Company Quick10K Filing
Quick10K
Carmax
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$82.79 166 $13,759
10-Q 2019-08-31 Quarter: 2019-08-31
10-Q 2019-05-31 Quarter: 2019-05-31
10-K 2019-02-28 Annual: 2019-02-28
10-Q 2018-11-30 Quarter: 2018-11-30
10-Q 2018-08-31 Quarter: 2018-08-31
10-Q 2018-05-31 Quarter: 2018-05-31
10-K 2018-02-28 Annual: 2018-02-28
10-Q 2017-11-30 Quarter: 2017-11-30
10-Q 2017-08-31 Quarter: 2017-08-31
10-Q 2017-05-31 Quarter: 2017-05-31
10-K 2017-02-28 Annual: 2017-02-28
10-Q 2016-11-30 Quarter: 2016-11-30
10-Q 2016-08-31 Quarter: 2016-08-31
10-Q 2016-05-31 Quarter: 2016-05-31
10-K 2016-02-29 Annual: 2016-02-29
10-Q 2015-11-30 Quarter: 2015-11-30
10-Q 2015-08-31 Quarter: 2015-08-31
10-Q 2015-05-31 Quarter: 2015-05-31
10-K 2015-02-28 Annual: 2015-02-28
10-Q 2014-11-30 Quarter: 2014-11-30
10-Q 2014-08-31 Quarter: 2014-08-31
10-Q 2014-05-31 Quarter: 2014-05-31
10-K 2014-02-28 Annual: 2014-02-28
10-Q 2013-11-30 Quarter: 2013-11-30
8-K 2019-10-07
8-K 2019-09-24
8-K 2019-06-26 Officers, Shareholder Vote, Exhibits
8-K 2019-06-21
8-K 2019-06-11
8-K 2019-03-29
8-K 2019-01-17 Regulation FD, Exhibits
8-K 2018-12-21
8-K 2018-12-04 Other Events, Exhibits
8-K 2018-10-23 Other Events
8-K 2018-10-02 Officers, Exhibits
8-K 2018-09-26
8-K 2018-07-18 Regulation FD, Exhibits
8-K 2018-06-29 Officers, Shareholder Vote, Exhibits
8-K 2018-06-22
8-K 2018-06-04 Officers
8-K 2018-04-04
8-K 2018-02-02 Officers, Exhibits
8-K 2018-01-23 Regulation FD, Exhibits
GPC Genuine Parts 12,827
CASY Caseys General Stores 6,312
AN Autonation 4,235
PAG Penske Automotive Group 3,546
MUSA Murphy 2,888
MNRO Monro 2,552
GPI Group 1 Automotive 1,387
SAH Sonic Automotive 1,175
TA TravelCenters of America 561
CVNA Carvana 0
KMX 2019-08-31
Part I. Financial Information
Item 1. Financial Statements
Item 2.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 q2fy20ex311.htm
EX-31.2 q2fy20ex312.htm
EX-32.1 q2fy20ex321.htm
EX-32.2 q2fy20ex322.htm

Carmax Earnings 2019-08-31

KMX 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended August 31, 2019
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 incorporation)
 
(I.R.S. Employer Identification No.)
 
 
12800 Tuckahoe Creek Parkway
 
23238
Richmond,
Virginia
 
 
(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)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
KMX
New York Stock Exchange
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      No   
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes       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 as of September 30, 2019
Common Stock, par value $0.50
 
164,430,050

Page 1



CARMAX, INC. AND SUBSIDIARIES
 
TABLE OF CONTENTS
 
 
Page
No.
PART I.
FINANCIAL INFORMATION 
 
 
 
 
 
 
Item 1.
Financial Statements:
 
 
 
 
 
 
 
Consolidated Statements of Earnings (Unaudited) –
 
 
 
Three and Six Months Ended August 31, 2019 and 2018
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income (Unaudited) –
 
 
 
Three and Six Months Ended August 31, 2019 and 2018
 
 
 
 
 
 
Consolidated Balance Sheets (Unaudited) –
 
 
 
August 31, 2019 and February 28, 2019
 
 
 
 
 
 
Consolidated Statements of Cash Flows (Unaudited) –
 
 
 
Six Months Ended August 31, 2019 and 2018
 
 
 
 
 
 
Consolidated Statements of Shareholders' Equity (Unaudited) –
 
 
 
Three and Six Months Ended August 31, 2019 and 2018
 
 
 
 
 
 
Notes to Consolidated Financial Statements (Unaudited)
 
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and
 
 
 
Results of Operations
 24
 
 
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
 
 
Item 4.
Controls and Procedures
 
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
 
 
Item 1A.
Risk Factors
 
 
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
Item 6.
Exhibits
 
 
 
 
SIGNATURES
 
 


Page 2



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
 
 
 
 
Three Months Ended August 31
 
Six Months Ended August 31
(In thousands except per share data)
2019
%(1)
 
2018
%(1)
 
2019
%(1)
 
2018
%(1)
SALES AND OPERATING REVENUES:
 
 
 
 
 
 
 
 
 
 
 
Used vehicle sales
$
4,346,295

83.6
 
$
3,975,368

83.4

 
$
8,886,952

84.1

 
$
7,996,415

83.7
Wholesale vehicle sales
678,286

13.0
 
627,990

13.2

 
1,340,735

12.7

 
1,245,641

13.0
Other sales and revenues
176,570

3.4
 
162,677

3.4

 
339,782

3.2

 
316,571

3.3
NET SALES AND OPERATING REVENUES
5,201,151

100.0
 
4,766,035

100.0

 
10,567,469

100.0

 
9,558,627

100.0
COST OF SALES:
 
 
 
 
 
 
 
 
 
 
 
Used vehicle cost of sales
3,889,917

74.8
 
3,546,383

74.4

 
7,933,741

75.1

 
7,127,992

74.6
Wholesale vehicle cost of sales
560,906

10.8
 
516,913

10.8

 
1,097,396

10.4

 
1,019,858

10.7
Other cost of sales
56,875

1.1
 
52,103

1.1

 
100,496

1.0

 
98,801

1.0
TOTAL COST OF SALES
4,507,698

86.7
 
4,115,399

86.3

 
9,131,633

86.4

 
8,246,651

86.3
GROSS PROFIT 
693,453

13.3
 
650,636

13.7

 
1,435,836

13.6

 
1,311,976

13.7
CARMAX AUTO FINANCE INCOME 
114,131

2.2
 
109,667

2.3

 
230,090

2.2

 
225,260

2.4
Selling, general and administrative expenses
480,831

9.2
 
453,554

9.5

 
970,491

9.2

 
891,788

9.3
Interest expense
21,073

0.4
 
17,950

0.4

 
38,857

0.4

 
36,002

0.4
Other expense (income)
143

 
(686
)

 
(216
)

 
277

Earnings before income taxes
305,537

5.9
 
289,485

6.1

 
656,794

6.2

 
609,169

6.4
Income tax provision
71,938

1.4
 
68,595

1.4

 
156,451

1.5

 
149,623

1.6
NET EARNINGS 
$
233,599

4.5
 
$
220,890

4.6

 
$
500,343

4.7

 
$
459,546

4.8
WEIGHTED AVERAGE COMMON SHARES:
 
 
 
 
 
 
 
 
 
 
 
Basic
165,354

 
 
176,284



 
165,839

 

 
177,211

 
Diluted
167,272

 
 
178,200



 
167,458

 

 
178,811

 
NET EARNINGS PER SHARE:
 
 
 
 
 
 
 
 

 
 
 
Basic
$
1.41

 
 
$
1.25



 
$
3.02

 

 
$
2.59

 
Diluted
$
1.40

 
 
$
1.24



 
$
2.99

 

 
$
2.57

 
 
(1)    Percents are calculated as a percentage of net sales and operating revenues and may not total due to rounding. 
 
 








See accompanying notes to consolidated financial statements.

Page 3



CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
 
 
Three Months Ended August 31
 
Six Months Ended August 31
(In thousands)
2019
 
2018
 
2019
 
2018
NET EARNINGS
$
233,599

 
$
220,890

 
$
500,343

 
$
459,546

Other comprehensive (loss) income, net of taxes
 
 
 
 
 
 

Net change in retirement benefit plan unrecognized actuarial losses
356

 
370

 
711

 
739

Net change in cash flow hedge unrecognized losses
(10,780
)
 
240

 
(24,331
)
 
(862
)
Other comprehensive (loss) income, net of taxes
(10,424
)
 
610

 
(23,620
)
 
(123
)
TOTAL COMPREHENSIVE INCOME
$
223,175

 
$
221,500

 
$
476,723

 
$
459,423

 
  
 






































See accompanying notes to consolidated financial statements.

Page 4



CARMAX, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
 
As of August 31
 
As of February 28
(In thousands except share data)
2019
 
2019
ASSETS
 

 
 

CURRENT ASSETS:
 

 
 

Cash and cash equivalents
$
40,737

 
$
46,938

Restricted cash from collections on auto loan receivables
483,374

 
440,669

Accounts receivable, net
141,091

 
139,850

Inventory
2,604,750

 
2,519,455

Other current assets
114,987

 
67,101

TOTAL CURRENT ASSETS 
3,384,939

 
3,214,013

Auto loan receivables, net
13,065,959

 
12,428,487

Property and equipment, net of accumulated depreciation of $1,199,375 and $1,297,393 as of August 31, 2019 and February 28, 2019, respectively
2,981,260

 
2,828,058

Deferred income taxes
66,048

 
61,346

Operating lease assets
456,449

 

Other assets
185,599

 
185,963

TOTAL ASSETS 
$
20,140,254

 
$
18,717,867

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 
CURRENT LIABILITIES:
 

 
 
Accounts payable
$
628,507

 
$
593,171

Accrued expenses and other current liabilities
301,503

 
318,204

Accrued income taxes
1,389

 
3,784

Current portion of operating lease liabilities
30,066

 

Short-term debt
915

 
1,129

Current portion of long-term debt
10,762

 
10,177

Current portion of non-recourse notes payable
423,562

 
385,044

TOTAL CURRENT LIABILITIES 
1,396,704

 
1,311,509

Long-term debt, excluding current portion
1,689,079

 
1,649,244

Non-recourse notes payable, excluding current portion
12,695,050

 
12,127,290

Operating lease liabilities, excluding current portion
448,640

 

Other liabilities
299,224

 
272,796

TOTAL LIABILITIES 
16,528,697

 
15,360,839

 
 
 
 
Commitments and contingent liabilities


 


SHAREHOLDERS’ EQUITY:
 
 
 
Common stock, $0.50 par value; 350,000,000 shares authorized; 164,885,648 and 167,478,924 shares issued and outstanding as of August 31, 2019 and February 28, 2019, respectively
82,442

 
83,739

Capital in excess of par value
1,313,290

 
1,237,153

Accumulated other comprehensive loss
(91,630
)
 
(68,010
)
Retained earnings
2,307,455

 
2,104,146

TOTAL SHAREHOLDERS’ EQUITY 
3,611,557

 
3,357,028

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 
$
20,140,254

 
$
18,717,867



See accompanying notes to consolidated financial statements.

Page 5



CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended August 31
(In thousands)
2019
 
2018
OPERATING ACTIVITIES:
 
 
 
Net earnings
$
500,343

 
$
459,546

Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
103,468

 
90,311

Share-based compensation expense
68,887

 
54,234

Provision for loan losses
83,693

 
70,863

Provision for cancellation reserves
45,471

 
38,699

Deferred income tax provision
3,812

 
2,539

Other
3,718

 
1,358

Net (increase) decrease in:
 
 
 
Accounts receivable, net
(1,241
)
 
28,438

Inventory
(85,295
)
 
33,339

Other current assets
(48,452
)
 
22,161

Auto loan receivables, net
(721,165
)
 
(675,614
)
Other assets
15,421

 
(7,167
)
Net (decrease) increase in:
 
 
 
Accounts payable, accrued expenses and other
 
 
 
  current liabilities and accrued income taxes
(26,632
)
 
57,639

Other liabilities
(67,484
)
 
(65,461
)
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
(125,456
)
 
110,885

INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(171,347
)
 
(171,111
)
Proceeds from disposal of property and equipment
3

 
565

Purchases of investments
(8,244
)
 
(5,306
)
Sales of investments
720

 
904

NET CASH USED IN INVESTING ACTIVITIES
(178,868
)
 
(174,948
)
FINANCING ACTIVITIES:
 
 
 
(Decrease) increase in short-term debt, net
(214
)
 
3,169

Proceeds from issuances of long-term debt
3,293,500

 
1,300,600

Payments on long-term debt
(3,284,866
)
 
(1,460,584
)
Cash paid for debt issuance costs
(10,862
)
 
(8,189
)
Payments on finance lease obligations
(1,694
)
 
(335
)
Issuances of non-recourse notes payable
5,748,000

 
5,486,502

Payments on non-recourse notes payable
(5,141,901
)
 
(4,878,974
)
Repurchase and retirement of common stock
(341,929
)
 
(381,347
)
Equity issuances
86,521

 
47,502

NET CASH PROVIDED BY FINANCING ACTIVITIES
346,555

 
108,344

Increase in cash, cash equivalents, and restricted cash
42,231

 
44,281

Cash, cash equivalents, and restricted cash at beginning of year
595,377

 
554,898

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
$
637,608

 
$
599,179

 
 
 
 
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS:
Cash and cash equivalents
$
40,737

 
$
37,147

Restricted cash from collections on auto loan receivables
483,374

 
447,642

Restricted cash included in other assets
113,497

 
114,390

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD
$
637,608

 
$
599,179


See accompanying notes to consolidated financial statements.

Page 6



CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Unaudited)

 
Three and Six Months Ended August 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

Net earnings

 

 

 
233,599

 

 
233,599

Other comprehensive loss

 

 

 

 
(10,424
)
 
(10,424
)
Share-based compensation expense

 

 
10,757

 

 

 
10,757

Repurchases of common stock
(1,526
)
 
(763
)
 
(11,933
)
 
(115,666
)
 

 
(128,362
)
Exercise of common stock options
1,008

 
504

 
52,766

 

 

 
53,270

Stock incentive plans, net shares issued
9

 
4

 
(42
)
 

 

 
(38
)
Balance as of August 31, 2019
164,886

 
$
82,442

 
$
1,313,290

 
$
2,307,455

 
$
(91,630
)
 
$
3,611,557

 
 
 
 
 
 
 
 
 
 
 
 
 
Three and Six Months Ended August 31, 2018
 
 
 
 
 
 
 
 
 
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, 2018
179,748

 
$
89,874

 
$
1,234,047

 
$
2,047,240

 
$
(54,312
)
 
$
3,316,849

Net earnings

 

 

 
238,656

 

 
238,656

Other comprehensive loss

 

 

 

 
(733
)
 
(733
)
Share-based compensation expense

 

 
16,645

 

 

 
16,645

Repurchases of common stock
(3,308
)
 
(1,654
)
 
(22,824
)
 
(182,926
)
 

 
(207,404
)
Exercise of common stock options
212

 
106

 
8,946

 

 

 
9,052

Stock incentive plans, net shares issued
68

 
34

 
(2,202
)
 

 

 
(2,168
)
Adoption of ASU 2014-09

 

 

 
12,864

 

 
12,864

Balance as of May 31, 2018
176,720

 
$
88,360

 
$
1,234,612

 
$
2,115,834

 
$
(55,045
)
 
$
3,383,761

Net earnings

 

 

 
220,890

 

 
220,890

Other comprehensive income

 

 

 

 
610

 
610

Share-based compensation expense

 

 
9,695

 

 

 
9,695

Repurchases of common stock
(2,291
)
 
(1,146
)
 
(16,334
)
 
(153,746
)
 

 
(171,226
)
Exercise of common stock options
860

 
430

 
38,019

 

 

 
38,449

Stock incentive plans, net shares issued
1

 
1

 
(62
)
 

 

 
(61
)
Balance as of August 31, 2018
175,290

 
$
87,645

 
$
1,265,930

 
$
2,182,978

 
$
(54,435
)
 
$
3,482,118


See accompanying notes to consolidated financial statements.

Page 7



CARMAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

1.    Background

Business. CarMax, Inc. (“we,” “our,” “us,” “CarMax” and “the company”), including its wholly owned subsidiaries, is the largest retailer of used vehicles in the United States. We operate in two reportable segments:  CarMax Sales Operations and CarMax Auto Finance (“CAF”).  Our CarMax Sales Operations segment consists of all aspects of our auto merchandising and service operations, excluding financing provided by CAF.  Our CAF segment consists solely of our own finance operation that provides financing to customers buying retail vehicles from CarMax.
 
We deliver an unrivaled customer experience by offering a broad selection of quality used vehicles and related products and services at competitive, no-haggle prices using a customer-friendly sales process in an attractive, modern sales facility, as well as through carmax.com and our mobile apps.  We provide customers with a range of related products and services, including the appraisal and purchase of vehicles directly from consumers; the financing of retail vehicle purchases through CAF and third-party finance providers; the sale of extended protection plan (“EPP”) products, which include extended service plans (“ESPs”) and guaranteed asset protection (“GAP”); and vehicle repair service.  Vehicles purchased through the appraisal process that do not meet our retail standards are sold to licensed dealers through on-site wholesale auctions.

Basis of Presentation and Use of Estimates. The accompanying interim unaudited consolidated financial statements include the accounts of CarMax and our wholly owned subsidiaries.  All significant intercompany balances and transactions have been eliminated in consolidation.  These consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  In the opinion of management, such interim consolidated financial statements reflect all normal recurring adjustments considered necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented.  The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year.  

The accounting policies followed in the presentation of our interim financial results are consistent with those included in the company's Annual Report on Form 10-K for the fiscal year ended February 28, 2019 (the “2019 Annual Report”), with the exception of those related to recent accounting pronouncements adopted in the current fiscal year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in our 2019 Annual Report.
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities.  Actual results could differ from those estimates.  Certain prior year amounts have been reclassified to conform to the current year’s presentation.  Amounts and percentages may not total due to rounding.

In connection with our adoption of Accounting Standards Update (“ASU”) 2016-02, Leases (“ASC 842”) during the current fiscal year, certain prior period amounts have been reclassified to conform to the current period's presentation. In the consolidated balance sheets, financing obligations have been reclassified to current portion of long-term debt and long-term debt, excluding current portion. Also, capital lease obligations have been reclassified to accrued expenses and other current liabilities and other liabilities. In the consolidated statements of cash flows, payments on financing obligations have been reclassified to payments on long-term debt. See Notes 9 and 13 for additional information on financing obligations and leases, respectively.

Recent Accounting Pronouncements.
Adopted in the Current Period.
In August 2018, the FASB issued an accounting pronouncement (FASB ASU 2018-13) related to disclosure requirements for fair value measurements. The pronouncement eliminates, modifies and adds disclosure requirements for fair value measurements. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We early adopted this pronouncement during the second quarter of fiscal 2020, and it did not have a material effect on our consolidated financial statements.

Effective in Future Periods.
In June 2016, the FASB issued an accounting pronouncement (FASB ASU 2016-13) related to the measurement of credit losses on financial instruments. This pronouncement, along with subsequent ASUs issued to clarify certain provisions of ASU 2016-13, changes the impairment model for most financial assets and will require the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such

Page 8



instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. We plan to adopt this pronouncement for our fiscal year beginning March 1, 2020. We are currently evaluating the effect on our consolidated financial statements, as well as the impacts on our business processes, systems and internal controls, and expect that the standard will have a material impact on our calculation of the allowance for loan losses.

2.    Revenue
 
We recognize revenue when control of the good or service has been transferred to the customer, generally either at the time of sale or upon delivery to a customer.  Our contracts have a fixed contract price and revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. We collect sales taxes and other taxes from customers on behalf of governmental authorities at the time of sale.  These taxes are accounted for on a net basis and are not included in net sales and operating revenues or cost of sales. We generally expense sales commissions when incurred because the amortization period would have been less than one year. These costs are recorded within selling, general and administrative expenses. We do not have any significant payment terms as payment is received at or shortly after the point of sale.

Disaggregation of Revenue

 
Three Months Ended August 31
 
Six Months Ended August 31
(In millions)
2019
 
2018
 
2019
 
2018
Used vehicle sales
$
4,346.3

 
$
3,975.4

 
$
8,887.0

 
$
7,996.4

Wholesale vehicle sales
678.3

 
628.0

 
1,340.7

 
1,245.6

Other sales and revenues:
 
 
 
 
 
 
 
Extended protection plan revenues
113.3

 
98.5

 
224.6

 
198.6

Third-party finance fees, net
(10.3
)
 
(9.7
)
 
(25.8
)
 
(24.2
)
Service revenues
33.4

 
36.1

 
67.3

 
72.7

Other
40.2

 
37.8

 
73.7

 
69.5

Total other sales and revenues
176.6

 
162.7

 
339.8

 
316.6

Total net sales and operating revenues
$
5,201.2

 
$
4,766.0

 
$
10,567.5

 
$
9,558.6



Used Vehicle Sales. Revenue from the sale of used vehicles is recognized upon transfer of control of the vehicle to the customer. As part of our customer service strategy, we guarantee the retail vehicles we sell with a 7-day, money-back guarantee.  We record a reserve for estimated returns based on historical experience and trends. The reserve for estimated returns is presented gross on the consolidated balance sheets, with a return asset recorded in other current assets and a refund liability recorded in accrued expenses and other current liabilities. We also guarantee the used vehicles we sell with a 90-day/4,000 mile limited warranty. These warranties are deemed assurance-type warranties and accounted for as warranty obligations. See Note 15 for additional information on this warranty and its related obligation.

Wholesale Vehicle Sales. Wholesale vehicles are sold at our auctions, and revenue from the sale of these vehicles is recognized upon transfer of control of the vehicle to the customer. Dealers also pay a fee to us based on the sale price of the vehicles they purchase. This fee is recognized as revenue at the time of sale. While we provide condition disclosures on each wholesale vehicle sold, the vehicles are subject to a limited right of return. We record a reserve for estimated returns based on historical experience and trends. The reserve for estimated returns is presented gross on the consolidated balance sheets, with a return asset recorded in other current assets and a refund liability recorded in accrued expenses and other current liabilities.

EPP Revenues. We also sell ESP and GAP products on behalf of unrelated third parties, who are primarily responsible for fulfilling the contract, to customers who purchase a retail vehicle.  The ESPs we currently offer on all used vehicles provide coverage up to 60 months (subject to mileage limitations), while GAP covers the customer for the term of their finance contract. We recognize revenue, on a net basis, at the time of sale. We also record a reserve for estimated contract cancellations. The reserve for cancellations is evaluated for each product and is based on forecasted forward cancellation curves utilizing historical experience, recent trends and credit mix of the customer base.  Our risk related to contract cancellations is limited to the revenue that we receive.  Cancellations fluctuate depending on the volume of EPP sales, customer financing default or prepayment rates, and shifts in customer behavior, including those related to changes in the coverage or term of the product.  The current portion of estimated

Page 9



cancellation reserves is recognized as a component of accrued expenses and other current liabilities with the remaining amount recognized in other liabilities.  See Note 7 for additional information on cancellation reserves.

We are contractually entitled to receive profit-sharing revenues based on the performance of the ESPs administered by third parties. These revenues are a form of variable consideration included in EPP revenues to the extent that it is probable that it will not result in a significant revenue reversal. An estimate of the amount to which we expect to be entitled, subject to various constraints, is recognized upon satisfying the performance obligation of selling the ESP. These constraints include factors that are outside of the company’s influence or control and the length of time until settlement. We apply the expected value method, utilizing historical claims and cancellation data from CarMax customers, as well as external data and other qualitative assumptions. This estimate is reassessed each reporting period with changes reflected in other sales and revenues on our consolidated statements of earnings and other assets on our consolidated balance sheets. Profit-sharing payments by the ESP provider begin when the underlying ESPs reach a specified level of claims history. As of August 31, 2019 and February 28, 2019, we recognized a contract asset of $32.2 million and $25.7 million, respectively, related to cumulative profit-sharing payments to which we expect to be entitled. During the current quarter, this amount was reclassified from other assets to other current assets on our consolidated balance sheets, as we expect to begin receiving ESP profit-sharing payments in the first calendar quarter of 2020. While the initial payment could be up to $50 million, the revenue recognized to-date represents the amount for which we have determined it is probable it will not result in a significant revenue reversal. The first payment reflects the accumulation of profit-sharing for four years under our current contracts with the providers, while any subsequent profit-sharing payments we receive will only reflect one year of incremental earnings.

Third-Party Finance Fees. Customers applying for financing who are not approved or are conditionally approved by CAF are generally evaluated by other third-party finance providers.  These providers generally either pay us or are paid a fixed, pre-negotiated fee per contract.   We recognize these fees at the time of sale.

Service Revenues. Service revenue consists of labor and parts income related to vehicle repair service, including repairs of vehicles covered under an ESP we sell or warranty program. Service revenue is recognized at the time the work is completed.

Other Revenues. Other revenues consist primarily of new vehicle sales at our two new car franchise locations and sales of accessories. Revenue in this category is recognized upon transfer of control to the customer.

3.    CarMax Auto Finance
 
CAF provides financing to qualified retail customers purchasing vehicles from CarMax.  CAF provides us the opportunity to capture additional profits, cash flows and sales while managing our reliance on third-party finance sources.  Management regularly analyzes CAF's operating results by assessing profitability, the performance of the auto loan receivables, including trends in credit losses and delinquencies, and CAF direct expenses.  This information is used to assess CAF's performance and make operating decisions, including resource allocation.

We typically use securitizations or other funding arrangements to fund loans originated by CAF.  CAF income primarily reflects the interest and fee income generated by the auto loan receivables less the interest expense associated with the debt issued to fund these receivables, a provision for estimated loan losses and direct CAF expenses.

CAF income does not include any allocation of indirect costs.  Although CAF benefits from certain indirect overhead expenditures, we have not allocated indirect costs to CAF to avoid making subjective allocation decisions.  Examples of indirect costs not allocated to CAF include retail store expenses and corporate expenses.  In addition, except for auto loan receivables, which are disclosed in Note 4, CAF assets are not separately reported nor do we allocate assets to CAF because such allocation would not be useful to management in making operating decisions.


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Components of CAF Income


Three Months Ended August 31
 
Six Months Ended August 31
(In millions)
2019
 
(1)
 
2018
 
(1)
 
2019
 
(1)
 
2018
 
(1)
Interest margin:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest and fee income
$
275.7

 
8.5

 
$
242.2

 
8.0

 
$
541.9

 
8.4

 
$
474.5

 
8.0

Interest expense
(90.6
)
 
(2.8
)
 
(69.1
)
 
(2.3
)
 
(178.0
)
 
(2.8
)
 
(132.9
)
 
(2.2
)
Total interest margin
185.1

 
5.7

 
173.1

 
5.7

 
363.9

 
5.7

 
341.6

 
5.7

Provision for loan losses
(45.5
)
 
(1.4
)
 
(40.0
)
 
(1.3
)
 
(83.7
)
 
(1.3
)
 
(70.9
)
 
(1.2
)
Total interest margin after provision for loan losses
139.6

 
4.3

 
133.1

 
4.4

 
280.2

 
4.4

 
270.7

 
4.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total other expense

 

 
(0.3
)
 

 

 

 
(0.3
)
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Direct expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Payroll and fringe benefit expense
(10.4
)
 
(0.3
)
 
(9.6
)
 
(0.3
)
 
(20.5
)
 
(0.3
)
 
(19.2
)
 
(0.3
)
Other direct expenses
(15.1
)
 
(0.5
)
 
(13.5
)
 
(0.4
)
 
(29.6
)
 
(0.5
)
 
(25.9
)
 
(0.4
)
Total direct expenses
(25.5
)
 
(0.8
)
 
(23.1
)
 
(0.8
)
 
(50.1
)
 
(0.8
)
 
(45.1
)
 
(0.8
)
CarMax Auto Finance income
$
114.1

 
3.5

 
$
109.7

 
3.6

 
$
230.1

 
3.6

 
$
225.3

 
3.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total average managed receivables
$
13,012.1

 


 
$
12,067.5

 


 
$
12,859.7

 
 
 
$
11,921.4

 
 

(1)  
Annualized percentage of total average managed receivables.     

4.    Auto Loan Receivables
 
Auto loan receivables include amounts due from customers related to retail vehicle sales financed through CAF and are presented net of an allowance for estimated loan losses.  We generally use warehouse facilities to fund auto loan receivables originated by CAF until we elect to fund them through an asset-backed term funding transaction, such as a term securitization or alternative funding arrangement.  We recognize transfers of auto loan receivables into the warehouse facilities and asset-backed term funding transactions (together, “non-recourse funding vehicles”) as secured borrowings, which result in recording the auto loan receivables and the related non-recourse notes payable on our consolidated balance sheets. The majority of the auto loan receivables serve as collateral for the related non-recourse notes payable of $13.14 billion as of August 31, 2019 and $12.54 billion as of February 28, 2019. See Note 9 for additional information on non-recourse notes payable.

Auto Loan Receivables, Net
 
As of August 31
 
As of February 28
(In millions)
2019
 
2019
Asset-backed term funding
$
10,452.9

 
$
10,273.4

Warehouse facilities
2,265.0

 
1,877.0

Overcollateralization (1)
295.2

 
273.3

Other managed receivables (2)
118.4

 
86.5

Total ending managed receivables
13,131.5

 
12,510.2

Accrued interest and fees
59.3

 
49.6

Other
25.6

 
6.9

Less allowance for loan losses
(150.4
)
 
(138.2
)
Auto loan receivables, net
$
13,066.0

 
$
12,428.5


(1)  
Represents receivables restricted as excess collateral for the non-recourse funding vehicles.
(2)
Other managed receivables includes receivables not funded through the non-recourse funding vehicles.

Credit Quality.  When customers apply for financing, CAF’s proprietary scoring models rely on the customers’ credit history and certain application information to evaluate and rank their risk.  We obtain credit histories and other credit data that includes information such as number, age, type of and payment history for prior or existing credit accounts.  The application information that is used includes income, collateral value and down payment.  The scoring models yield credit grades that represent the relative