UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended May 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-31420
CARMAX, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1821055
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4900 COX ROAD, GLEN ALLEN, VIRGINIA 23060
(Address of principal executive offices) (Zip Code)
(804) 747-0422
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 30, 2005
------------------------------------ ----------------------------
Common Stock, par value $0.50 104,512,221
An Index is included on Page 2 and a separate Exhibit Index is included on Page
29.
CARMAX, INC. AND SUBSIDIARIES
-----------------------------
TABLE OF CONTENTS
-----------------
Page
No.
---
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Consolidated Financial Statements:
Consolidated Statements of Earnings -
Three Months Ended May 31, 2005 and 2004 3
Consolidated Balance Sheets -
May 31, 2005, and February 28, 2005 4
Consolidated Statements of Cash Flows -
Three Months Ended May 31, 2005 and 2004 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits 27
SIGNATURES 28
- ----------
EXHIBIT INDEX 29
- -------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARMAX, INC. AND SUBSIDIARIES
-----------------------------
Consolidated Statements of Earnings (Unaudited)
-----------------------------------------------
(In thousands except per share data)
Three Months Ended May 31
2005 %(1) 2004 %(1)
------ ---- ------ ----
Sales and operating revenues:
Used vehicle sales $ 1,203,805 76.3 $ 985,375 74.4
New vehicle sales 134,093 8.5 136,765 10.3
Wholesale vehicle sales 189,492 12.0 156,871 11.8
Other sales and revenues 50,970 3.2 45,979 3.5
------------------------------------------------
Net sales and operating revenues 1,578,360 100.0 1,324,990 100.0
Cost of sales 1,380,601 87.5 1,157,760 87.4
------------------------------------------------
Gross profit 197,759 12.5 167,230 12.6
CarMax Auto Finance income (Notes 3 and 4) 27,071 1.7 21,816 1.6
Selling, general, and administrative expenses 159,235 10.1 130,688 9.9
Interest expense 1,194 0.1 493 -
Interest income 135 - 53 -
------------------------------------------------
Earnings before income taxes 64,536 4.1 57,918 4.4
Provision for income taxes 24,718 1.6 22,588 1.7
------------------------------------------------
Net earnings $ 39,818 2.5 $ 35,330 2.7
================================================
Weighted average common shares (Note 7):
Basic 104,387 103,864
============ ===========
Diluted 106,185 105,774
============ ===========
Net earnings per share (Note 7):
Basic $ 0.38 $ 0.34
============ ===========
Diluted $ 0.37 $ 0.33
============ ===========
(1) Percents are calculated as a percentage of net sales and operating revenues
and may not equal totals due to rounding.
See accompanying notes to consolidated financial statements.
CARMAX, INC. AND SUBSIDIARIES
-----------------------------
Consolidated Balance Sheets
---------------------------
(In thousands except share data)
May 31, 2005 February 28, 2005
------------ -----------------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents (Note 2) $ 33,518 $ 29,099
Accounts receivable, net 79,970 76,167
Automobile loan receivables held for sale (Note 4) 35,559 22,152
Retained interest in securitized receivables (Note 4) 144,363 147,963
Inventory 583,289 576,567
Prepaid expenses and other current assets 4,975 13,008
------------ ------------
Total current assets 881,674 864,956
Property and equipment, net 439,091 406,301
Other assets 21,732 21,756
------------ ------------
TOTAL ASSETS $ 1,342,497 $ 1,293,013
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 177,952 $ 170,646
Accrued expenses and other current liabilities 65,035 65,664
Accrued income taxes 25,408 1,179
Deferred income taxes 24,602 26,315
Short-term debt 41,428 65,197
Current installments of long-term debt 100,351 330
------------ ------------
Total current liabilities 434,776 329,331
Long-term debt, excluding current installments 28,315 128,419
Deferred revenue and other liabilities 30,325 29,260
Deferred income taxes 4,315 5,027
------------ ------------
TOTAL LIABILITIES 497,731 492,037
------------ ------------
Commitments and contingent liabilities (Note 6) - -
Shareholders' equity:
Common stock, $0.50 par value; 350,000,000 shares authorized; 104,490,545 and
104,303,375 shares issued and outstanding at
May 31, 2005, and February 28, 2005, respectively 52,245 52,152
Capital in excess of par value 493,043 489,164
Retained earnings 299,478 259,660
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 844,766 800,976
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,342,497 $ 1,293,013
============ ============
See accompanying notes to consolidated financial statements.
CARMAX, INC. AND SUBSIDIARIES
-----------------------------
Consolidated Statements of Cash Flows (Unaudited)
-------------------------------------------------
(In thousands)
Three Months Ended May 31
2005 2004
----------- -----------
Operating Activities:
- ---------------------
Net earnings $ 39,818 $ 35,330
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 5,926 4,282
Amortization of restricted stock awards 20 31
Loss (gain) on disposition of assets 12 (62)
Provision for deferred income taxes (2,425) (193)
Changes in operating assets and liabilities:
Increase in accounts receivable, net (3,803) (20,266)
Increase in automobile loan receivables held
for sale (13,407) (6,356)
Decrease in retained interest in securitized
receivables 3,600 19,557
Increase in inventory (6,722) (57,605)
Decrease in prepaid expenses and
other current assets 8,033 1,691
Decrease in other assets 24 32
Increase in accounts payable, accrued
expenses and other current liabilities,
and accrued income taxes 33,118 25,336
Increase in deferred revenue and other liabilities 688 847
---------- ----------
Net cash provided by operating activities 64,882 2,624
---------- ----------
Investing Activities:
- ---------------------
Purchases of property and equipment (55,056) (46,455)
Proceeds from sales of assets 16,705 18,790
---------- ----------
Net cash used in investing activities (38,351) (27,665)
---------- ----------
Financing Activities:
- ---------------------
(Decrease) increase in short-term debt, net (23,769) 23,736
Payments on long-term debt (83) -
Equity issuances, net 1,740 1,338
---------- ----------
Net cash (used in) provided by financing activities (22,112) 25,074
----------- ----------
Increase in cash and cash equivalents 4,419 33
Cash and cash equivalents at beginning of year 29,099 61,643
---------- ----------
Cash and cash equivalents at end of period $ 33,518 $ 61,676
========== ==========
See accompanying notes to consolidated financial statements.
CARMAX, INC. AND SUBSIDIARIES
-----------------------------
Notes to Consolidated Financial Statements
------------------------------------------
(Unaudited)
1. Background
----------
CarMax, Inc. ("CarMax" and "the company"), including its wholly owned
subsidiaries, is the largest retailer of used cars and light trucks in the
United States. CarMax was 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.
CarMax also sells new vehicles under various franchise agreements. CarMax
provides its customers with a full range of related services, including the
financing of vehicle purchases through its own finance operation, CarMax
Auto Finance ("CAF"), and third-party lenders; the sale of extended service
plans; and vehicle repair service.
2. Accounting Policies
-------------------
Principles of Consolidation. CarMax's consolidated financial statements
conform to accounting principles generally accepted in the United States of
America. The interim period consolidated financial statements are
unaudited; however, in the opinion of management, all adjustments, which
consist only of normal, recurring adjustments necessary for a fair
presentation of the interim consolidated financial statements, have been
included. All significant intercompany balances and transactions have been
eliminated in consolidation.
The fiscal year end balance sheet data were derived from the audited
consolidated financial statements included in the company's Annual Report
on Form 10-K for the fiscal year ended February 28, 2005. The Notes to
Consolidated Financial Statements contained in the Annual Report should be
read in conjunction with these consolidated financial statements.
Cash and Cash Equivalents. Cash equivalents of $18.1 million at May 31,
2005, and $18.0 million at February 28, 2005, consisted of highly liquid
debt securities with original maturities of three months or less. Included
in cash equivalents at May 31, 2005, and February 28, 2005, were restricted
cash deposits of $12.0 million, which were associated with certain
insurance deductibles.
Stock-Based Compensation. The company accounts for its stock-based
compensation plans under the recognition and measurement principles of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Under this opinion and
related interpretations, compensation expense is recorded on the date of
grant and amortized over the period of service only if the market value of
the underlying stock on the grant date exceeds the exercise price. No stock
option-based employee compensation cost is reflected in net earnings, as
options granted under those plans had exercise prices equal to the market
value of the underlying common stock on the date of grant. The following
table illustrates the effect on net earnings and net earnings per share as
if the fair-value-based method of accounting had been applied to all
outstanding stock awards in each reported period:
Three Months Ended May 31
(In thousands except per share data) 2005 2004
---------------------------------------------------------------------------------------------------------
Net earnings, as reported............................................. $ 39,818 $ 35,330
Total additional stock-based compensation expenses
determined under the fair-value-based method
for all awards, net of related tax effects........................ 2,785 2,607
--------------------------------
Pro forma net earnings................................................ $ 37,033 $ 32,723
================================
Earnings per share:
Basic, as reported................................................ $ 0.38 $ 0.34
Basic, pro forma.................................................. $ 0.35 $ 0.32
Diluted, as reported.............................................. $ 0.37 $ 0.33
Diluted, pro forma................................................ $ 0.35 $ 0.31
The pro forma effect on the first quarter of fiscal 2006 and prior periods
may not be representative of the pro forma effects on net earnings and net
earnings per share for future periods.
Reclassifications. Certain prior year amounts have been reclassified to
conform to the current year's presentation.
3. CarMax Auto Finance Income
--------------------------
The company's finance operation, CAF, originates prime-rated financing for
qualified customers at competitive market rates of interest. Throughout
each month, the company sells substantially all of the loans originated by
CAF in securitization transactions as discussed in Note 4. The majority of
the contribution from CAF is generated by the spread between the interest
rate charged to the customer and the company's cost of funds. A gain,
recorded at the time of each securitization transaction, 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 prepayment and
default rates.
CarMax Auto Finance income was as follows:
Three Months Ended May 31
(In millions) 2005 2004
--------------------------------------------------------------------------------------------------------------
Gains on sales of loans...................................................... $ 20.5 $ 15.5
-----------------------------
Other CAF income:
Servicing fee income...................................................... 6.6 6.0
Interest income........................................................... 5.0 5.0
-----------------------------
Total other CAF income....................................................... 11.7 11.0
-----------------------------
Direct CAF expenses:
CAF payroll and fringe benefit expense.................................... 2.4 2.2
Other direct CAF expenses................................................. 2.7 2.5
-----------------------------
Total direct CAF expenses.................................................... 5.1 4.7
-----------------------------
CarMax Auto Finance income................................................... $ 27.1 $ 21.8
=============================
Amounts in the table above may not total due to rounding.
CarMax Auto Finance income does not include any allocation of indirect
costs or income. The company presents 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, retail financing commissions, and corporate
expenses such as human resources, administrative services, marketing,
information systems, accounting, legal, treasury, and executive payroll.
4. Securitizations
---------------
The company uses a securitization program to fund substantially all of the
automobile loan receivables originated by CAF. The company sells 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 the company's assets. The company's risk is limited to
the retained interest on the company's 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.
The company periodically uses 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. Prior to this quarter, the
earnings impact of refinancing receivables in a public securitization had
not been significant to the operation of the company. During the first
quarter of fiscal 2006, the company recognized a benefit of $0.01 per share
related to the 2005-1 public securitization. However, because
securitization market conditions and structures could change over time,
this may not be representative of the potential impact of future
securitizations.
The transfers of receivables are accounted for as sales in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." When the receivables are securitized, the company recognizes
a gain or loss on the sale of the receivables as described in Note 3.
Three Months Ended May 31
(In millions) 2005 2004
-------------------------------------------------------------------------------------------------------------
Net loans originated....................................................... $ 436.5 $ 386.0
Loans sold................................................................. $ 474.6 $ 430.6
Gains on sales of loans.................................................... $ 20.5 $ 15.5
Gains on sales of loans as a percentage of loans sold...................... 4.3% 3.6%
Retained Interest. The company retains an interest in the automobile loan
receivables that it securitizes. The retained interest, presented as a
current asset on the company's 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," the restricted cash on deposit in
various reserve accounts, and an undivided ownership interest in the
receivables securitized through the warehouse facility and certain public
securitizations, or "required excess receivables," as described below. On a
combined basis, the cash reserves and required excess receivables are
generally 2% to 4% of managed receivables. The special purpose entities and
the investors have no recourse to the company's assets. The company's risk
is limited to the retained interest on the company's consolidated balance
sheets. The fair value of the retained interest may fluctuate depending on
the performance of the securitized receivables.
The fair value of the retained interest was $144.4 million as of May 31,
2005, and $148.0 million as of February 28, 2005. The retained interest had
a weighted average life of 1.5 years as of May 31, 2005, and February 28,
2005. As defined in SFAS No. 140, the weighted average life in periods (for
example, months or years) of pre-payable 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. The following is a
detailed explanation of the components of the retained interest.
Interest-only strip receivables. Interest-only strip receivables represent
-------------------------------
the present value of residual cash flows the company expects to receive
over the life of the securitized receivables. The value of these
receivables is determined by estimating the future cash flows using
management's assumptions of key factors, such as finance charge income,
default 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. Management evaluates 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.
Restricted cash. Restricted cash represents amounts on deposit in 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
the company's securitizations requires that an amount equal to a specified
percentage of the initial receivables balance 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, an amount equal to that 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 required to be maintained in the public securitization
reserve accounts may increase depending upon the performance of the
securitized receivables. The amount on deposit in restricted cash accounts
was $28.9 million as of May 31, 2005, and $33.5 million as of February 28,
2005.
Required excess receivables. The warehouse facility and certain public
---------------------------
securitizations require that the total value of the securitized receivables
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. The unpaid principal balance
related to the required excess receivables was $40.1 million as of May 31,
2005, and $44.3 million as of February 28, 2005.
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 May 31, 2005, and a
sensitivity analysis showing the hypothetical effect on the retained
interest if there were unfavorable variations from the assumptions used.
Key economic assumptions at May 31, 2005, were not materially different
from assumptions used to measure the fair value of the retained interest at
the time of securitization. These sensitivities 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.
Impact on Fair Impact on Fair
Assumptions Value of 10% Value of 20%
(In millions) Used Adverse Change Adverse Change
---------------------------------------------------------------------------------------------------------------------
Prepayment rate........................ 1.44%-1.50% $5.3 $ 10.6
Cumulative default rate................ 1.60%-2.16% $4.3 $ 8.7
Annual discount rate................... 12.0% $2.2 $ 4.3
Prepayment rate. The company uses 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 default rate. The cumulative default 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.
Continuing Involvement with Securitized Receivables. The company continues
to manage the automobile loan receivables that it securitizes. The company
receives servicing fees of approximately 1% of the outstanding principal
balance of the securitized receivables. The servicing fees specified in the
securitization agreements adequately compensate the company for servicing
the securitized receivables. Accordingly, no servicing asset or liability
has been recorded. The company is at risk for the retained interest in the
securitized receivables. If the securitized receivables do not perform as
originally projected, the value of the retained interest would be impacted.
Supplemental information about the managed receivables is shown in the
following tables:
As of May 31 As of February 28 or 29
(In millions) 2005 2004 2005 2004
-----------------------------------------------------------------------------------------------------------------------
Loans securitized..................................... $ 2,499.0 $ 2,283.2 $2,427.2 $2,200.4
Loans held for sale or investment..................... 81.9 55.0 67.7 48.2
------------------------------------------------------------
Ending managed receivables............................ $ 2,580.9 $ 2,338.2 $2,494.9 $2,248.6
============================================================
Accounts 31+ days past due............................ $ 34.5 $ 35.3 $ 31.1 $ 31.4
Past due accounts as a percentage of
ending managed receivables........................ 1.34% 1.51% 1.24% 1.40%
Three Months Ended May 31
(In millions) 2005 2004
---------------------------------------------------------------------------------------------------------------
Average managed receivables................................................. $ 2,537.1 $ 2,299.8
Credit losses on managed receivables........................................ $ 3.1 $ 4.0
Annualized credit losses as a percentage of
average managed receivables............................................. 0.49% 0.70%
Selected Cash Flows from Securitized Receivables. The table below
summarizes certain cash flows received from and paid to the automobile loan
securitizations:
Three Months Ended May 31
(In millions) 2005 2004
--------------------------------------------------------------------------------------------------------------
o Proceeds from new securitizations...................................... $ 407.5 $ 375.5
o Proceeds from collections reinvested in
revolving period securitizations................................... $ 171.2 $ 144.1
o Servicing fees received................................................ $ 6.5 $ 5.9
o Other cash flows received from the retained interest:
Interest-only strip receivables.................................... $ 23.9 $ 23.6
Cash reserve releases, net....................................... $ 8.9 $ 9.9
Proceeds from new securitizations. Proceeds from new securitizations
---------------------------------
includes proceeds from receivables newly securitized through the warehouse
facility during the period. Proceeds from receivables previously
securitized through the warehouse facility that are periodically refinanced
in public securitizations are not considered proceeds from new
securitizations for this table. Proceeds from receivables repurchased from
public securitizations and refinanced through the warehouse facility are
included in proceeds from new securitizations and totaled $51.5 million in
the first quarter of fiscal 2006 and $51.0 million in the first quarter of
fiscal 2005.
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 the
--------------
company to service the securitized receivables.
Other cash flows received from the retained interest. Other cash flows
----------------------------------------------------
received from the retained interest represent cash received by the company
from securitized receivables other than servicing fees. It includes cash
collected on interest-only strip receivables and amounts released to the
company from restricted cash accounts.
Financial Covenants and Performance Triggers. Certain securitization
agreements include various financial covenants and performance triggers.
For such agreements, the company must meet financial covenants relating to
minimum tangible net worth, maximum total liabilities to tangible net worth
ratio, minimum tangible net worth to managed assets ratio, minimum current
ratio, minimum cash balance or borrowing capacity, and minimum fixed charge
coverage ratio. Certain securitized receivables must meet performance tests
relating to portfolio yield, default rates, and delinquency rates. If these
financial covenants and/or performance tests are not met, in addition to
other consequences, the company may be unable to continue to securitize
receivables through the warehouse facility or it may be terminated as
servicer under the securitizations. At May 31, 2005, the company was in
compliance with these financial covenants, and the securitized receivables
were in compliance with these performance triggers.
5. Financial Derivatives
---------------------
The company enters into amortizing fixed-pay interest rate swaps relating
to its 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. During the first quarter of fiscal 2006, the
company entered into six 40-month amortizing interest rate swaps and one
17-month amortizing interest rate swap with initial notional amounts
totaling $425.5 million. The amortized notional amount of all outstanding
swaps related to the automobile loan receivable securitizations was $452.6
million at May 31, 2005, and $662.1 million at February 28, 2005. At May
31, 2005, the fair value of swaps was a net liability of $0.7 million,
which was included in accounts payable. At February 28, 2005, the fair
value of swaps was a net asset of $5.4 million, which was included in
prepaid expenses and other current assets.
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. The
company does 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. The company mitigates credit risk by dealing with highly rated
bank counterparties.
6. Retirement Plans
----------------
The company has a noncontributory defined benefit pension plan (the
"pension plan") covering the majority of full-time employees. The company
also has an unfunded nonqualified plan (the "restoration plan") that
restores retirement benefits for certain senior executives who are affected
by the Internal Revenue Code limitations on benefits provided under the
pension plan. The liabilities for these plans are included in accrued
expenses and other current liabilities in the consolidated balance sheets.
The company uses a fiscal year end measurement date for both the pension
plan and the restoration plan. The components of net pension expense were
as follows:
Three Months Ended May 31
Pension Plan Restoration Plan Total
------------ ---------------- ------------------
(In thousands) 2005 2004 2005 2004 2005 2004
-----------------------------------------------------------------------------------------------------------------------
Service cost............................... $2,126 $1,684 $94 $80 $2,220 $1,764
Interest cost.............................. 699 538 65 54 764 592
Expected return on plan assets............. (493) (352) -- -- (493) (352)
Amortization of prior year
service cost........................... 9 9 6 -- 15 9
Recognized actuarial loss.................. 240 184 34 38 274 222
---------------------------------------------------------------------------
Net pension expense........................ $2,581 $2,063 $199 $172 $2,780 $2,235
===========================================================================
The company did not make a contribution to the pension plan during the
first quarter of fiscal 2006. There are no minimum required contributions
for the remainder of fiscal 2006. However, the company expects to
contribute at least $4.0 million to the pension plan in fiscal 2006.
7. Earnings per Share
------------------
Reconciliations of the numerator and denominator of basic and diluted
earnings per share are presented below:
Three Months Ended May 31
(In thousands except per share data) 2005 2004
------------------------------------------------------------------------------------------------------------------
Weighted average common shares............................................... 104,387 103,864
Dilutive potential common shares:
Options................................................................... 1,781 1,896
Restricted stock.......................................................... 17 14
--------------------------------
Weighted average common shares
and dilutive potential common shares...................................... 106,185 105,774
================================
Net earnings available to common shareholders................................ $ 39,818 $ 35,330
Basic net earnings per share................................................. $ 0.38 $ 0.34
Diluted net earnings per share............................................... $ 0.37 $ 0.33
Certain options were outstanding and not included in the computation of
diluted earnings per share because the options' exercise prices were
greater than the average market price of the common shares. As of May 31,
2005, options to purchase 25,904 shares of common stock with exercise
prices ranging from $30.34 to $43.44 per share were outstanding and not
included in the calculation. As of May 31, 2004, options to purchase
2,116,895 shares with exercise prices ranging from $28.38 to $43.44 per
share were outstanding and not included in the calculation.
8. Recent Accounting Pronouncements
--------------------------------
SFAS No. 123R, "Share-Based Payment," replaces SFAS No. 123, "Accounting
for Stock-Based Compensation" and supercedes APB 25, "Accounting for Stock
Issued to Employees." This new standard requires a public entity to measure
the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. That cost will
be recognized over the period during which an employee is required to
provide service in exchange for the award (usually the vesting period). In
accordance with the revised statement, the company will be required to
recognize the expense attributable to stock options effective with the
company's 2007 fiscal year, beginning March 1, 2006. The company has not
yet determined the impact of adopting SFAS 123R on its financial position,
results of operations, or cash flows.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is provided as a supplement to, and should be
read in conjunction with, our audited consolidated financial statements, the
accompanying notes, and the MD&A included in the company's Annual Report on Form
10-K for the fiscal year ended February 28, 2005.
In this discussion, "we," "our," "us," "CarMax," "CarMax, Inc.," and "the
company" refer to CarMax, Inc. and its wholly owned subsidiaries, unless the
context requires otherwise. Amounts and percentages in tables may not total due
to rounding.
BUSINESS OVERVIEW
CarMax is the nation's largest retailer of used vehicles. As of May 31, 2005, we
operated 62 used car superstores in 28 markets, including 20 mid-sized markets,
which we define as those with television viewing audiences between 1 million and
2.5 million people, and 8 large markets. We also operated seven new car
franchises, all of which were integrated or co-located with our used car
superstores. During the twelve month period ended May 31, 2005, we sold 264,958
used cars, representing 93% of the total 285,354 vehicles the company sold at
retail during that period.
We believe the CarMax consumer offer is unique in the auto 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 four core equities: low, no-haggle prices; a broad selection;
high quality; and customer-friendly service. We generate revenues, income, and
cash flows primarily by retailing used vehicles and associated items including
vehicle financing, extended service plans, and vehicle repair service. A
majority of the used vehicles we retail are purchased directly from consumers.
Vehicles purchased through our appraisal process that do not meet our retail
standards are sold at on-site wholesale auctions. CarMax provides prime-rated
financing to qualified customers through CarMax Auto Finance ("CAF") and Bank of
America. Nonprime financing is provided through three third-party lenders, and
subprime financing is provided through a third-party lender under a program
rolled out to our entire store base in August 2004. We periodically test
additional third-party lenders. CarMax has no recourse liability for loans
provided by third-party lenders. We sell extended service plans 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.
Sales of new vehicles represented a decreasing percentage of our total revenues
over the last several years as we divested new car franchises and added used car
superstores.
We are still at an 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 store sales increases and from geographic expansion. 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 2006, we plan to open nine used
car superstores, representing an approximate 16% increase in our store base.
Fiscal 2006 First Quarter Highlights
- ------------------------------------
* Net sales and operating revenues increased 19% to $1.58 billion from
$1.32 billion in the first quarter of fiscal 2005, while net earnings
increased 13% to $39.8 million, or $0.37 per share, from $35.3 million,
or $0.33 per share.
* Total used vehicle units increased 19%, which included a 6% increase
in comparable store used unit sales.
* We opened four used car superstores in the first quarter, including two
standard-sized superstores and two satellite superstores. Two of the
stores were in Los Angeles, bringing our store count in this large
market to five.
* Our total gross profit margin of 12.5% was similar to the 12.6%
reported in the first quarter of fiscal 2005, while total gross profit
per unit was $2,480 in the current quarter versus $2,452 in the prior
year's quarter. Declines in used vehicle gross profit margins were
offset by an increase in wholesale vehicle gross profit margins.
* CAF income increased 24% to $27.1 million from $21.8 million in the
first quarter of fiscal 2005, reflecting a favorable valuation
adjustment of our retained interest and the favorable terms of a new
$617 million public securitization.
* Selling, general, and administrative expenses as a percent of net sales
and operating revenues (the "SG&A ratio") increased to 10.1% from 9.9%
in the first quarter of fiscal 2005, reflecting the growing proportion
of our store base that is comprised of stores not yet at base maturity
and the March 30, 2005, rollout of marketwide advertising in Los
Angeles. Stores generally have higher SG&A ratios during their first
several years of operation.
* We completed the sale-leaseback of one superstore for total proceeds of
$16.7 million.
* Net cash from operations increased to $64.9 million from $2.6 million
in the first quarter of fiscal 2005, primarily reflecting changes in
inventory. Inventory increased by $6.7 million, compared with a $57.6
million increase in last year's first quarter. The current year's
increase reflects our decision to maintain inventory levels consistent
with the current sales pace at the end of the quarter. The prior year's
increase reflected the slower-than-expected sales pace in April and May
of 2004, and the decision to hold inventories at a level higher than
then-current sales rates in anticipation of improving sales in the
seasonally strong summer months.
FORWARD-LOOKING STATEMENTS
The company cautions readers that the statements contained in this MD&A
regarding the company's future business plans, operations, opportunities, or
prospects, including without limitation any statements or factors regarding
expected sales, margins, or earnings, are forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are based upon management's
current knowledge and assumptions about future events and involve risks and
uncertainties that could cause actual results to differ materially from
anticipated results. For more details on factors that could affect expectations,
see the company's Annual Report on Form 10-K for the fiscal year ended February
28, 2005, and its quarterly and current reports as filed with or furnished to
the Securities and Exchange Commission.
CRITICAL ACCOUNTING POLICIES
For a discussion of our critical accounting policies see "Critical Accounting
Policies" in Management's Discussion and Analysis included in the CarMax, Inc.
2005 Annual Report to Shareholders, which is included as Exhibit 13.1 to the
Annual Report on Form 10-K for the fiscal year ended February 28, 2005. These
policies relate to securitization transactions, revenue recognition, income
taxes, and the defined benefit retirement plan.
RESULTS OF OPERATIONS
Reclassifications. Certain prior year amounts have been reclassified to conform
- -----------------
to the current year's presentation.
Seasonality. CarMax's operations, in common with other retailers in general, are
- -----------
subject to seasonal influences. Historically, our superstores experience their
strongest sales in the spring and summer fiscal quarters. The net earnings of
any quarter are seasonally disproportionate to net sales since administrative
and certain operating expenses remain relatively constant during the year.
Therefore, quarterly results should not be relied upon as necessarily indicative
of results for the entire fiscal year.
Net Sales and Operating Revenues
- --------------------------------
Three Months Ended May 31
(In millions) 2005 % 2004 %
- ------------------------------------------------------------------------------------------------------------
Used vehicle sales........................................ $ 1,203.8 76.3 $ 985.4 74.4
New vehicle sales......................................... 134.1 8.5 136.8 10.3
Wholesale vehicle sales................................... 189.5 12.0 156.9 11.8
Other sales and revenues:
Extended service plan revenues......................... 24.5 1.6 21.1 1.6
Service department sales............................... 22.7 1.4 20.4 1.5
Third-party finance fees............................... 3.8 0.2 4.5 0.3
----------------------------------------------
Total other sales and revenues............................ 51.0 3.2 46.0 3.5
----------------------------------------------
Total net sales and operating revenues.................... $ 1,578.4 100.0 $1,325.0 100.0
==============================================
Retail vehicle sales changes were as follows:
Three Months Ended May 31
2005 2004
----------------------------------
Vehicle units:
Used vehicles................................................ 19 % 7 %
New vehicles................................................. (4) % (1)%
Total ............................................................ 17 % 7 %
Vehicle dollars:
Used vehicles................................................ 22 % 11 %
New vehicles................................................. (2) % 0 %
Total ............................................................ 19 % 9 %
Comparable store used unit sales growth is one of the key drivers of our
profitability. A CarMax store is included in comparable store sales in the
store's fourteenth full month of operation. Comparable store retail sales
changes were as follows:
Three Months Ended May 31
2005 2004
----------------------------------
Vehicle units:
Used vehicles................................................ 6 % (3)%
New vehicles................................................. 0 % 11 %
Total ............................................................ 5 % (2)%
Vehicle dollars:
Used vehicles................................................ 9 % 0 %
New vehicles................................................. 2 % 12 %
Total ............................................................ 8 % 2 %
Used Vehicle Sales. The 22% increase in used vehicle dollar sales in the first
- ------------------
quarter of fiscal 2006 reflects a 19% increase in unit sales and a 3% increase
in average retail selling price. The unit sales growth was driven by a 6%
increase in comparable store used units, together with sales from newer
superstores that are not yet in the comparable store base. The 6% increase in
comparable store used units included 3 percentage points added from sales
financed by a new subprime finance provider, which was added to our third-party
lender group in August 2004.
Our sales pace began to lose some momentum in April and weakened further in May,
reflecting a softening used car market environment. We believe some of the same
factors that affected the marketplace last spring and summer put pressure on the
market this spring, including an atypical rise in wholesale auction prices and
higher gas prices. We saw prices for low-mileage, late model vehicles at major
public wholesale auctions increase this spring in a fashion unprecedented in our
history. Our analysis suggests that reduced supplies of off-lease cars combined
with an unexpected shortage of off-rental cars have been major factors in these
increases. In response, we did not increase our appraisal offers at the same
rate as the steep increase in major public wholesale auction market prices. We
believe that doing so helped to keep our retail prices more in line with demand,
helping to keep our cars attractive to consumers as they compared their options
in the new and used car marketplace. We also believe that our appraisal offers
are consistent with the broader market trade-in offers, as our buy rate, the
rate of appraisal purchases completed per appraisal offers made, was higher than
our buy rate for the first quarter of fiscal 2005.
New Vehicle Sales. Sales of new vehicles declined in the first quarter,
- -----------------
reflecting the disposal, as planned, of five new car franchises since last
year's first quarter. The sales performance for our continuing new car
franchises was generally in line with the overall performance of the brands we
represent.
Wholesale Vehicle Sales. The 21% increase in wholesale vehicles sales in the
- -----------------------
first quarter of fiscal 2006 reflects the combination of higher average
wholesale prices and an 8% increase in wholesale units sold. Our in-house
wholesale auction prices usually reflect the trends in the general wholesale
market, which experienced a steep increase in pricing in the spring. Several
factors contributed to the growth in wholesale units sold, including the
expansion of our store base and an increase in our buy rate. Vehicles acquired
through the appraisal purchase process that do not meet our retail standards are
sold at our on-site wholesale auctions.
Other Sales and Revenues. Other sales and revenues include extended service plan
- ------------------------
revenues, service department sales, and third-party finance fees. Other sales
and revenues increased as extended service plan and service department revenues
benefited from the growth in the store base and the increase in retail vehicle
sales. Third-party finance fees declined, as increases in fees received from our
nonprime finance providers were more than offset by the impact of the growth in
sales financed by our new subprime provider. As is customary in the industry,
subprime finance contracts are purchased from the company at a discount. We
record this discount as an offset to third-party finance fee revenues.
Supplemental information related to vehicle sales follows:
Retail Unit Sales
- -----------------
Three Months Ended May 31
2005 2004
----------------------------------
Used vehicles..................................................... 74,143 62,353
New vehicles...................................................... 5,604 5,844
----------------------------------
Total............................................................. 79,747 68,197
==================================
Average Retail Selling Prices
- -----------------------------
Three Months Ended May 31
2005 2004
------------------------------
Used vehicles ................................................... $16,117 $15,663
New vehicles ................................................... $23,763 $23,224
Total vehicles ................................................... $16,654 $16,311
Retail Vehicle Sales Mix
- ------------------------
Three Months Ended May 31
2005 2004
---------------------------------
Vehicle units:
Used vehicles............................................... 93 % 91 %
New vehicles................................................ 7 9
---------------------------------
Total ............................................................ 100 % 100 %
=================================
Vehicle dollars:
Used vehicles............................................... 90 % 88 %
New vehicles................................................ 10 12
---------------------------------
Total............................................................. 100 % 100 %
=================================
Retail Stores. CarMax opened four superstores in the first quarter of fiscal
- -------------
2006. We expanded our presence in the Los Angeles market, adding both a standard
and a satellite superstore and bringing to five the total store count in this
large market. We entered the Jacksonville market with a standard superstore, and
we added a satellite superstore in the Kansas City market. In May, we added
Dodge to our existing Chrysler Jeep franchise in Orlando and moved the new car
business to a separate facility co-located with our existing Orlando used car
superstore. We have a total of seven new car franchises. We expect to maintain
long-term strategic relationships with the automotive manufacturers we currently
represent.
The following table provides detail on CarMax retail stores:
Estimate
Store Mix Feb. 28, 2006 May 31, 2005 Feb. 28, 2005 May 31, 2004
- --------------------------------------------------------------------------------------------------------------------------
Mega superstores(1).......................... 13 13 13 13
Standard superstores(2)...................... 34 31 29 27
Satellite superstores(3)..................... 20 18 16 12
-------------------------------------------------------------------------
Total used car superstores................... 67 62 58 52
Co-located new car stores.................... 4 4 3 3
--------------------------------------------------------------------------
Total........................................ 71 66 61 55
==========================================================================
(1) 70,000 to 95,000 square feet on 20 to 35 acres
(2) 40,000 to 60,000 square feet on 10 to 25 acres
(3) 10,000 to 20,000 square feet on 4 to 7 acres
Gross Profit
- ------------
Three Months Ended May 31
2005 2004
$ per unit(1) %(2) $ per unit(1) %(2)
---------------------------------------------
Used vehicle gross profit................................... $ 1,801 11.1 $ 1,864 11.8
New vehicle gross profit.................................... $ 804 3.4 $ 828 3.5
Wholesale vehicle gross profit.............................. $ 631 14.9 $ 439 11.6
Other gross profit.......................................... $ 396 61.9 $ 412 61.0
Total gross profit.......................................... $ 2,480 12.5 $ 2,452 12.6
(1) Calculated as category gross profit dollars divided by its respective units
sold, except the other and total categories, which are divided by total
retail units sold.
(2) Calculated as a percentage of its respective sales or revenue.
Used Vehicle Gross Profit. Our first quarter fiscal 2006 used vehicle gross
- -------------------------
profit per unit was within our target range, despite a modest decline compared
with last year's first quarter. The increase in wholesale auction pricing
adversely affected used vehicle gross profits, particularly for vehicles
obtained through the major public wholesale auctions.
In April, we began to take steps to counter the softening used car market
environment. These steps included the decision to not increase our in-store
appraisal offers at the same rate as the steep increase in the major public
wholesale auction market prices. We also began to bring inventory levels in line
with our lower-than-expected sales pace. This strategy contrasted with our
decision in the spring of fiscal 2005, when we elected to keep inventory at
levels higher than the slowing sales pace, in anticipation of a stronger summer
selling season that did not occur.
New Vehicle Gross Profit. New vehicle gross profit per unit decreased slightly
- ------------------------
compared with the first quarter of last year. The new vehicle market remains
highly competitive.
Wholesale Vehicle Gross Profit. Our first quarter fiscal 2006 wholesale vehicle
- ------------------------------
gross profit per unit increased from the prior year level, primarily as a result
of the strengthening wholesale vehicle pricing environment. We typically
experience our strongest wholesale profits during the spring when wholesale
prices are rising, and the atypical rate of increase in the current year added
to the profit improvement. Wholesale profits also benefited from our decision
not to increase appraisal offers at the same rate as the steep increase in major
public wholesale auction market prices
Other Gross Profit. Compared with the prior year's quarter, other gross profit
- ------------------
per unit decreased slightly in the first quarter, due primarily to a decline in
third-party finance fees. Reflected as an offset to third-party finance fees,
the discount at which our subprime lender purchases installment contracts more
than offset the growth in fees received from our other third-party lenders. The
service department, which is the only category within other sales and revenues
that has an associated cost of sales, also reported slightly higher profits.
CarMax Auto Finance Income
- --------------------------
CAF provides prime auto 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 such
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 an 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 loan receivables, both for CAF and for 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.
The components of CarMax Auto Finance income are as follows:
Three Months Ended May 31
(In millions) 2005 % 2004 %
- --------------------------------------------------------------------------------------------------------------------
Gains on sales of loans(1)...................................... $ 20.5 4.3 $ 15.5 3.6
--------------------------------------------------
Other CAF income: (2)
Servicing fee income............................................ 6.6 1.0 6.0 1.0
Interest income................................................. 5.0 0.8 5.0 0.9
--------------------------------------------------
Total other CAF income.......................................... 11.7 1.8 11.0 1.9
--------------------------------------------------
Direct CAF expenses: (2)
CAF payroll and fringe benefit expense..................... 2.4 0.4 2.2 0.4
Other direct CAF expenses.................................. 2.7 0.4 2.5 0.4
--------------------------------------------------
Total direct CAF expenses....................................... 5.1 0.8 4.7 0.8
--------------------------------------------------
CarMax Auto Finance income (3).................................. $ 27.1 1.7 $ 21.8 1.6
==================================================
Loans sold...................................................... $ 474.6 $ 430.6
Average managed receivables..................................... $ 2,537.1 $ 2,299.8
Net sales and operating revenues................................ $ 1,578.4 $ 1,325.0
Ending managed receivables...................................... $ 2,580.9 $ 2,338.2
Percent columns indicate:
(1) Percent of loans sold.
(2) Annualized percent of averaged managed receivables.
(3) Percent of net sales and operating revenues.
CAF income for the first quarter of fiscal 2006 increased 24% to $27.1 million
from $21.8 million in last year's first quarter. The majority of the increase
resulted from a favorable valuation adjustment and the favorable terms of the
public securitization completed in April. The fiscal 2006 CAF income included a
benefit of $0.02 per share from the adjustment in the valuation of the retained
interest in securitized receivables. We lowered the loss assumptions on
previously securitized receivables, reflecting the favorable market conditions
and the continued favorable performance of CAF's portfolio.
CAF's first quarter of fiscal 2006 income also included a benefit of $0.01 per
share related to the 2005-1 public securitization. As described in Note 4 to the
consolidated financial statements, CAF initially funds its receivables through a
warehouse facility. Periodically, the company uses public securitizations to
refinance these receivables. Prior to this quarter, the impact of refinancing
the receivables in a public securitization had not been significant to the
operations of the company. Over time, CAF has benefited from improved execution
in its public securitization program resulting in a lower overall funding cost.
These benefits have included more favorable enhancement levels and tighter bond
spreads relative to pricing benchmarks. We believe these benefits were a
reflection of both the robust demand in the asset backed securities market, and
to a lesser extent, the strength and consistency of CAF's receivables
performance.
In May 2005, we exercised our option to repurchase the loan balances outstanding
in the 2001-2 securitization when the remaining balance of the related auto
loans receivable fell below 10% of the original pool balance. These loans were
subsequently resold into the warehouse facility. In May 2004, we completed a
similar repurchase and resale related to the 2001-1 securitization. In both
cases, the loan balances carried relatively high interest rates that, combined
with relatively low short-term funding costs, resulted in an earnings benefit of
approximately $0.01 per share.
The gain on loans originated and sold was 3.3% in the first quarter of fiscal
2006, and 3.8% in last year's first quarter. The reported gain as a percent of
all loans sold of 4.3% in the first quarter of fiscal 2006 included the effects
of the repurchase and resale of the 2001-2 public securitization, the valuation
adjustment, and the new public securitization. The reported gain as a percent of
all loans sold of 3.5% in the first quarter of fiscal 2005 included the effect
of the repurchase and resale of the 2001-1 public securitization.
We are at risk for the performance of the managed securitized receivables to the
extent that we maintain a retained interest in the receivables. Supplemental
information on our portfolio of managed receivables is as follows:
As of May 31 As of February 28 or 29
(In millions) 2005 2004 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------
Loans securitized.......................................... $ 2,499.0 $ 2,283.2 $ 2,427.2 $ 2,200.4
Loans held for sale or investment.......................... 81.9 55.0 67.7 48.2
------------------------------------------------------------
Ending managed receivables................................. $ 2,580.9 $ 2,338.2 $ 2,494.9 $ 2,248.6
=============================================================
Accounts 31+ days past due................................. $ 34.5 $ 35.3 $ 31.1 $ 31.4
Past due accounts as a percentage of
ending managed receivables................................. 1.34% 1.51% 1.24% 1.40%
Three Months Ended May 31
(In millions) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------
Average managed receivables.............................................. $ 2,537.1 $ 2,299.8
Credit losses on managed receivables..................................... $ 3.1 $ 4.0
Annualized credit losses as a percentage of
average managed receivables.............................................. 0.49% 0.70%
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. Annualized losses as a percentage of average managed receivables
decreased substantially in the first quarter this year compared to the same
period in fiscal 2005. We believe the decrease was due to a combination of
factors including improved general economic conditions, the implementation of a
new credit scorecard in the third quarter of fiscal 2003, and operational
efficiencies resulting from system enhancements. The change in performance is
reflected in the revaluation of the retained interest, as previously discussed.
Selling, General and Administrative Expenses
- --------------------------------------------
The SG&A ratio was 10.1% in the first quarter of fiscal 2006 compared with 9.9%
in the first quarter of the prior year. The increase primarily reflected the
larger percentage of our store base that is made up of stores not yet at base
maturity. Stores typically experience higher SG&A ratios during their first
several years of operation. In this year's first quarter, 45% of our stores were
newer stores; in last year's first quarter, that percentage was 35%. The
increase in the SG&A ratio also reflected the rollout of marketwide advertising
in Los Angeles during the quarter.
Income Taxes
- ------------
The effective income tax rate declined to 38.3% in the first quarter of fiscal
2006 from 39.0% in the first quarter of fiscal 2005, primarily as a result of a
legal entity reorganization in December 2004. The company 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
- ------------------
We anticipate comparable store used vehicle unit growth in the range of 3% to 9%
for the second quarter of fiscal 2006 and net earnings per share for the second
quarter in the range of $0.29 to $0.34. We have chosen to provide wider than
usual ranges for the second quarter's comparable used unit performance and
earnings per share expectations because of the continuing sales volatility in
the used car market environment. We expect the CAF gain on loans sold will be
somewhat below the normalized range of 3.5% to 4.5% as the increase in our cost
of funds continues to outpace rises in consumer rates. We have also chosen not
to provide our outlook for the second half of the fiscal year until we see a
more consistent trend that would allow us to issue an updated forecast.
We plan to open three standard superstores and two satellite superstores during
the balance of the fiscal year, bringing total fiscal 2006 store openings to
nine. In the first quarter of fiscal 2007, we currently plan to open four
superstores, entering the Columbus, Ohio, market with one standard-sized
superstore and one satellite superstore, and entering the Hartford, Conn., and
Oklahoma City, Okla., markets with one superstore each.
RECENT ACCOUNTING PRONOUNCEMENTS
For a discussion of recent accounting pronouncements applicable to the company,
see Note 8 to the company's consolidated financial statements.
FINANCIAL CONDITION
Liquidity and Capital Resources
- -------------------------------
Operating Activities. Net cash from operations increased to $64.9 million in the
- --------------------
first quarter of fiscal 2006 from $2.6 million in the first quarter of fiscal
2005, primarily reflecting changes in inventory. Inventory increased by $6.7
million in the first quarter of fiscal 2006, compared with a $57.6 million
increase in last year's first quarter. In fiscal 2006, we held inventory at a
level consistent with the sales pace at the end of the first quarter. The prior
year's increase reflected the slower-than-expected sales pace in April and May
of 2004, and the decision to hold inventory at a level higher than the
then-current sales pace in anticipation of improving sales in the seasonally
strong summer months.
Investing Activities. Net cash used in investing activities was $38.4 million in
- --------------------
the first quarter of fiscal 2006, compared with $27.7 million in the prior
year's quarter. Capital expenditures were $55.1 million in the first quarter of
fiscal 2006, compared with $46.5 million in the first quarter of fiscal 2005.
The increase in capital expenditures reflects the increase in our store base.
The company generated net proceeds from sales of property and equipment of $16.7
million in the first quarter of fiscal 2006, and $18.8 million in the first
quarter of fiscal 2005. These proceeds were primarily due to sale-leaseback
transactions, each involving one superstore property. The sale-leaseback
transactions resulted in operating leases with initial lease terms of 20 years
with four, five-year renewal options. In June 2005, the company completed a
sale-leaseback transaction involving four superstore properties for proceeds of
$56.0 million.
Financing Activities. Net cash used in financing activities was $22.1 million in
- --------------------
the first three months of fiscal 2006, compared with net cash provided of $25.1
million in the first three months of last fiscal year. In the first quarter of
fiscal 2006, we used cash generated from operations to reduce short-term debt by
$23.9 million. In the first quarter of fiscal 2005, we increased total
outstanding debt by $23.7 million.
The aggregate principal amount of automobile loan receivables funded through
securitizations, which are discussed in Notes 3 and 4 to the company's
consolidated financial statements, totaled $2.50 billion at May 31, 2005, and
$2.28 billion at May 31, 2004. During the first quarter of fiscal 2006, the
company completed a public securitization of automobile loan receivables. The
total value of the automobile loan receivables securitized through this public
offering was $617 million. At May 31, 2005, the warehouse facility limit was
$825 million and unused warehouse capacity totaled $372 million. The warehouse
facility matures in August 2005. We anticipate that we will be able to renew,
expand, or enter into new securitization arrangements to meet the future needs
of the automobile finance operation.
We maintain a $300 million credit facility secured by vehicle inventory. As of
May 31, 2005, the amount outstanding under this credit facility was $141.4
million, with the remainder fully available to the company. As this facility
expires in May 2006, the amount outstanding is presented as a current obligation
on the company's consolidated balance sheet as of May 31, 2005. CarMax has
signed a commitment letter with Bank of America N.A. and Banc of America
Securities LLC to arrange a new credit facility. This new credit facility is
expected to close during the second quarter of fiscal 2006 and have an initial
term of four years. The facility is expected to contain more favorable terms and
conditions and provide funding commitments of up to $450 million.
We expect that proceeds from securitization transactions; sale-leaseback
transactions; current and, if needed, additional credit facilities; and cash
generated by operations will be sufficient to fund capital expenditures and
working capital for the foreseeable future.
ITEM 3.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Automobile Installment Loan Receivables. At May 31, 2005, and February 28, 2005,
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all loans in the 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. Interest rate exposure relating to floating-rate
securitizations is managed 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.
Credit risk is mitigated 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.
The total principal amount of managed receivables securitized or held for
investment or sale as of May 31, 2005, and February 28, 2005, was as follows:
(In millions) May 31 February 28
- ----------------------------------------------------------------------------------------------------------------
Fixed-rate securitizations............................................. $ 2,046.0 $ 1,764.7
Floating-rate securitizations
synthetically altered to fixed.................................... 452.6 662.1
Floating-rate securitizations......................................... 0.4 0.4
Held for investment (1)............................................... 46.3 45.5
Held for sale (2)..................................................... 35.6 22.2
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Total................................................................. $ 2,580.9 $ 2,494.9
=======================================
(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 the debt is
floating-rate debt based on LIBOR. A 100-basis point increase in market interest
rates would not have had a material effect on our first quarter fiscal 2006
results of operations or cash flows.
ITEM 4.
CONTROLS AND PROCEDURES
-----------------------
The company maintains 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 such information is accumulated and communicated to
our 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, the company evaluated the
effectiveness of the design and operation of its disclosure controls. This
evaluation was performed under the supervision and with the participation of
management, including our CEO and CFO. Based upon that evaluation, the CEO and
CFO concluded that the company's disclosure controls were effective as of the
end of such period. There was no change in the company's internal control over
financial reporting that occurred during the quarter ended May 31, 2005, that
has materially affected, or is reasonably likely to materially affect, the
company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
CarMax is subject to various legal proceedings, claims, and
liabilities that arise in the ordinary course of its business. In
the opinion of management, the amount of ultimate liability with
respect to these actions will not materially affect the financial
position or results of operations of CarMax.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of the company's shareholders was held
June 21, 2005.
(b) At the annual meeting, the shareholders reelected
W. Robert Grafton, William S. Kellogg, and Austin Ligon to
the company's board of directors, each for a three-year
term expiring at the 2008 Annual Meeting of Shareholders
pursuant to the following vote:
Votes Votes
Directors For Withheld
----------------------------------------------------------------------------------------------------
W. Robert Grafton 93,960,190 456,866
William S. Kellogg 93,994,932 422,124
Austin Ligon 94,179,237 237,819
----------------------------------------------------------------------------------------------------
The following directors had terms of office that did
not expire at the 2005 annual meeting:
Keith D. Browning
James F. Clingman, Jr.
Jeffrey E. Garten
Hugh G. Robinson
Richard L. Sharp
Thomas G. Stemberg
Beth A. Stewart
William R. Tiefel
(c) At the annual meeting, the shareholders also voted
upon the following:
(i) The shareholders ratified the selection of KPMG LLP
as the company's independent auditors for fiscal year
2006 by a vote of 94,245,894 shares for, 114,782
shares against, and 56,380 shares abstaining.
(ii) The shareholders approved an amendment to the CarMax,
Inc. Amended and Restated 2002 Stock Incentive Plan
(the "2002 Plan"), which increased the number of
shares of common stock authorized for issuance under
the 2002 Plan by 6,750,000, by a vote of 57,496,745
shares for, 21,605,323 shares against, and 304,108
shares abstaining. There were 15,010,880 broker
non-votes on this matter.
(iii)The shareholders approved an amendment to the
CarMax, Inc. Amended and Restated 2002 Non-Employee
Directors Stock Incentive Plan (the "2002 Directors
Plan"), which increased the number of shares of
common stock authorized for issuance under the 2002
Directors Plan by 150,000 shares, by a vote of
69,513,420 shares for, 9,568,049 shares against, and
324,707 shares abstaining. There were 15,010,880
broker non-votes on this matter.
Item 6. Exhibits
31.1 Certification of the Chief Executive Officer Pursuant to
Rule 13a-14(a), filed herewith.
31.2 Certification of the Chief Financial Officer Pursuant to Rule
13a-14(a), filed herewith.
32.1 Certification of the Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, filed herewith.
32.2 Certification of the Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, filed herewith.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CARMAX, INC.
By: /s/ Austin Ligon
--------------------------------------
Austin Ligon
President and
Chief Executive Officer
By: /s/ Keith D. Browning
--------------------------------------
Keith D. Browning
Executive Vice President and
Chief Financial Officer
July 8, 2005
EXHIBIT INDEX
-------------
31.1 Certification of the Chief Executive Officer Pursuant to
Rule 13a-14(a), filed herewith.
31.2 Certification of the Chief Financial Officer Pursuant to
Rule 13a-14(a), filed herewith.
32.1 Certification of the Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, filed herewith.
32.2 Certification of the Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, filed herewith.