
Total interest margin	197.9			5.9		178.8			5.6
Provision for loan losses	(122.0		)	(3.6	)	(38.2		)	(1.2	)
Total interest margin after provision for loan losses	75.9			2.3		140.6			4.4

Total other expense	(1.9		)	(0.1	)	—			—

Direct expenses:
Payroll and fringe benefit expense	(11.2		)	(0.3	)	(10.1		)	(0.3	)
Other direct expenses	(11.8		)	(0.4	)	(14.5		)	(0.5	)
Total direct expenses	(23.0		)	(0.7	)	(24.6		)	(0.8	)
CarMax Auto Finance income	$	51.0		1.5		$	116.0		3.7

Total average managed receivables	$	13,408.5				$	12,707.3



	As of May 31			As of February 29
(In millions)	2020			2020
Asset-backed term funding	$	10,795.3		$	11,007.1
Warehouse facilities	1,949.7			2,181.7
Overcollateralization ⁽¹⁾	291.0			289.0
Other managed receivables⁽²⁾	135.9			140.0
Total ending managed receivables	13,171.9			13,617.8
Accrued interest and fees	64.8			56.2
Other	(4.9		)	35.5
Less: allowance for loan losses	(437.2		)	(157.8		)
Auto loans receivable, net	$	12,794.6		$	13,551.7



	As of May 31, 2020
	Fiscal Year of Origination⁽¹⁾
(In millions)	2021		2020		2019		2018		2017		Prior to 2017		Total		% ⁽²⁾
A	$	493.7	$	2,928.5	$	1,689.5	$	957.6	$	450.1	$	139.7	$	6,659.1	50.6
B	334.0		1,891.8		1,214.7		731.3		367.2		160.9		4,699.9		35.7
C and other	129.7		706.8		438.6		271.8		174.0		92.0		1,812.9		13.7
Total ending managed receivables	$	957.4	$	5,527.1	$	3,342.8	$	1,960.7	$	991.3	$	392.6	$	13,171.9	100.0


⁽²⁾	Other managed receivables includes receivables not funded through the non-recourse funding vehicles.



	As of February 29
(In millions)	2020⁽¹⁾		% ⁽²⁾
A	$	6,915.9	50.8
B	4,841.2		35.6
C and other	1,860.7		13.6
Total ending managed receivables	$	13,617.8	100.0


⁽¹⁾	Classified based on credit grade assigned when customers were initially approved for financing.


⁽²⁾	The comparative information has not been restated and continues to be reported under the accounting guidance in effect during fiscal 2020.



	As of May 31, 2020
	Major Credit Grade
(In millions)	A		B		C & Other		Total		% ⁽¹⁾
Current	$	6,632.0	$	4,554.5	$	1,658.7	$	12,845.2	97.52
Delinquent loans:
31-60 days past due	16.4		89.3		92.8		198.5		1.51
61-90 days past due	7.0		38.9		44.3		90.2		0.68
Greater than 90 days past due	3.7		17.2		17.1		38.0		0.29
Total past due	27.1		145.4		154.2		326.7		2.48
Total ending managed receivables	$	6,659.1	$	4,699.9	$	1,812.9	$	13,171.9	100.00


Level 1	Inputs include unadjusted quoted prices in active markets for identical assets or liabilities that we can access at the measurement date.


Level 2	Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets in active markets, quoted prices from identical or similar assets in inactive markets and observable inputs such as interest rates and yield curves.


Level 3	Inputs that are significant to the measurement that are not observable in the market and include management’s judgments about the assumptions market participants would use in pricing the asset or liability (including assumptions about risk).



	As of February 29, 2020
(In thousands)	Level 1			Level 2			Total
Assets:
Money market securities	$	273,203		$	—		$	273,203
Mutual fund investments	22,668			—			22,668
Total assets at fair value	$	295,871		$	—		$	295,871

Percent of total assets at fair value	100.0		%	—		%	100.0		%
Percent of total assets	1.4		%	—		%	1.4		%

Liabilities:
Derivative instruments designated as hedges	$	—		$	(23,992	)	$	(23,992	)
Total liabilities at fair value	$	—		$	(23,992	)	$	(23,992	)

Percent of total liabilities	—		%	0.1		%	0.1		%


⁽¹⁾	Interest is payable monthly, with the exception of our senior notes, which are payable semi-annually.


⁽²⁾	Borrowings accrue interest at variable rates based on the Eurodollar rate (LIBOR), the federal funds rate, or the prime rate, depending on the type of borrowing.



(In billions)	Capacity
Warehouse facilities:
August 2020 expiration	$	1.40
September 2020 expiration	0.15
February 2021 expiration	1.95
Combined warehouse facility limit	$	3.50
Unused capacity	$	1.55

Non-recourse notes payable outstanding:
Warehouse facilities	$	1.95
Asset-backed term funding transactions	11.22
Non-recourse notes payable	$	13.17



	Three Months Ended
	May 31
	2020		2019
Number of shares repurchased (in thousands)	515.5		2,953.1
Average cost per share	$	78.96	$	69.35
Available for repurchase, as of end of period (in millions)	$	1,511.6	$	1,909.1



	As of May 31, 2020
			Weighted Average
	Unrecognized		Remaining
	Compensation		Recognition Life
(Costs in millions)	Costs		(Years)
Nonqualified stock options	$	62.4	2.8
Stock-settled market stock units	23.9		1.9
Other share-based incentives:
Stock-settled performance stock units	0.9		1.9
Stock-settled deferred stock units	—		—
Restricted stock	0.3		2.6
Total other share-based incentives	1.2		0.8
Total	$	87.5	2.5



					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
	Number of		Exercise		Contractual	Intrinsic
(Shares and intrinsic value in thousands)	Shares		Price		Life (Years)	Value
Outstanding as of February 29, 2020	6,994		$	64.85
Options granted	1,571		$	71.07
Options exercised	(35	)	$	48.15
Options forfeited or expired	(19	)	$	69.84
Outstanding as of May 31, 2020	8,511		$	66.06	4.6	$	187,179

Exercisable as of May 31, 2020	4,562		$	62.39	3.5	$	117,074


⁽¹⁾	Measured using historical daily price changes of our stock for a period corresponding to the term of the options and the implied volatility derived from the market prices of traded options on our stock.


⁽²⁾	Based on the U.S. Treasury yield curve at the time of grant.


⁽³⁾	Represents the estimated number of years that options will be outstanding prior to exercise.



	As of May 31, 2020
(In thousands)	Minimum ⁽¹⁾		Maximum⁽¹⁾
Fiscal 2022	$	33,150	$	88,399
Fiscal 2023	36,187		96,500
Fiscal 2024	9,638		25,700
Total expected cash settlements	$	78,975	$	210,599



	As of May 31		As of February 29
Lease Term and Discount Rate	2020		2020
Weighted Average Remaining Lease Term (in years)
Operating leases	19.88		19.98
Finance leases	13.31		13.55

Weighted Average Discount Rate
Operating leases	5.40	%	5.40	%
Finance leases	10.84	%	10.32	%