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 November 30, 2002
-----------------August 31, 2003
---------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File NumberNumber: 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
incorporation or organization) Identification No.)
4900 COX ROAD, GLEN ALLEN, VIRGINIA 23060
(Address of Principal Executive Offices and Zip Code)principal executive offices) (Zip code)
(804) 747-0422
(Registrant's Telephone Number, Including Area Code)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 No X
----- -----
Indicate the number of shares outstanding of each of the Registrant'sissuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at December 31, 2002
-----September 30, 2003
- ----------------------------- ---------------------------------
Common Stock, par value $0.50 103,111,075103,631,814
An Index is included on Page 2 and a separate Exhibit Index for Exhibits is included on Page
30.29.
CARMAX, INC. AND SUBSIDIARIES
-----------------------------
INDEX
-----
Page
No.
----
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Consolidated Financial Statements:
Consolidated Statements of Earnings -
Three Months and NineSix Months Ended November 30,August 31, 2003 and 2002 and 2001 3
Consolidated Balance Sheets -
November 30, 2002,August 31, 2003, and February 28, 20022003 4
Consolidated Statements of Cash Flows -
NineSix Months Ended November 30,August 31, 2003 and 2002 and 2001 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 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 2728
- ----------
SECTION 302 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER 28
- --------------------------------------------------------
SECTION 302 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER 29
- --------------------------------------------------------
EXHIBIT INDEX 3029
- -------------
Page 2 of 3029
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CARMAX, INC. AND SUBSIDIARIES
-----------------------------
Consolidated Statements of Earnings (Unaudited)
-----------------------------------------------
(Amounts in thousands except per share data)
Three Months Ended NineSix Months Ended
November 30 November 30
------------------------------------------ ------------------------------------------
2002 %(1) 2001August 31 August 31
-------------------------------------- --------------------------------------
2003 %(1) 2002 %(1) 20012003 %(1) ------ ----- ------ ----- ------------ ------ ------- ------2002 %(1)
---- ---- ---- ---- ---- ---- ---- ----
Sales and operating revenues:
Used vehicle sales $ 690,318 73.7938,726 75.9 $ 590,148 69.2 $2,212,925 73.2 $1,867,758 69.7784,826 72.6 $ 1,828,868 75.9 $ 1,522,607 73.0
New vehicle sales 117,849 12.6 148,973 17.5 402,053 13.3 445,418 16.6139,600 11.3 151,861 14.1 275,999 11.5 284,204 13.6
Wholesale vehicle sales 87,493 9.3 76,697112,995 9.1 97,671 9.0 277,617 9.2 251,270 9.4213,728 8.9 190,124 9.1
Other sales and revenues 41,159 4.4 36,85245,136 3.7 46,324 4.3 130,70990,697 3.8 89,550 4.3
114,172 4.3
--------- ---- ---------- ---- ---------- ---- ---------- ---------- --- ------ --- ------ --- ------ ---
Net sales and operating revenues 936,8191,236,457 100.0 852,6701,080,682 100.0 3,023,3042,409,292 100.0 2,678,6182,086,485 100.0
Cost of sales 829,879 88.6 757,781 88.9 2,665,410 88.2 2,363,206 88.21,073,352 86.8 951,870 88.1 2,098,416 87.1 1,835,531 88.0
--------- ---- ----------------- ---- ------------------- ---- ------------------- ----
Gross profit 106,940 11.4 94,889 11.1 357,894 11.8 315,412 11.8163,105 13.2 128,812 11.9 310,876 12.9 250,954 12.0
CarMax Auto Finance income 19,220 2.1 18,027 2.1 61,16822,677 1.8 22,110 2.0 52,26748,425 2.0 41,948 2.0
(Notes 5 and 6)
Selling, general and administrative
101,810 10.9 83,117 9.7 292,844 9.7 246,206expenses 121,174 9.8 97,997 9.1 236,727 9.8 191,034 9.2
expenses
Interest expense 299383 - 64721 0.1 1,137 - 1,7141,415 0.1 4,701 0.2
Interest income 274182 - 12216 - 568304 - 12294 -
--------- ---- ---------- ---- ---------- ---- ---------- ----------- --- ------ --- ------- --- ------- ---
Earnings before income taxes 24,325 2.6 29,747 3.5 125,072 4.1 116,784 4.464,407 5.2 52,420 4.9 121,741 5.1 100,747 4.8
Provision for income taxes 9,608 1.0 11,304 1.3 49,403 1.6 44,378 1.7
--------- ---- ---------- ---- ---------- ---- ---------- ----24,797 2.0 20,706 1.9 46,870 1.9 39,795 1.9
------ --- ------ --- ------ --- ------ ---
Net earnings $ 14,717 1.639,610 3.2 $ 18,443 2.2 75,669 2.5 72,406 2.7
========= ==== ========== ==== ========== ==== ========== ====31,714 2.9 $ 74,871 3.1 $ 60,952 2.9
=========== === =========== === =========== === =========== ===
Weighted average common
shares (Note 3):
Basic 103,047 102,215 102,973 101,882
========= ========== =========== ===========103,484 102,988 103,320 102,936
======= ======= ======= =======
Diluted 104,516 104,239 104,602 103,862
========= ========== =========== ===========105,864 104,542 105,313 104,647
======= ======= ======= =======
Net earnings per share (Note 3):
Basic $ 0.140.38 $ 0.180.31 $ 0.730.72 $ 0.71
========= ==========0.59
=========== =========== =========== ===========
Diluted $ 0.140.37 $ 0.180.30 $ 0.720.71 $ 0.70
========= ==========0.58
=========== =========== =========== ===========
(1) PercentsPercentages are calculated as a percentage of net sales and operating
revenuesrevenues. Percentages may not total due to rounding.
See accompanying notes to consolidated financial statements.
Page 3 of 3029
CARMAX, INC. AND SUBSIDIARIES
-----------------------------
Consolidated Balance Sheets
---------------------------
(Amounts in thousands)
Nov. 30, 2002 Feb. 28, 2002
-------------- -------------thousands except share data)
Aug.31,2003 Feb.28,2003
----------- -----------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 31,65445,328 $ 3,28634,615
Accounts receivable, net 59,559 50,44171,008 56,449
Automobile loan receivables held for sale 15,860 2,144(Note 6) 20,402 3,579
Retained interests in securitized receivables (Note 6) 140,530 120,683148,042 135,016
Inventory 401,596 399,084409,477 466,450
Prepaid expenses and other current assets 5,734 2,065
------------ -----------11,167 12,636
------- -------
Total current assets 654,933 577,703705,424 708,745
Property and equipment, net 142,840 120,976236,606 187,158
Deferred income taxes 3,208 -
Other assets 23,613 21,543
------------ -----------20,398 21,714
------- -------
TOTAL ASSETS $ 821,386 $ 720,222
============ ===========$965,636 $917,617
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 108,003 $ 87,160$115,366 $117,587
Accrued expenses and other current liabilities 30,920 25,77559,331 44,682
Accrued income taxes 8,736 -
Deferred income taxes 22,927 22,00928,912 29,783
Short-term debt 4,485 9,840
Current installments of long-term debt 826 78,608
------------ -----------3,353 56,051
-------- --------
Total current liabilities 167,161 223,392215,698 248,103
Long-term debt, excluding current installments 100,000 -100,000
Deferred revenue and other liabilities 10,800 8,41612,921 10,904
Deferred income taxes 3,244 2,935
------------ ------------ 4,041
------- -------
TOTAL LIABILITIES 281,205 234,743328,619 363,048
Stockholders' equity:equity (Note 1):
Common stock, $0.50 par value;value $0.50; authorized: 350,000,000
shares authorized; 103,100,953 sharesshares; issued and outstanding 103,623,076 shares at
November 30, 2002 51,550 -August 31, 2003, and 103,083,047 shares at February 28, 2003 51,812 51,542
Capital in excess of par value 477,482 -480,052 472,745
Retained earnings 11,149 -
Parent's equity - 485,479
------------ ------------105,153 30,282
------- -------
TOTAL STOCKHOLDERS' EQUITY 540,181 485,479
------------ -----------637,017 554,569
------- -------
Commitments and contingent liabilities (Note 1) - -
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 821,386 $ 720,222
============ ===========$965,636 $917,617
======== ========
See accompanying notes to consolidated financial statementsstatements.
Page 4 of 3029
CARMAX, INC. AND SUBSIDIARIES
-----------------------------
Consolidated Statements of Cash Flows (Unaudited)
-------------------------------------------------
(Amounts in thousands)
NineSix Months Ended November 30August 31
2003 2002
2001
----------- --------------- ----
Operating Activities:
- ---------------------
Net earnings $ 75,66974,871 $ 72,40660,952
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 11,950 13,2398,373 8,424
Amortization of restricted stock awards 45 8065 23
Loss on disposition of property and equipment 118 -15 68
Provision for deferred income taxes 1,227 1,770(8,120) (86)
Changes in operating assets and liabilities:
(Increase) decreaseIncrease in accounts receivable, net (9,118) 9,594(14,559) (16,267)
Increase in automobile loan receivables held
for sale (13,716) (747)(16,823) (11,922)
Increase in retained interests in securitized
receivables (19,847) (42,383)
Increase(13,026) (10,438)
Decrease in inventory (2,512) (3,873)
(Increase) decrease56,973 38,238
Decrease (increase) in prepaid expenses and
other current assets (3,669) 247
(Increase) decrease1,469 (1,498)
Decrease (increase) in other assets (2,610) 7731,232 (845)
Increase in accounts payable, accrued
expenses and other current liabilities
32,820 21,976and accrued income taxes 25,480 24,613
Increase in deferred revenue and other liabilities 2,384 970
---------- -----------2,017 1,870
-------- --------
Net cash provided by operating activities 72,741 74,052
---------- -----------117,967 93,132
-------- --------
Investing Activities:
- ---------------------
Purchases of property and equipment (71,318) (22,911)(82,662) (40,062)
Proceeds from sales of property and equipment 37,926 96,344
---------- -----------24,910 6
-------- ---------
Net cash used in investing activities (57,752) (40,056)
-------- ---------
Financing Activities:
- ---------------------
Decrease in short-term debt, net (52,698) (4,634)
Issuance of long-term debt - 100,000
Payments on long-term debt - (77,782)
Equity issuances, net 3,196 744
-------- --------
Net cash (used in) provided by investing activities (33,392) 73,433
---------- -----------
Financing Activities:
- ---------------------
(Decrease) increase in short-term debt, net (5,355) 96
Issuance of long-term debt 100,000 -
Payments on long-term debt (77,782) (147,344)
Equity issuances, net 556 975
Dividends paid (28,400) -
---------- -----------
Net cash used in financing activities (10,981) (146,273)
---------- -----------(49,502) 18,328
-------- --------
Increase in cash and cash equivalents 28,368 1,21210,713 71,404
Cash and cash equivalents at beginning of year 34,615 3,286
8,802
---------- ------------------- --------
Cash and cash equivalents at end of period $ 31,65445,328 $ 10,014
========== ===========74,690
======== ========
See accompanying notes to consolidated financial statements.
Page 5 of 3029
CARMAX, INC. AND SUBSIDIARIES
-----------------------------
Notes to Consolidated Financial Statements
------------------------------------------
(Unaudited)
1. Basis of Presentation
On September 10,---------------------
Prior to October 1, 2002, theCarMax, Inc. ("CarMax" and "the company") was a
wholly owned subsidiary of Circuit City Stores, Inc. shareholders, which
included ("Circuit City
Group shareholders andStores".) On that date, CarMax Group shareholders,
approved the separation of the CarMax businesswas separated from Circuit City Stores
Inc., and thethrough a transaction in which each share of Circuit City Stores, Inc. board of directors authorized the
redemption of the Circuit City Stores, Inc-CarMax Group Common Stock and
the distribution of CarMax, Inc. common stock to effect the separation. In
addition, the CarMax board of directors approved a one-time special
dividend payment of $28.4 million to Circuit City Stores on the separation
date. The separation was effective October 1, 2002. Each share of--
CarMax Group Common Stock outstanding was redeemed in exchange for one share of
new CarMax,
Inc. common stock. In addition, each holder of Circuit City Stores, Inc. --
Circuit City Group Common Stock received as a tax-free distribution approximately 0.314
of a
0.313879 share of CarMax, Inc. common stock for each share of Circuit City
Group Common Stock owned as of September 16, 2002, the record date of the
distribution.Stock. As a result of the separation, all of the businesses,
assets and liabilities of the CarMax Group are now held in CarMax, Inc. ("CarMax"
or the "company"),
which is an independent, separately traded public company. CarMax's assets
and liabilities are accounted for at the historical values carried by
Circuit City Stores prior to the separation. These consolidated financial
statements are presented as if CarMax existed as an entity separate from
the other businesses of Circuit City Stores during the periods presented.
Circuit City Stores contributed to CarMax all of the subsidiaries and net
assets that constituted the CarMax Group. CarMax includes the same
businesses, assets and liabilities whose financial performance was intended
to be reflected by the CarMax Group Common Stock. CarMax's assets are
accounted for at the historical values carried by Circuit City Stores prior
to the separation.
In conjunction with the separation, all outstanding CarMax Group stock
options and restricted stock were replaced with CarMax, Inc. stock options
and restricted stock with the same terms and conditions, exercise priceprices
and restrictions as the CarMax Group stock options and restricted stock
they replaced.
The current relationship between Circuit City Stores and CarMax is governed
by a transition services agreement under which Circuit City Stores provides
CarMax services including human resources, payroll, benefits
administration, tax services, television advertising buying, computer center support and
telecommunications services. These services have original terms ranging
from six to 24 months, with varying renewal options. A tax allocation
agreement, which generally provides that pre-separation taxes attributable
to the business of each party will be borne solely by that party, was also
executed upon separation.
2. Accounting Policies
-------------------
CarMax's consolidated financial statements conform to accounting principles
generally accepted in the United States of America. The interim period
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. The fiscal year-endyear end balance sheet data were
derived from the audited consolidated financial statements included in CarMax'sthe
company's annual report on Form S-4
Registration Statement (S-4), Amendment No. 5, filed August 5, 2002.
Page 6 of 30
10-K for the fiscal year ended February 28,
2003.
3. Net Earnings per Share
----------------------
CarMax was a wholly owned subsidiary of Circuit City Stores Inc. during a
portion offor the periods presented. Unaudited earningsquarter
and six months ended August 31, 2002. Earnings per share for these periods
have been presented to reflect the capital structure effective with the
separation of CarMax from Circuit City Stores, Inc.Stores. All earnings per share
calculations have been computed as if the separation had occurred at the
beginning of the periods presented.
Basic earnings per
share have been computed by dividing the net earningsPage 6 of CarMax by the
weighted average common shares outstanding. Diluted net earnings per share
calculations have been computed by dividing the net earnings of CarMax by
the sum of the weighted average common shares outstanding and dilutive
potential common shares.29
Reconciliations of the numerator and denominator of the basic and diluted net
earnings per share calculations are presented below:
Three Months Ended NineSix Months Ended
August 31 August 31
(Amounts in thousands November 30 November 30 except per share data) 2003 2002 20012003 2002
2001
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares............... 103,047 102,215 102,973 101,882shares.................. 103,484 102,988 103,320 102,936
Dilutive potential common shares:
Options................................... 1,466 1,998 1,620 1,944Options...................................... 2,367 1,549 1,983 1,699
Restricted stock.......................... 3 26 9 36stock............................. 13 5 10 12
--------------------------- ---------------------------
Weighted average common shares
and dilutive potential common shares...... 104,516 104,239 104,602 103,862shares......... 105,864 104,542 105,313 104,647
=========================== ===========================
Net earnings available to common shareholdersshareholders... $ 14,71739,610 $ 18,44331,714 $ 75,66974,871 $ 72,40660,952
Basic net earnings per share.................share.................... $ 0.140.38 $ 0.180.31 $ 0.730.72 $ 0.710.59
Diluted net earnings per share...............share.................. $ 0.140.37 $ 0.180.30 $ 0.720.71 $ 0.700.58
Certain options were outstanding and not included in the computation of
diluted net earnings per share because the options' exercise prices were
greater than the average market price of the common shares. ForAs of August
31, 2003, options to purchase 18,364 shares of common stock at prices
ranging from $35.23 to $43.44 per share were outstanding and not included
in the three month
period ended November 30,calculation. As of August 31, 2002, options to purchase 1,046,5101,056,496
shares of
common stock at prices ranging from $19.16 to $43.44 per share were outstanding
and not included in the calculation.
For4. Stock-Based Compensation
------------------------
The company accounts for its stock-based compensation plans under the
three monthrecognition and measurement principles of Accounting Principles Board
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 ended November 30, 2001,of service only if the market value of the underlying stock on
the grant date exceeded the exercise price. No stock-based employee
compensation cost is reflected in net earnings, as options granted under
those plans had an exercise price equal to purchase 8,406 sharesthe market value of the
underlying common stock at prices ranging from $16.31 to $16.36on the date of grant. The following table
illustrates the effect on net earnings per share wereas if the fair value
method of accounting had been applied to all outstanding and not
includedstock awards in
the calculation.
4. Debt
On May 17,each reported period as follows:
Three Months Ended Six Months Ended
August 31 August 31
(Amounts in thousands except per share data) 2003 2002 CarMax entered into a $200 million credit agreement
secured by vehicle inventory. The credit agreement includes a $100 million
revolving loan commitment and a $100 million term loan. Principal is due in
full at maturity with interest payable monthly at a LIBOR-based rate. The
agreement is scheduled to terminate in May 2004. The termination date2003 2002
--------------------------------------------------------------------------------------------------------------
Net earnings, as reported .............................. $ 39,610 $ 31,714 $ 74,871 $ 60,952
Total stock-based compensation expenses
determined under fair value based method
for all awards, net of the agreement will be automatically extended one year on May 17, 2003, and
on each May 17 thereafter unless CarMax or either lender elects, prior to
the next extension date, not to extend the agreement. The value of CarMax's
eligible motor vehicle inventory must be at least 150 percent of the
aggregate principal amount outstanding under the credit facility on any
date. As of November 30, 2002, the amount outstanding under this credit
agreement was $104.5 million. Under this agreement, CarMax must meet
quarterly financial covenants relating to minimum current ratio, maximum
total liabilities to tangiblerelated tax effects .......... 1,717 1,030 3,255 2,108
---------------------- -----------------------
Pro forma net worth ratio and minimum fixed charge
coverage ratio. CarMax was in compliance with these covenants at November
30, 2002.earnings ................................ $ 37,893 $ 30,684 $ 71,616 $ 58,844
====================== =======================
Earnings per share:
Basic, as reported ................................. $ 0.38 $ 0.31 $ 0.72 $ 0.59
Basic, pro forma ................................... $ 0.37 $ 0.30 $ 0.69 $ 0.57
Diluted, as reported ............................... $ 0.37 $ 0.30 $ 0.71 $ 0.58
Diluted, pro forma ................................. $ 0.36 $ 0.29 $ 0.68 $ 0.56
Page 7 of 3029
The pro forma effect on the second quarter and the first six months of
fiscal 2004 may not be representative of the pro forma effects on net
earnings for future periods.
5. CarMax Auto Finance Income
--------------------------
The company's finance operation, CarMax Auto Finance ("CAF"), originates
automobile loans to CarMax consumersprime-rated customers at competitive market rates of
interest. CarMaxThe company sells the majoritysubstantially all of the loans it originates
each month in a securitization transaction discussed in Note 6 below.6. The
majority of the profit contribution from CarMax Auto
FinanceCAF is generated by the spread
between the interest rate charged to the consumercustomer and the cost of funds.
A gain, recorded at the time of the securitization transaction, results
from recording a receivable equal to the present value of the expected
residual cash flows generated by the securitized receivables. The cash
flows are calculated taking into account expected prepayment and default
rates.
For the three and nine month periods ended November 30, 2002 and 2001,
CarMax Auto Finance income was as follows:
Three Months Ended NineSix Months
Ended November 30 November 30August 31 Ended August 31
(Amounts in millions) 2003 2002 20012003 2002
2001
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Gains on sales of loans......................... $15.9 $15.6 $ 49.6 $43.3
-------------------------------------------------------loans........................ $18.3 $18.1 $37.9 $33.7
------------------ ------------------
Other income.................................... 6.8 5.5 22.2 17.6
-------------------------------------------------------income:
Servicing fee income........................ 5.4 4.0 10.5 8.0
Interest income............................. 3.9 3.7 9.1 7.3
------------------ ------------------
Total other income............................. 9.4 7.7 19.5 15.4
------------------ ------------------
Direct expenses:
PayrollCAF payroll and fringes expense..................fringe benefit expense...... 2.0 1.7 1.5 5.1 4.14.0 3.4
Other direct expenses........................ 1.8 1.6 5.5 4.5
-------------------------------------------------------CAF expenses................... 3.0 2.0 5.1 3.7
------------------ ------------------
Total direct expenses........................... 3.5 3.1 10.6 8.6
-------------------------------------------------------expenses.......................... 5.0 3.6 9.0 7.1
------------------ ------------------
CarMax Auto Finance income...................... $19.2 $18.0 $61.2 $52.3
=======================================================
Other income includes servicing fee income and interest income.income..................... $22.7 $22.1 $48.4 $41.9
================== ==================
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. CarMaxThe company presents this information on a direct basis to
avoid making arbitrary decisions regarding the periodic indirect benefit or costs
that could be attributed to this operation.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.
6. Securitizations
---------------
The company uses a securitization program to fund substantially all of the
automobile loan receivables originated by CarMax Auto Finance. The company
sells the automobile loan receivables to a wholly owned, bankruptcy-remote,
special purpose subsidiaryentity that transfers an undivided interest in the
receivables to a group of third partythird-party investors. The special purpose entity
and investors have no recourse to the company's assets for the principal
amount of the loans.loans beyond the retained interests. 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. This
frees up capacity in the warehouse facility. In a public securitization, a
Page 8 of 3029
pool of automobile loan receivables areis 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. The earnings impact of moving receivables from the
warehouse facility to a public securitization has not been and is not
expected to be material to the operations of the company.
The transfers of receivables are accounted for as sales in accordance with
Statement of Financial Accounting Standards (SFAS)SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." TheWhen the receivables are securitized,
the company recognizes a gain or loss on the sale of the receivables when the receivables are securitized as
described in Note 5
above.5.
Three Months Ended NineSix Months
Ended November 30 November 30August 31 Ended August 31
(Amounts in millions) 2003 2002 20012003 2002
2001
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net loans originated..........originated........................... $ 301.2387.8 $ 229.6304.3 $ 895.3756.7 $ 713.9594.1
Loans sold....................sold..................................... $ 292.2378.3 $ 241.5299.8 $ 875.1736.3 $ 715.1582.9
Gains on sales of loans.......loans........................ $ 15.918.3 $ 15.618.1 $ 49.637.9 $ 43.333.7
Gains on sales of loans as a
percentage of loans sold................... 4.8% 6.0% 5.1% 5.8%
Retained Interests. The company retains various interests in the automobile
loan receivables that it securitizes. The retained interests, presented as
current assets on the company's consolidated balance sheet,sheets, serve as a
credit enhancement for the benefit of the investors in the securitized
receivables. These retained interests include the present value of the
expected residual cash flows ongenerated by the securitized receivables, ("interest-onlyor
"interest-only strip receivables"),receivables," the restricted cash on deposit in
various reserve accounts and an undivided ownership interest in the
receivables securitized through the warehouse facility, ("requiredor "required excess
receivables"). as described below. The special purpose entities and the
investors have no recourse to the company's assets beyond the retained
interests. The fair value of the retained interests may fluctuate depending
upon the performance of the securitized receivables. Retained interests
balances at November 30, 2002 and 2001, and at February 28, 2002 and 2001, consisted of the following:
As of November 30August 31 As of February 28
(Amounts in millions) 2003 2002 20012003 2002
2001
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Interest-only strip receivables............................ $ 89.4 $ 84.2 $ 88.3 $ 74.3
Restricted cash............................................ 35.2 35.9 33.3 34.7
Required excess receivables................................ 23.5 11.0 13.4 11.7
-----------------------------------------
Total retained interests in securitized receivables........ $ 83.1148.0 $ 78.2131.1 $ 74.3 $ 42.0
Restricted cash........................ 39.2 31.9 34.7 23.6
Required excess receivables............ 18.2 6.4 11.7 8.5
------------------------------------------------------
Total.................................. $ 140.5 $ 116.5135.0 $ 120.7
$ 74.1
===============================================================================================
Amounts in the table above may not total due to rounding.
The retained interests had a weighted average life of 1.5 years as of
August 31, 2003, and 1.6 years as of November 30, 2002 and February 28, 2002.2003. As defined in SFAS
No. 140, the weighted average life in periods (for example, months or
years) of prepayable assets is calculated by summing the product (a), the
sum of the principal collections expected in each future period, times (b),
the number of periods until collection, and then dividing that total by
(c), the initial principal balance.
Interest-only strip receivables. Interest-only strip receivables represent
-------------------------------
the present value of residual cash flows CarMaxthe 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 projections of key factors, such as finance charge income,
default rates, pre-paymentprepayment 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
projections. Management evaluates the performance of the receivables
relative to the initialthese assumptions on a regular basis.
Page 9 of 29
Any financial impact resulting from an adversea change in performance is recognized
in earnings in the period in which it occurs.
Page 9 of 30
Restricted cash. Restricted cash represents amounts on deposit in various
---------------
reserve accounts established for the benefit of the securitization
investors. The amounts on deposit in the reserve accounts are used to pay
various amounts, including principal and interest to investors, in the
event that the cash generated by the securitized receivables in a given
period is insufficient 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 CarMax.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 at the floor amount until the investors are paid in full, at which
time the remaining reserve account balance is released through the
qualified special purpose entity to CarMax.the company. The amount required to be
maintained in the public securitization reserve accounts may increase
depending upon the performance of the securitized receivables. Generally,
restricted cash reserves range between 2.0% andare less than 2.5% of managed receivables.
Required excess receivables. The warehouse facility requiresand 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.
Key Assumptions Used in Measuring Retained Interests and Sensitivity
Analysis. The following table shows the key economic assumptions used in
measuring the fair value of the retained interests at November 30, 2002,August 31, 2003, and
a sensitivity analysis showing the hypothetical effect on the interest-only
strip receivables if there were unfavorable variations from the assumptions
used. Key economic assumptions at November 30, 2002,August 31, 2003, are not materially
different from assumptions used to measure the fair value of retained
interests 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
interests 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%
(Dollar amounts in millions) Used Adverse Change Adverse Change
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Prepayment rate................ 1.5%-1.6% $ 4.5 $ 9.2rate...................... 1.45%-1.55% $5.6 $10.9
Cumulative default rate........ 1.8%-2.1%rate.............. 1.85%-2.40% $3.8 $ 2.3 $ 4.77.7
Annual discount rate...........rate................. 12.0% $2.1 $ 1.6 $ 3.24.1
Prepayment rate. CarMaxThe 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 percent1% ABS rate means
that 100 receivables prepay each month.
Cumulative default rate. Cumulative default rate or "static pool" net
-----------------------
losses are calculated by dividing the total projected future credit losses
of a pool of receivables by the original pool balance.
The cumulative
default rate of 1.8% - 2.1% is comparable to the annualized loss rate of
1.0% - 1.2% previously presented. Annualized losses represent annual losses
expressed as a percentage of the average receivable balance. This change in
the previous presentation does not represent a change in the assumptions
used or expected performance of the receivables.
Page 10 of 3029
CarMax's
Continuing Involvement with Securitized Receivables. CarMaxThe company continues
to manage the automobile loan receivables that it securitizes. CarMaxThe company
receives servicing fees of approximately 1 percent1% of the outstanding principal
balance of the securitized receivables. The servicing fees specified in the
securitization agreements adequately compensate CarMaxthe company for servicing
the securitized receivables. Accordingly, no servicing asset or liability
has been recorded. CarMaxThe company is at risk for the retained interests in the
securitized receivables. If the securitized receivables do not perform as
originally projected, the value of the retained interests would be
impacted. The assumptions used to value the retained interests, as well as
a sensitivity analysis, are detailed in the "Key Assumptions Used in
Measuring Retained Interests and Sensitivity Analysis "Analysis" section of this
footnote. Supplemental information about the managed receivables is noted
below:shown
in the following tables:
As of November 30August 31 As of February 28
(Amounts in millions) 2003 2002 20012003 2002
2001
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Loans securitized............................ $1,760.0 $1,446.3securitized......................... $2,077.0 $1,664.0 $1,859.1 $1,489.4 $1,215.4
Loans held for sale or investment............ 34.0 10.1investment......... 45.2 25.1 19.6 13.9
11.6
------------------------------------------------------------------------------------ ---------------------------
Ending managed receivables................... $1,794.0 $1,456.4receivables................ $2,122.2 $1,689.1 $1,878.7 $1,503.3
$1,227.0
==================================================================================== ========================
Accounts 31+ days past due...................due................ $ 25.932.0 $ 21.626.1 $ 22.327.6 $ 18.122.3
Past due accounts as a percentage of
ending managed receivables................ 1.4% 1.5% 1.5% 1.5%receivables............. 1.51% 1.55% 1.47% 1.48%
Three Months Ended NineSix Months
Ended November 30 November 30August 31 Ended August 31
(Amounts in millions) 2003 2002 20012003 2002
2001
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Average managed receivables...................... $1,748.8 $1,439.7 $1,651.7 $1,361.7receivables................. $2,068.2 $1,647.2 $2,005.3 $1,603.2
Credit losses on managed receivables............. 4.9 3.8 12.3 8.3receivables........ 5.3 4.1 9.5 7.3
Annualized losses as a percentage
of average managed receivables................. 1.1% 1.1% 1.0% 0.8%receivables........... 1.03% 1.00% 0.95% 0.91%
Selected Cash Flows from Securitized Receivables. The table below
summarizes certain cash flows received from and paid to the automobile loan
securitizations.securitizations:
Three Months Ended NineSix Months
Ended November 30 November 30August 31 Ended August 31
(Amounts in millions) 2003 2002 20012003 2002
2001
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
o Proceeds from new securitizations...................... $ 254.0 $193.7 $ 741.6 $ 569.7$336.0 $266.6 $632.0 $487.6
o Proceeds from collections reinvested in
revolving period securitizations................... $ 105.6 $132.3 $ 364.2 $ 350.7$127.6 $124.1 $279.8 $258.6
o Servicing fees received................................ $ 4.55.3 $ 3.73.9 $ 12.310.2 $ 10.47.8
o Other cash flows received from retained interests:
Interest-only strip receivables.................... $ 15.018.9 $ 13.217.0 $ 49.035.7 $ 32.834.0
Cash reserve releases..............................releases, net......................... $ 3.05.9 $ 3.57.1 $ 13.18.2 $ 12.910.1
Proceeds from new securitizations. Proceeds from new securitizations
---------------------------------
represent receivables newly securitized through the warehouse facility
during the period. Receivables initially securitized through the warehouse
facility that are periodically soldrefinanced in publicly underwritten offerspublic securitizations are not
considered new securitizations for this table.
Proceeds from collections. Proceeds from collections reinvested in
-------------------------
revolving period securitizations represent principal amounts collected on
receivables securitized through the warehouse facility, which are used to
fund new originations.
Page 11 of 30
Servicing fees. Servicing fees received represent cash fees paid to CarMaxthe
--------------
company to service the securitized receivables.
Page 11 of 29
Other cash flows received from retained interests. Other cash flows
-------------------------------------------------
received from retained interests represent cash received by CarMaxthe company
from securitized receivables other than servicing fees. It includes cash
collected on interest-only strip receivables and amounts released to CarMaxthe
company from restricted cash accounts.
Financial Covenants and Performance Triggers. TheCertain securitization
agreements include various financial covenants and performance tests. CarMaxtriggers,
while other securitization agreements, such as a public securitization with
a senior-subordinated structure do not include financial covenants or
performance triggers. For those agreements with financial covenants and
performance tests, 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. TheCertain securitized receivables must meet performance tests
relating to portfolio yield, default rates and delinquency rates. If these
financial covenants and / and/or performance tests are not met, in addition to
other consequences, CarMaxthe company may be unable to continue to securitize
receivables through the warehouse facility or it may be terminated as
servicer under the public securitizations. CarMaxAt August 31, 2003, the company
was in compliance with these financial covenants and the securitized
receivables were in compliance with these performance tests at November 30,
2002.triggers.
7. Financial Derivatives
CarMax---------------------
The company enters into amortizing swaps relating to automobile loan
receivable securitizations to convert variable-rate financing costs in the warehouse
facility to
fixed-rate obligations to better match funding costs to the receivables
being securitized.securitized in the warehouse facility. During the thirdsecond quarter of
fiscal 2003,
CarMax2004, the company entered into twofive 40-month amortizing interest
rate swaps with an
initial notional amountamounts totaling approximately $191.0$307.0
million. The
amortized notional amount of the CarMax interest rate swaps was reduced in
the third quarter in conjunction with the replacement of variable-rate
securities in the warehouse facility with a $500 million fixed-rate public
securitization that was completed in December 2002. The current amortized notional amount of all outstanding swaps related to the
automobile loan receivable securitizations was approximately $102.0$548.7 million
at November 30,
2002,August 31, 2003, and $413.3$473.2 million at February 28, 2002.2003. At November 30, 2002,August 31,
2003, the fair value of swaps totaledwas a net asset of $0.2$3.3 million, andwhich was
included in other current assets.accounts receivable. At February 28, 2002,2003, the fair value of
swaps totaledwas a net liability of $0.8$2.6 million, andwhich was included in accounts
payable.
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. CarMaxThe company mitigates credit risk by dealing with highly rated
bank counterparties.
8. Recent Accounting Pronouncements
--------------------------------
In August 2001,January 2003, the Financial Accounting Standards Board (FASB)FASB issued SFASFASB Interpretation ("FIN") No. 143, "Accounting For Asset Retirement Obligations.46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51." This statement
addressesFIN No. 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a controlling
financial accounting and reportinginterest or do not have sufficient equity at risk for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. Itentity
to finance its activities without additional subordinated financial support
from other parties. FIN No. 46 is effective for fiscal yearsall new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of
FIN No. 46 must be applied for the first interim or annual period beginning
after June 15, 2002. CarMax2003. The company does not expect the provisions of FIN No.
46 to have a material impact on its financial position, results of
operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
Page 12 of 29
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement is effective for contracts entered
into, modified and for hedging relationships designated after June 30,
2003. The company does not expect the application of the provisions of SFAS
No. 143149 to have ana material impact on theits financial position, results of
operations or cash flows of the company.flows.
In June 2002,May 2003, the FASB issued SFAS No. 146,150, "Accounting for Costs
AssociatedCertain
Financial Instruments with Exit or Disposal Activities.Characteristics of Both Liabilities and Equity."
This statement addressesestablishes standards for how an issuer classifies and
measures certain financial accountinginstruments with characteristics of both
liabilities and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF)equity. SFAS No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Page 12 of 30
Restructuring)." It150 is effective for exitfinancial instruments
entered into or disposal activities initiatedmodified after DecemberMay 31, 2002. CarMax2003, and otherwise is effective at
the beginning of the first interim period beginning after June 15, 2003.
The company does not expect the application of the provisions of SFAS No.
146150 to have ana material impact on theits financial position, results of
operations or cash flows of the company.flows.
9. Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the current
year's presentation. ForPrior to the three and nine month periods ended November
30, 2001, wholesale sales have been reclassified and reported in net sales
and operating revenues. In previous periods, wholesale sales were recorded
as a reduction to cost of sales. The reclassification of wholesale sales to
sales increased sales and cost of sales by $76.7 million for thethird fiscal quarter ended November 30,
2001,2002, income generated by CAF and by $251.3 million for the nine months ended
November 30, 2001. An additional reclassification between sales and cost of
sales made to conform to the current presentation decreased sales and cost
of sales by $2.2 million for the quarter ended November 30, 2001, and by
$7.1 million for the nine months ended November 30, 2001. Also, effective
in the third quarter of fiscal 2003, third partythird-party finance fees have been
reclassified and reported in net sales and operating revenues. In previous
periods, third party finance feesfee income were
recorded as a reductionreductions to selling, general and administrative expenses. The
reclassificationcompany currently presents CAF income as a separate line item in the
consolidated statements of third partyearnings, and third-party finance fees increasedare
reported as a component of other sales and revenues. For the three months
ended August 31, 2002, CAF income was $22.1 million and third-party finance
fee income was $4.6 million. These reclassifications increased last year's
second quarter selling, general and administrative expenses by $3.9$26.7
million forand other sales and revenues by $4.6 million. For the quarter ended November 30, 2001, and $11.9
million for the ninesix months
ended November 30, 2001. Also, effective in the
third quarter of fiscal 2003, the company presents CarMax Auto Finance
income separately in the Consolidated Statements of Earnings. Previously,
CarMax Auto FinanceAugust 31, 2002, CAF income was recorded as a reduction to selling, general$41.9 million and administrative expenses. The reclassificationthird-party finance
fee income was $8.8 million. These reclassifications increased the first
six months of CarMax Auto Finance
income increaseslast year's selling, general and administrative expenses by
$18.0$50.7 million for the quarter ended November 30, 2001, and $52.3 million for the
nine months ended November 30, 2001. Theseother sales and revenues by $8.8 million. The
reclassifications had no impact on CarMax'sthe company's net earnings.
Page 13 of 3029
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
In this discussion, "we", "our", "CarMax""we," "our," "CarMax," "CarMax, Inc." and "the company"
refer to CarMax, Inc. and its wholly owned subsidiaries, unless the context
requires otherwise. All references to "quarter"Amounts and "year" refer to our fiscal year periods rather
than calendar year periods unless stated otherwise.
Percentspercents in the tables may not total due to
rounding.
Prior to October 1, 2002, CarMax was formerly a wholly owned subsidiary of Circuit City
Stores, Inc. ("Circuit City Stores".). On September 10, 2002, the Circuit City Stores
shareholders, which included Circuit City Group shareholders andthat date, CarMax Group
shareholders, approved the separation of the CarMax Groupwas separated from
Circuit City Stores and thethrough a transaction in which each share of Circuit City
Stores, board of directors authorized the redemption
of the Circuit City Stores, Inc.-CarMax Group Common Stock and the distribution
of CarMax, Inc. common stock to effect the separation. The separation was
effective October 1, 2002. Each outstanding share of- CarMax Group Common Stock was redeemed in exchange for one share
of new CarMax, Inc. common stock. In addition, each holder of Circuit City Stores,
Inc. - Circuit City Group Common Stock received as a tax-free distribution a
0.313879 of a share of CarMax, Inc. common stock for each share of Circuit City Group
Common Stock owned asStock. As a result of September 16, 2002, the record date
for the distribution. Following the separation, all of the Circuit Citybusinesses, assets and
liabilities of the CarMax Group Common
Stock was renamed Circuit City common stock, representing an ownership interest
onlyare now held in the Circuit City business, and CarMax, Inc. became, which is an
independent, separately traded public company.
FORWARD-LOOKING STATEMENTS
The company cautions readers that the statements contained in Management's
Discussion and Analysis of Financial Condition and Results of Operations
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, 2003, and its quarterly and current reports as filed with or furnished to
the Securities and Exchange Commission.
CRITICAL ACCOUNTING POLICIES
See theFor a discussion of our critical accounting policies see "Critical Accounting
Policies" in Management's Discussion and Analysis included in CarMax'sthe CarMax, Inc.
2003 Annual Report to Shareholders, which is included as Exhibit 13.1 to the
Annual Report on Form S-4
Registration Statement (S-4), Amendment No. 5, filed August 5, 2002 (the "Form
S-4").10-K for the fiscal year ended February 28, 2003. These
policies relate to the calculation of the fair value of retained interests in
securitization transactions.transactions, revenue recognition, defined benefit retirement
plans and insurance liabilities.
RESULTS OF OPERATIONS
Reclassifications. Effective in the first quarter of fiscal 2003, CarMax
classifies revenue from the sale of wholesale vehicles in net sales and
operating revenues. Previously, CarMax wholesale vehicle sales were recorded as
reductions to cost of sales. The reclassification of wholesale sales to sales
increased sales and cost of sales by $76.7 million for the quarter ended
November 30, 2001, and $251.3 million for the nine months ended November 30,
2001. An additional reclassification between sales and cost of sales madeCertain prior year amounts have been reclassified to conform
to the current presentation decreased sales and cost of sales by $2.2
million foryear's presentation. Prior to the third fiscal quarter ended
November 2001,30, 2002, income generated by CarMax Auto Finance ("CAF") and
$7.1 million for the nine
months ended November 30, 2001. Also effective in the third quarter of fiscal
2003, third partythird-party finance fees have been reclassified and reported in net sales
and operating revenues. In previous periods, third party finance feesfee income were recorded as a reductionreductions to selling, general
and administrative expenses. The reclassificationcompany currently presents CAF income as a
separate line item in the consolidated statements of third partyearnings, and third-party
finance fees increasedare reported as a component of other sales and revenues. For the
three months ended August 31, 2002, CAF income was $22.1 million and third-party
finance fee income was $4.6 million. These reclassifications increased last
year's second quarter selling, general and administrative expenses by $3.9$26.7
million forand other sales and revenues by $4.6 million. For the quarter ended
November 30, 2001, and $11.9 million for the ninesix months ended
November 30,
2001. Also effective in the third quarter of fiscal 2003, the company presents
CarMax Auto Finance income separately in the Consolidated Statements of
Earnings. Previously, CarMax Auto FinanceAugust 31, 2002, CAF income was recorded as a reduction to
selling, general$41.9 million and administrative expenses. The reclassificationthird-party finance fee income
was $8.8 million. These reclassifications increased the first six months of CarMax
Auto Finance income increaseslast
year's selling, general and administrative expenses by $18.0$50.7 million for the quarter ended November 30, 2001, and $52.3 million for the
nine months ended November 30, 2001. Theseother
sales and revenues by $8.8 million. The reclassifications had no impact on CarMax'sthe
company's net earnings.
Page 14 of 3029
Seasonality. CarMax's operations, in common with other retailers in general, are
subject to seasonal influences. Historically, CarMax has experienced more of its
net sales in the first half of the fiscal year. 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 RevenueRevenues
- --------------------------------
Total sales for the thirdsecond quarter of fiscal 20032004 increased 10 percent14% to $936.8
million$1.24 billion
from $852.7 million$1.08 billion in last year's thirdsecond quarter. For the ninesix months ended
November 30, 2002,August 31, 2003, total sales increased 13 percent15% to $3.02$2.41 billion from $2.68$2.09 billion
in last year's first ninesix months.
Three Months Ended November 30 NineAugust 31 Six Months Ended November 30August 31
(Amounts in millions) 2002 % 20012003 % 2002 % 20012003 % 2002 %
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Used vehicle sales.................... $690.3 $590.1 $2,212.9 $1,867.8$ 938.7 $ 784.8 $1,828.9 $1,522.6
New vehicle sales..................... 117.8 149.0 402.1 445.4
---------------------------------------------------------------------------139.6 151.9 276.0 284.2
-------------------------------------------------------------------------------
Total retail vehicle sales............ 808.1 86.3 739.11,078.3 87.2 936.7 86.7 2,615.0 86.5 2,313.2 86.4
---------------------------------------------------------------------------2,104.9 87.4 1,806.8 86.6
-------------------------------------------------------------------------------
Wholesale vehicle sales............... 87.5 9.3 76.7113.0 9.1 97.7 9.0 277.6 9.2 251.3 9.4
---------------------------------------------------------------------------213.7 8.9 190.1 9.1
-------------------------------------------------------------------------------
Other sales and revenues:
Extended warranty.................. 16.6 13.1 51.5warranty revenue.......... 21.0 18.1 41.0 34.8
Service department sales........... 13.9 14.0 45.2 42.5
Processing fees.................... 7.0 5.9 21.5 18.7
Third party financing fees........ 3.7 3.9 12.5 11.9
---------------------------------------------------------------------------17.7 15.9 34.1 31.4
Third-party finance fees........... 5.5 4.6 10.3 8.8
Appraisal purchase processing fees 0.9 7.7 5.3 14.5
-------------------------------------------------------------------------------
Total other sales and revenues........ 41.2 4.4 36.945.1 3.7 46.3 4.3 130.790.7 3.8 89.6 4.3
114.1 4.3
----------------------------------------------------------------------------------------------------------------------------------------------------------
Total net sales and operating
revenues............................ $936.8revenues.............................. $1,236.5 100.0 $852.7$1,080.7 100.0 $3,023.3$2,409.3 100.0 $2,678.6$2,086.5 100.0
==========================================================================================================================================================
Total Retail Vehicle Sales. Comparable store used unit sales growth is a primary
- --------------------------
driver of CarMax's profitability. For the third quarter and nine months ended
November 30, 2002, the overall increase in retail sales is attributed to the
growth in comparable store used unit sales and the five CarMax stores opened
since February 2002. For the third quarter, we were able to achieve comparable
store used unit sales growth of 8 percent on top of last year's exceptional 29
percent. For the nine months ended November 30, 2002, we had comparable store
used unit sales growth of 11 percent on top of last year's nine months' 24
percent. For the three month and nine month periods ended November 30, 2002, the
comparable store new unit sales were down. This was generally in line with the
new car industry's performance as that industry continued to struggle with
comparisons to the unprecedented traffic driven by zero-percent financing
promotions utilized in last year's third quarter. A CarMax store is included in comparable store
retail sales afterin the store has
been open for astore's fourteenth full year (in the stores' fourteenth month of operation).operation. Comparable store
retail vehicle unit and dollar sales changes for the thirdsecond quarter and the first
ninesix months of fiscal years2004 and 2003 and 2002 were as follows:
Three Months Ended NineSix Months
Ended November 30 November 30August 31 Ended August 31
2003 2002 20012003 2002
2001
-------------------------- -----------------------------------------------------------------------------
Vehicle units:
Used vehicles.....................vehicles........... 6 % 12% 8 % 29% 11 12%
New vehicles............ (9)% 24%
New vehicles...................... (16)5% (4)% 46% (5)1%
Total...................... 4 % 24%
Total................................ 511% 7 % 31% 9 % 24%10%
Vehicle dollars:
Used vehicles.....................vehicles........... 7 % 12% 8 % 36% 11 13%
New vehicles............ (8)% 31%
New vehicles...................... (17)8% (3)% 51% (4)2%
Total...................... 5 % 28%
Total................................ 311% 6 % 38% 9 % 30%11%
Comparable store sales growth was driven by continuing improvement in store
execution, with strong sales growth experienced broadly across the company's
store base. Second quarter comparable store sales reflect the adverse impacts of
an estimated 1% to 2% of cannibalization and one fewer Saturday and one
additional Sunday in this year's second quarter compared with last year. The
slightly higher than expected sales cannibalization resulted from the addition
of four satellite stores in existing mid-sized markets in the last year, which
are not yet included in the comparable store base. The company has chosen to add
satellite stores to existing markets, despite some anticipated sales
cannibalization, based on the attractive economics of this store format. The
economics are based upon driving higher market share with a lower cost
structure. Satellite stores share the cost of the purchasing and reconditioning
operations of a nearby hub store, with little or no incremental advertising
expenditures. Consequently, satellite store economics drive attractive returns
on the net incremental sales added to a market. As long as the total market
Page 15 of 3029
Supplemental information relatedsales goals are achieved, the economic returns are neutral as to whether there
is more or less cannibalization than originally anticipated.
The company's new car sales performance was generally in line with industry
performance for the brands we sell. The reported new car comparable sales and
units were reduced by both the April 2003 sale of the Kenosha, Wis., Jeep
franchise and the July 2002 sale of the Kenosha Nissan franchise. Because the
company has multiple new car franchises within the Kenosha auto mall, we have
not adjusted our comparable sales base for the impact of disposing of any one
franchise within this location.
Total retail vehicle unit and dollar sales changes for the second quarter and
first six months of fiscal 2004 and 2003 were as follows:
Retail Vehicle Units Sold (in thousands):
-----------------------------------------
Three Months Ended NineSix Months
Ended November 30 November 30August 31 Ended August 31
2003 2002 20012003 2002
2001
-------------------------- --------------------------
Used vehicles........................ 45.3 38.7 143.4 122.2
New vehicles......................... 5.0 6.4 17.3 19.2
-------------------------- --------------------------
Total................................ 50.3 45.1 160.7 141.4
========================== ==========================
Average Retail Selling Prices (in thousands):
---------------------------------------------
Three Months Ended Nine Months Ended
November 30 November 30
2002 2001 2002 2001
-------------------------- --------------------------
Used vehicles........................ $15.2 $15.1 $15.4 $15.2
New vehicles......................... $23.2 $23.5 $23.2 $23.1
Blended average...................... $16.0 $16.3 $16.2 $16.3
Retail Vehicle Sales Mix:
-------------------------
Three Months Ended Nine Months Ended
November 30 November 30
2002 2001 2002 2001
-------------------------- ---------------------------------------------------------------------------
Vehicle units:
Used vehicles..................... 90% 86% 89% 86%vehicles............... 18 % 18 % 20 % 18 %
New vehicles...................... 10 14 11 14
-------------------------- --------------------------
Total................................ 100% 100% 100% 100%
========================== ==========================vehicles................ (10)% (2)% (4)% (5)%
Total.......................... 15 % 15 % 18 % 15 %
Vehicle dollars:
Used vehicles..................... 85% 80% 85% 81%vehicles............... 20 % 18 % 20 % 19 %
New vehicles......................vehicles................ (8)% 1 % (3)% (4)%
Total.......................... 15 20% 15 19
-------------------------- --------------------------
Total................................ 100% 100% 100% 100%
========================== ==========================
Wholesale Vehicle Sales. CarMax's operating strategy is to build customer
confidence% 16 % 15 %
For the second quarter and satisfaction by offering high-quality vehicles; therefore, fewer
than half ofsix months ended August 31, 2003, the vehicles acquired through the appraisal process meet CarMax
standards for reconditioning and subsequentoverall
increase in retail sale. Those vehicles that dosales reflects growth in comparable store used unit sales as
well as growth in new stores not meet CarMax's standards are sold at its own on-site wholesale auctions.
Wholesale vehicle sales totaled $87.5 millionyet included in the third quarter of fiscal
2003, compared with $76.7 million in the same period last year. For the nine
months ended November 30, 2002, wholesale vehicle sales totaled $277.6 million,
compared with $251.3 million in the same period last year. These increases
resulted from increased consumer response to CarMax's vehicle appraisal offer,
the impact of which was partially offset by lower average wholesale sale prices.comparable store base.
Other Sales and Revenues. Other sales and revenues include extended warranty
revenues,- ------------------------
revenue, service department sales, third-party finance fees and appraisal
purchase processing fees collected from consumerscustomers for the purchase of their
vehicles at a CarMax retail location and third party
financing fees. These totaled $41.2 million in the third quarter of fiscal 2003,
compared with $36.9 million in the same period last year. For the nine months
ended November 30, 2002, other sales and revenues totaled $130.7 million,
compared with $114.1 million in the same period last year.vehicles.
CarMax sells extended warranties on behalf of unrelated third parties who are
the primary obligors. Under these third partythird-party warranty programs, CarMax has no
contractual liability to the customer. Extended warranty revenue was $16.6
million inrepresents
commissions from the unrelated third quarter of fiscal 2003 compared with $13.1 million in the
Page 16 of 30
third quarter of fiscal 2002. For the nine months ended November 30, 2002,
extended warranty revenue was $51.5 million, compared with $41.0 million in the
same period last year. Theseparties. The increases in warranty revenue
reflect improved
penetration,for the three and six month periods ended August 31, 2003, are a result in part of continuing enhancement of CarMax's extended
warranty offer, andthe
strong sales growth for used cars, which achieve a higher extended warranty
penetration rate than new cars.
Service departmentAppraisal purchase processing fees collected from customers were designed to
cover the costs of our appraisal and wholesale operations. During the first
quarter of fiscal 2004, CarMax tested an alternative method for recovering the
costs. Based on the test results, during the second quarter the appraisal
purchase processing fees were discontinued across our entire store base
resulting in a decrease in appraisal purchase processing fees for the three and
six month periods ended August 31, 2003 compared to the same periods last year.
Under the appraisal cost recovery method, instead of charging the customer the
appraisal purchase processing fee, the company adjusts the price of its purchase
offer thereby reducing the acquisition cost of used and wholesale vehicles and
increasing used vehicle and wholesale vehicle gross profit margins. The intent
of changing to this method is to recover all costs, including the expense of
land on which we hold vehicles prior to being sold at the wholesale auctions
while also improving the consumers experience by eliminating a fee.
Page 16 of 29
Supplemental information related to vehicle sales were $13.9 millionfollows:
Retail Unit Sales
-----------------
Three Months Six Months
Ended August 31 Ended August 31
2003 2002 2003 2002
-----------------------------------------------------------------
Used vehicles......................... 60,150 50,877 118,195 98,187
New vehicles.......................... 5,842 6,489 11,725 12,225
-----------------------------------------------------------------
Total................................. 65,992 57,366 129,920 110,412
=================================================================
Average Retail Selling Prices
-----------------------------
Three Months Six Months
Ended August 31 Ended August 31
2003 2002 2003 2002
-----------------------------------------------------------------
Used vehicles......................... $ 15,484 $ 15,378 $ 15,377 $ 15,437
New vehicles.......................... $ 23,723 $ 23,361 $ 23,392 $ 23,206
Weighted average...................... $ 16,214 $ 16,281 $ 16,100 $ 16,297
Retail Vehicle Sales Composition
--------------------------------
Three Months Six Months
Ended August 31 Ended August 31
2003 2002 2003 2002
-----------------------------------------------------------------
Vehicle units:
Used vehicles.................... 91% 89% 91% 89%
New vehicles..................... 9 11 9 11
-----------------------------------------------------------------
Total ................................ 100% 100% 100% 100%
=================================================================
Vehicle dollars:
Used vehicles.................... 87% 84% 87% 84%
New vehicles..................... 13 16 13 16
-----------------------------------------------------------------
Total................................. 100% 100% 100% 100%
=================================================================
Retail Stores. In the second quarter of fiscal 2004, CarMax opened a standard
- -------------
superstore in Hoover, (Birmingham market), Ala., and a satellite superstore in
Sanford, (Orlando market), Fla. During the third quarter, CarMax plans to add a
standard superstore in the Memphis, Tenn., market (middle of the third quarter),
a satellite superstore in the Chicago market (late third quarter) and a standard
superstore in the Los Angeles market (middle of the third quarter) that will
integrate the company's two remaining stand-alone new car franchises.
Page 17 of 29
The following tables provide detail on the CarMax retail stores and new car
franchises:
Estimate
Store Mix Feb. 28, 2004 August 31, 2003 Feb. 28, 2003 August 31, 2002
-----------------------------------------------------------------------------------------------------------------
Mega superstores(1)................ 13 13 13 13
Standard superstores(2)............ 25 22 19 18
Satellite stores(3)................ 11 9 8 5
Co-located new car stores.......... 2 2 2 2
Stand-alone new car stores......... 0 2 2 2
---------------------------------------------------------------------------
Total.............................. 51 48 44 40
===========================================================================
(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.
Estimate
Feb. 28, 2004 August 31, 2003 Feb. 28, 2003 August 31, 2002
-----------------------------------------------------------------------------------------------------------------
Integrated/co-located
new car franchises............ 8 13 15 15
Stand-alone new car franchises..... 0 2 2 2
---------------------------------------------------------------------------
Total.............................. 8 15 17 17
===========================================================================
Gross Profit Margin
- -------------------
The total gross profit margin was 13.2% of sales in the second quarter of fiscal
2004 and 11.9% for the second quarter of fiscal 2003. Total gross profit margin
was 12.9% of sales for the six months ended August 31, 2003 and 12.0% for the
six months ended August 31, 2002.
Three Months Six Months
Ended August 31 Ended August 31
2003 2002 2003 2002
%(1) $ per unit(2) %(1) $ per unit(2) %(1) $ per unit(2) %(1) $ per unit(2)
-------------------------------------- --------------------------------------
Used vehicle gross profit margin.......... 11.9 1,860 10.9 1,675 11.5 1,781 10.9 1,688
New vehicle gross profit margin........... 4.0 959 4.2 982 3.9 909 4.1 950
------------------------------------- ------------------------------------
Total retail vehicle gross profit margin.. 10.9 1,780 9.8 1,596 10.5 1,702 9.8 1,607
Wholesale vehicle gross profit margin..... 10.0 334 4.4 153 9.8 333 5.5 194
Other gross profit margin................. 76.0 NM(3) 71.2 NM(3) 75.9 NM(3) 70.5 NM(3)
------------------------------------- ------------------------------------
Total gross profit margin................. 13.2 NM(3) 11.9 NM(3) 12.9 NM(3) 12.0 NM(3)
===================================== ====================================
(1) Gross profit margin percentages are calculated as a percentage of its respective sales or revenue.
(2) Dollars per unit are calculated as gross profit margin dollars divided by its respective unit sales.
(3) Not meaningful.
As compared with $14.0 million in the same periodperiods last year. The slight decrease isyear, the used vehicle profit margin per
used vehicle sold for the three and six month periods ended August 31, 2003,
increased as a result of the initial roll-outchange in the appraisal cost recovery methodology,
consistent sales performance during both the first and second quarters and
better inventory management. We now recover the expense of our appraisal, buying
and wholesale operating processes by factoring those costs into the purchase
offers we make. The acquisition cost of a used vehicle decreased due to the
implementation of the new appraisal cost recovery method.
The wholesale vehicle gross profit margin per wholesale vehicle sold for the
three and six month periods ended August 31, 2003, as compared with the same
periods last year increased, also due to the implementation of our new appraisal
Page 18 of 29
cost recovery method. The acquisition cost of a wholesale vehicle decreased due
to the new appraisal cost recovery method implemented. The expense of the
appraisal, buying and wholesaling processes are recovered by factoring those
costs in the purchase offers we make. Our intent is to recover all costs,
including the expense of the land on which we hold vehicles prior to being sold
at the wholesale auctions. Previously, we had not been fully recovering these
land costs.
The increase in other gross profit margin was primarily due to the increase in
service margins resulting from increased service sales and the benefits of our
new electronic repair order system to
many of our stores in the third quarter. For months when roll-outs occur, store(ERO). Last year's service sales are negatively impacted due to technician training time
requirements. Forand costs
were adversely affected as we began the nine months ended November 30, 2002, service sales were
$45.2 million compared with $42.5 million in the same period last year. The
increase in service department sales for the nine months ended November 30,
2002, reflects the overall increase in CarMax's customer base, offset by the
initial effect of the roll-out of the new electronic repair order system to many
of our stores.
Processing fees were $7.0 million in the third quarter of fiscal 2003,
compared with $5.9 million in the same period last year. For the nine months
ended November 30, 2002, processing fees were $21.5 million, compared with $18.7
million in the same period last year. Consumers are assessed a processing fee
when selling a vehicle to a CarMax retail location. These fees are designed to
cover some of the cost of CarMax's appraisal and purchasing operations. These
increases in processing fee revenue resulted from increased consumer response to
CarMax's vehicle appraisal offer.
Third party financing fees represent fees received from third party lenders who
finance CarMax customers' automobile loans. For the third quarter of fiscal
2003, third party financing fees were $3.7 million, compared with $3.9 million
for the same period last year. The decrease in the three months ended November
30, 2002 is a result of the decline in new car sales as compared to November 30,
2001. Since some third party financing fees are derived from the sale of new
cars, the decline in these fees was expected based on the decline in new car
sales. Also contributing to the decline in third party financing fees was an
increase in market share that CarMax Auto Finance captured from the third party
lender to prime customers. During the quarter, CarMax Auto Finance reduced its
retail interest rates to become more competitive. For the nine months ended
November 30, 2002, third party finance fees were $12.5 million, compared with
$11.9 million for the same period last year. The increase in third party
financing fees for the nine months ended November 30, 2002, was a result of the
total increase in retail vehicle sales.
Retail Stores. In the third quarter, CarMax opened a standard superstore in
Knoxville, Tenn., and a satellite superstore in Charlotte, NC. During the fourth
quarter, CarMax plans to add satellite superstores in the Chicago, Ill., and
Atlanta, Ga., markets. CarMax also plans to open its Las Vegas, Nev.,
superstore, originally planned to open in February 2003, in early March 2003.
The following table provides detail on the CarMax retail stores:
Estimate
Store Mix Feb. 28, 2003 Nov. 30, 2002 Feb. 28, 2002 Nov. 30, 2001
------------------------------------- -------------------- ------------------- ------------------ --------------------
Mega superstores 13 13 13 13
------------------------------------- -------------------- ------------------- ------------------ --------------------
Standard superstores 19 19 17 16
------------------------------------- -------------------- ------------------- ------------------ --------------------
Prototype satellite stores 8 6 5 4
------------------------------------- -------------------- ------------------- ------------------ --------------------
Co-located new car stores 2 2 2 2
------------------------------------- -------------------- ------------------- ------------------ --------------------
Stand-alone new car stores 2 2 3 4
------------------------------------- -------------------- ------------------- ------------------ --------------------
Total 44 42 40 39
===================================== ==================== =================== ================== ====================
Page 17 of 30
Gross Profit Margin
The totalERO rollout. Other gross profit margin
was 11.4 percent of salesalso benefited from increases in the third quarter of
fiscal 2003 and 11.1 percent for the third quarter of fiscal 2002. For the nine
months ended November 30, 2002 and 2001, the total gross profit margin was 11.8
percent of sales.
Retail Vehicle Gross Profit Margin. The retail vehicle gross profit margin was
9.7 percent of retail vehicle sales in the third quarter of fiscal 2003 versus
9.2 percent for the same period last year. For the nine months ended November
30, 2002 and 2001, the retail gross profit margin was 9.8 and 9.7 percent,
respectively.
Used Vehicle Gross Profit Margin. The used vehicle gross profit margin was 10.6
percent of used vehicle sales in the third quarter of fiscal 2003 versus 10.4
percent for the same period last year. The increase in used vehicle gross profit
margin reflects the continued improvement of our proprietary inventory
management and pricing system which allows us to turn our inventory rapidly. In
addition, the rapid decline of the wholesale market in fiscal 2002 after
September 11, 2001, negatively impacted the used vehicle gross margin in the
third quarter of fiscal 2002. For the nine months ended November 30, 2002, the
used vehicle gross profit margin was 10.8 percent compared with 10.9 percent for
the same period last year.
New Vehicle Gross Profit Margin. The new vehicle gross profit margin was 4.4
percent of new vehicle sales in the third quarter of fiscal 2003 versus 4.6
percent for the same period last year. For the nine months ended November 30,
2002, the new vehicle gross profit margin was 4.2 percent compared with 4.7
percent for the same period last year. The new car margin decline reflects an
increased competitive environment in new cars in the third quarter compared with
the same period in the prior year, requiring more aggressive pricing in order to
drive sales unit volume.
Wholesale Vehicle Gross Profit Margin. The wholesale gross margin covers the
costs of operating the auctions and their related costs. The wholesale vehicle
gross profit margin was 3.6 percent of wholesale sales in the third quarter of
fiscal 2003, compared with 3.2 percent for the same period last year. For the
nine months ended November 30, 2002, the wholesale vehicle gross profit margin
was 4.9 percent, compared with 4.5 percent for the same period last year. For
the three months and nine months ended November 30, 2002, the increase in the
wholesale vehicle gross profit margin over the same periods of fiscal 2002
reflects the negative impact of the rapid decline in the wholesale market in
fiscal 2002 after September 11, 2001.
Other Gross Profit Margin. The gross profit margin for otherextended warranty sales and revenues
was 62.5 percentthird-party finance
fees as a percentage of other sales and revenues, inpartially offset by the third quarter of fiscal
2003, compared with 65.6 percent for the same period last year. For the nine
months ended November 30, 2002 , the gross profit margin for other sales and
revenues was 68.0 percent, compared with 69.1 percent for the same period last
year. The
decrease in the other gross profit margin is due to increased costs
incurred by the service department and relatively flat sales as compared to the
third quarter of fiscal 2001. The flat growth and increased costs during the
third quarter reflects the initial effect of the roll-out of our new electronic
repair order system to many of our stores. In months when roll-outs occur, store
service sales and costs are impacted. The electronic repair order system
enhances our reconditioning efficiency and is expected to enhance the service
department and improve customer service.appraisal purchase processing fees.
CarMax Auto Finance Income
- --------------------------
CarMax Auto Finance ("CAF") is a division of CarMax with operations located in
Kennesaw, Ga.the company's finance operation. CAF's lending business
is limited to providing prime auto loans for CarMax's newused and usednew 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 CarMax'sour business that
such financing be available to credit-worthy customers. While this financing can also
be obtained from third
Page 18 of 30
partythird-party sources, CarMax iswe are concerned that total reliance on
such sourcesthird parties can create an unacceptable volatility and business risk.
Furthermore, we believe that the CarMaxour processes and systems, the transparency of CarMaxour
pricing and vehicle quality provide a unique and ideal environment in which to
procure high-quality auto loan receivables.receivables, both for CAF and for third-party
lenders. CAF provides CarMax with the opportunity to capture additional profits
and cash flows from auto loan receivables while managing ourthe company's reliance
on third partythird-party finance sources.
CAF income does not include any allocation of indirect costs or income. CarMax
presentsWe
present this information on a direct basis to avoid making arbitrary decisions
regarding the periodic indirect benefit or costs that could be attributed to this
operation. 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.
Page 19 of 29
For the thirdsecond quarter and first ninesix months of fiscal 20032004 and 2002,2003, CarMax Auto
Finance income was as follows:
Three Months Ended November 30 NineSix Months
Ended November 30August 31 Ended August 31
(Amounts in millions) 2002 % 20012003 % 2002 % 20012003 % 2002 %
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Gains on sales of loans (1)...........loans(1)....................... $ 15.918.3 4.8 $ 18.1 6.0 $ 37.9 5.1 $ 33.7 5.8
--------------------------------- ---------------------------------
Other income:(2)
Servicing fee income......................... 5.4 $ 15.6 6.5 $ 49.6 5.7 $ 43.3 6.1
---------------------------------------------------------------------------
Other income (2)...................... 6.8 1.6 5.5 1.5 22.21.0 4.0 1.0 10.5 1.0 8.0 1.0
Interest income.............................. 3.9 0.8 3.7 0.9 9.1 0.9 7.3 0.9
--------------------------------- ---------------------------------
Total other income............................... 9.4 1.8 17.6 1.7
----------------------------------------------------------------------------7.7 1.9 19.5 1.9 15.4 1.9
--------------------------------- ---------------------------------
Direct expenses expenses:(2)
PayrollCAF payroll and fringes expense......fringe benefit expense....... 2.0 0.4 1.7 0.4 1.54.0 0.4 5.1 0.4 4.13.4 0.4
Other direct expenses............ 1.8 0.4 1.6 0.4 5.5 0.4 4.5 0.4
---------------------------------------------------------------------------CAF expenses.................... 3.0 0.6 2.0 0.5 5.1 0.5 3.7 0.5
--------------------------------- ---------------------------------
Total direct expenses................. 3.5 0.8 3.1expenses............................ 5.0 1.0 3.6 0.9 10.69.0 0.9 8.6 0.8
---------------------------------------------------------------------------
Total income (3)......................7.1 0.9
--------------------------------- ---------------------------------
CarMax Auto Finance income(3).................... $ 19.2 2.122.7 1.8 $ 18.0 2.122.1 2.0 $ 61.248.4 2.0 $52.3$ 41.9 2.0
============================================================================================================ =================================
Loans sold....................................... $ 378.3 $ 299.8 $ 736.3 $ 582.9
Average managed receivables........... $1,748.8receivables...................... $ 1,439.72,068.2 $ 1,651.7 $1,361.7
Loans sold............................1,647.2 $ 292.22,005.3 $ 241.5 $ 875.1 $ 715.11,603.2
Net sales and operating revenues......revenues................. $ 936.81,236.5 $ 852.71,080.7 $ 3,023.3 $2,678.62,409.3 $ 2,086.5
Ending managed receivables balance............... $ 2,122.2 $ 1,689.1 $ 2,122.2 $ 1,689.1
Percent columns indicate:
(1) Percent of loans sold
(2) Annualized percent of averagedaverage managed receivables
(3) Percent of net sales and operating revenues
Key Accounting Policies. CAF originates automobile loans to CarMax consumerscustomers at competitive market rates
of interest. CarMax sells the majority of
the loans it originates each month in a securitization transaction as described
in Note 6 to CarMax's consolidated financial statements. The majority of the profit contribution from CAF is generated by
the spread between the interest rate charged to the consumercustomer and the cost of
funds. Substantially all of the loans originated by CAF each month are sold in
securitization transactions as described in Note 6 to the company's consolidated
financial statements. A gain results from recording a receivable 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 Performance. Forincome increased 3% in the three months ended November 30,
2002, gainssecond quarter of fiscal 2004 to
$22.7 million from $22.1 million for the same period last year. Gains on the sales
of loans were flat compared to the same period in the
prior year. Increasesincreased $0.2 million. The increase in loans sold driven by higher
vehicle sales were
partiallywas substantially offset by an expected decreaseanticipated compression of spreads due to
rising interest rates. The increase in yield spreads.other income was proportionate to the
increase in the managed receivables. Direct expenses were slightly higher
compared with the prior year as a result of certain start-up costs related to a
shelf registration of asset-backed securities with the Securities and Exchange
Commission for public securitizations.
For the ninesix months ended November 30, 2002, gainsAugust 31, 2003, CarMax Auto Finance income increased
15% to $48.4 million from $41.9 million for the same period last year. Gains on
sales of loans increased by $6.3 million. This$4.2 million with the majority of the increase
occurring in the first quarter of fiscal 2004 when spreads remained at
abnormally high levels. Spread compression in the second quarter resulted fromin a
decrease in gains as a percent of loans sold. The compression of the spread was
partially offset by an increase in loans sold driven by higher sales volumes,
partially offset by a decreasesales. The
increase in yield spreads. Otherother income and total direct expenses for the three and nine month periods ended November 30, 2002, increased
proportionatelywas proportionate to the increase
in the managed receivables balance.
Managed Receivable Performance. CarMaxreceivables.
Page 20 of 29
The company is at risk for the performance of the securitized receivables
managed to the extent that it maintains a retained interest in the receivables.
Supplemental information on our portfolio of managed receivables is shown in the
following tables:
As of August 31 As of February 28
(Amounts in millions) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------
Loans securitized............................ $ 2,077.0 $ 1,664.0 $ 1,859.1 $ 1,489.4
Loans held for sale or investment............ 45.2 25.1 19.6 13.9
------------------------------------------------------------
Ending managed receivables................... $ 2,122.2 $ 1,689.1 $ 1,878.7 $ 1,503.3
============================================================
Accounts 31+ days past due................... $ 32.0 $ 26.1 $ 27.6 $ 22.3
Past due accounts as a percentage of
ending managed receivables................... 1.51% 1.55% 1.47% 1.48%
Three Months Six Months
Ended August 31 Ended August 31
(Amounts in millions) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------
Average managed receivables.................. $ 2,068.2 $ 1,647.2 $ 2,005.3 $ 1,603.2
Credit losses on managed receivables......... $ 5.3 $ 4.1 $ 9.5 $ 7.3
Annualized losses as a percentage of
average managed receivables.................. 1.03% 1.00% 0.95% 0.91%
If the managed receivables do not perform in accordance with the assumptions
used in determining the fair value of the retained interests, earnings could be
impacted. Despite the current weak economic environment, the managed receivables
continue to perform in line with our expectations. Detail concerning the
assumptions used to value the retained interests and itsthe valuation's sensitivity
to adverse changes in the performance of the managed receivables are included in
Note 6 to CarMax'sthe company's consolidated financial statements. Information on CarMax's portfolio of managed receivables
is included below:
Page 19 of 30
As of November 30 As of February 28
(Amounts in millions) 2002 2001 2002 2001
-------------------------------------------------------------------------------------------------------------
Loans securitized.............................. $1,760.0 $1,446.3 $1,489.4 $1,215.4
Loans held for sale or investment.............. 34.0 10.1 13.9 11.6
----------------------------------------------------------
Ending managed receivables..................... $1,794.0 $1,456.4 $1,503.3 $1,227.0
========================================================
Accounts 31+ days past due..................... $ 25.9 $ 21.6 $ 22.3 $ 18.1
Past due accounts as a percentage of
ending managed receivables.................. 1.4% 1.5% 1.5% 1.5%
Three Months Ended Nine Months Ended
November 30 November 30
(Amounts in millions) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------
Average managed receivables...................... $1,748.8 $1,439.7 $1,651.7 $1,361.7
Credit losses on managed receivables............. $ 4.9 $ 3.8 $ 12.3 $ 8.3
Annualized losses as a percentage of
average managed receivables................. 1.1% 1.1% 1.0% 0.8%
Delinquencies (the percentage of accounts greater than 31 days past due) and
annualized loss rates are impacted by seasonal trends. Delinquencies are
generally at their peak in the late fall and winter months. Annualized losses
peak in the winter and early spring months. Average delinquencies and annualized
losses are also impacted by the growth rate of the portfolio. When the average
age of the loans in the portfolio increases, the portfolio tends to experience
higher losses and delinquencies.
The increase in losses as a percent of managed receivables for the nine months
ended November 30, 2002, over the prior year resulted from a slow down in the
growth rate of CarMax's portfolio combined with general economic factors. The
growth rate of CarMax's portfolio has moderated over the last two years. CarMax
also experienced higher loss rates in the first six months of the year due
primarily to depressed wholesale values which lead to lower recovery rates on
repossessed vehicles.
If the managed receivables do not perform in accordance with the assumptions
CarMax uses in recording gains on sales, earnings could be impacted. Despite the
weak economic environment, the managed receivables continue to perform in line
with our initial gain assumptions.
Selling, General and Administrative Expenses
- --------------------------------------------
The selling, general and administrative expense ratio was 10.9 percent9.8% of net sales inand
operating revenues for the third quarter of fiscalthree and six month periods ended August 31, 2003,
and 9.7 percent of sales in9.1% and 9.2%, respectively, for the third
quarter of fiscal 2002.same periods last year. The increase in
the expense ratio reflects the expected higher level of operating expenses
associated with being a stand-alone company following our October 1, 2002,
separation from Circuit City Stores. The incremental costs related to being a
stand-alone company were approximately $6.5 million in the second quarter and
$12.0 million for the thirdsix months ended August 31, 2003. Also as anticipated, our
new stores have experienced higher expense ratios than stores in the comparable
store base due to the fact that these newer stores have not been open long
enough to ramp up to their expected mature sales levels. In addition, preopening
expenses increased because we opened four stores in the first half of this year
compared with one store opened in last year's first half.
Interest Expense
- ----------------
Interest expense decreased to $0.4 million for the second quarter of fiscal 2003 versus the third quarter of last fiscal year reflects the
one-time separation costs of $4.5 million, the expenses associated with the
ramping up of our geographic growth including pre-opening expenses, training and
recruiting, and incremental expenses caused by diseconomies of scale resulting2004
from the separation from Circuit City. These expenses include higher insurance
costs and health and welfare benefit costs. For the nine months ended November
30, 2002, the ratio was 9.7 percent of sales, compared with 9.2 percent in the
same period last year. The expense ratio in this year's first nine months
includes a higher level of expenses associated with geographic expansion, $7.6
million of one-time separation costs and the incremental expenses related to the
diseconomies of scale discussed above.
Interest Expense
Interest expense increased to $0.3 million for the third quarter of fiscal 2003
from $0.1$0.7 million in the same period last year. For the ninesix months ended November 30, 2002,August
31, 2003, interest expense was $1.7$1.1 million, compared with $4.7$1.4 million in the
same period last year.
The decline in interest expense for the nine
months ended November 30, 2002, is a result of lower average debt levels and
lower cost of funds.
Page 20 of 30
Income Taxes
- ------------
The effective income tax rate increaseddecreased to 39.5 percent38.5% for the thirdsecond quarter and the
six months ended August 31, 2003, from 39.5% for the same periods last year. In
the previous fiscal year, the effective tax rate was higher because the costs
related to the separation from Circuit City Stores completed last fiscal year
were not deductible.
Page 21 of 29
Net Earnings
- ------------
Second quarter fiscal 2004 net earnings increased 25% to $39.6 million from
$31.7 million in the second quarter of fiscal 2003 from 38.0 percent for the third quarter of fiscal 2002.2003. For the ninesix months ended
November 30, 2002, the effective income tax rate was 39.5 percent,
compared with 38.0 percent for the same period last year.August 31, 2003, net earnings increased 23% to $74.9 million from $61.0 million.
The increase in net earnings is a result of strong sales growth, increased used
vehicle gross margins and the fiscal 2003 effective tax rate reflects CarMax'sabsence of non-tax deductible separation expenses,
which were more than offset by the incremental costs of $4.5 million in the third quarter and $7.6 million in the first nine
months of the year.
Net Earnings
Third quarter fiscal 2003 net earnings decreased 20 percent to $14.7 million
from $18.4 million in the third quarter of fiscal 2002. Third quarter fiscal
2003 earnings include $4.5 million of one-time, non-tax-deductible costs
associated with the separation of CarMax from Circuit City. Excluding the
one-time separation costs, net earnings were 4 percent higher in the third
quarter of fiscal 2003 than the same period last year. For the nine months ended
November 30, 2002, net earnings increased 5 percent to $75.7 million from $72.4
million. Earnings for the nine months ended November 30, 2002, include $7.6
million of one-time, non-tax-deductible costs associated with the separation.
Excluding the one-time separation costs, net earnings increased 15 percent to
$83.3 million in the first nine months of fiscal 2003 compared with $72.4
million in the same period last year.being a stand-alone
company.
Operations Outlook
For more than two years,- ------------------
CarMax has demonstratedcontinues to demonstrate that its consumer offer and business model can
produce strong sales and earnings growth. AtIn addition to the beginningthree
standard-sized superstores and one satellite superstore opened in the first half
of fiscal 2002, CarMax announced that it would resume geographic growth, openingthe year, we plan to open approximately two superstores in late fiscal 2002, four to six superstores in fiscal 2003 and
six to eight stores in each of fiscal years 2004, 2005 and 2006. This expansion
is proceeding as planned with two morestandard-sized used car
superstores scheduledand two satellite superstores in the second half of fiscal 2004. In
addition, in Los Angeles, we intend to open
duringintegrate our two remaining stand-alone
new car franchises with a new used car superstore in the fourth quarterthird quarter. In the
first half of fiscal 2004, we sold our Jeep franchise in Kenosha, Wis., and
returned the fiscalMitsubishi new car franchise operation in Nashville, Tenn., to the
manufacturer. We still plan to sell or return the remaining four Mitsubishi new
car franchises; however, completion of this process may not be until the end of
calendar year bringing2004. In addition, we plan to sell the total numberFord franchise in Kenosha,
Wis. The sale or return of stores opened in fiscal 2003 to five.these franchises, which are integrated with used car
superstores, will create more space for used car sales expansion, which is more
profitable for us.
Comparable store used unit sales growth is a primary driver of CarMax's
profitability. For the fourthWe have lowered our third quarter we expect used unit comparable store
sales growth expectations to a range of 0% to 2%. The third quarter net earnings
per share have also been revised downward to a range of 16 cents to 18 cents. We
believe that the reduction in comparable sales expectations for the third
quarter is temporary and is caused by wholesale vehicle prices adjusting more
slowly and later in the fall model-year transition period than we have
historically seen. Consequently, we believe retail used car prices are likely
less competitive with new car closeout models than usual. We believe that these
seasonal transition issues will have been largely resolved by the beginning of
the fourth quarter. As a result of the change in expectations for the third
quarter, we are modifying our full year fiscal 2004 comparable used unit
expectations to a range of 4 percent5% to 7 percent, which would meet7% and now believe that our forecast for
mid- to high- single-digit used unit comparable store growth in the second half.
For fiscal 2003, CarMax anticipates pro forma net earnings will
be in a range of 95 cents$114 million to $1.00
per CarMax share, excluding approximately 8 cents per share of one-time,
non-tax-deductible costs associated with the separation from Circuit City.
Fiscal 2003 has been a year of transition for CarMax as it ramps up its growth
pace and assumes additional expenses related to the separation.$120 million. The expense leverage that CarMaxwe
would normally expect from the comparable store used unit comparable store growth during this fiscal year has been and will continueis estimated to
be partiallymore than offset by increased expenses resulting from diseconomies of scale, incremental expenses
due to the separation from Circuit City and costs related to the growth in the
number of CarMax stores. Increases in benefit plan costs, insurance and
management are examples of cost increases resulting from the separation. Growth
related costs include the developmentcombined effects of a management bench for store expansion
for the next two fiscal years and pre-opening expenses for stores opening during
the fourth quarterfull year of this fiscal yearincremental costs
associated with being a stand-alone company and the first half of next year. In
addition, other growth related costs such as training, recruitinghigher selling, general and
employee
relocation for newadministrative expense ratios experienced by our newer stores which have not
been open long enough to ramp up to their expected mature sales levels.
We also moderate the expense leverageanticipate that CarMax would
expect from used unit comparable store growth this year.
For fiscal 2003, CarMax initially had anticipated that theour cost of funds for CAF
would be higher than inthrough the third quarter of fiscal
2002 and therefore,2004 will remain roughly at the average of the second quarter levels. As long as
the spread between the average of the cost of funds and theretail interest rate
paid by consumers stabilizes at levels experienced at the end of the second
quarter, we would be lower in fiscal 2003,
resulting in lowerexpect CAF income. Based on the continued favorable interest rate
environment in fiscal 2003 thus far, CarMax anticipatesto contribute at a higher contribution
from CAF than originally expectedsimilar level as a percent of
net sales and operating revenues for the fourththird quarter as the second quarter.
Beyond fiscal 2003,
CarMax expectsHowever, if our cost of funds continues to increase, from the historical lows experienced
recently. When that occurs, CarMax expects the spread will ultimately return to
more normal levels thereby reducing CAF's contribution is
likely to earnings.
Page 21 of 30
decrease.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001,For a discussion of recent accounting pronouncements applicable to the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting For Asset Retirement Obligations." This statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It is effective for fiscal years beginning after June 15, 2002. CarMax
does not expect the applicationcompany,
see Note 8 of the provisionsNotes to the Consolidated Financial Statements set forth
elsewhere in this report.
Page 22 of SFAS No. 143 to have an
impact on the financial position, results of operations or cash flows of the
company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies EITF No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." It is effective for exit or disposal activities initiated
after December 31, 2002. CarMax does not expect the application of the
provisions of SFAS No. 146 to have an impact on the financial position, results
of operations or cash flows of the company.29
Financial Condition
Liquidity and Capital Resources
- -------------------------------
Operating Activities. For the first ninesix months of fiscal 2003,2004, CarMax generated
- --------------------
cash from operating activities of $72.7$118.0 million. In the same period last year,
CarMax generated cash from operating activities of $74.1$93.1 million. The fiscal
2004 improvement primarily resulted from an increase in net earnings and a
decrease in inventory. The decrease in our inventory balance is attributed to
reducing new vehicle inventory through the disposition of two new car
franchises, improving inventory management at our new vehicle locations and
improving our used vehicle inventory turns.
Investing Activities. Net cash used in investing activities was $33.4$57.8 million in
- --------------------
the six months ended August 31, 2003 compared with $40.1 million in the nine months ended November 30, 2002. In the first
ninesix months of last fiscal year, CarMax generated $73.4year. Capital expenditures were $82.7 million from investing activities.
CarMax capital expenditures increased to $71.3and
$40.1 million infor the first ninesix months of fiscalended August 31, 2003 compared with $22.9 million in the first nine months of fiscal
2002.and 2002, respectively.
The increase in CarMax capital expenditures resulted fromis primarily attributed to the resumptionincrease in
our store base associated with our growth plan. Additionally, some of geographic growth,the
increase is associated with five superstores opening since November 2001, the planned openinginitial expenditures associated with the
development of two superstoresour future corporate headquarters site in Richmond, Va. In the
fourthsecond quarter of fiscal 2003 and2004, the planned openingcompany received proceeds of six to eight stores in fiscal 2004.
Proceeds from the sale of property and equipment declined to $37.9 in the first
nine months of fiscal 2003, comparedapproximately
$25 million associated with $96.3 million in the first nine months
of last year. Proceeds from sales of property and equipment in the first nine
months of last year included amounts received from the sale-leaseback transaction of nine
CarMax superstorethree properties. In the third quarter of fiscal 2002, CarMax
entered into a sale-leaseback transaction involving three properties valued at
approximately $37.6 million.
The transaction was entered into at competitive
rates and structured as an operating lease with an initial lease term
of 15 years with two 10-yearfour five-year renewal options. At August 31, 2003, a total of
five CarMax superstores were owned, pending completion of sale-leaseback
transactions in the third quarter of fiscal 2004.
Financing Activities. Net cash used in financing activities was $11.0$49.5 million in
- --------------------
the first six months of fiscal 2004, compared with net cash generated of $18.3
million in the first nine months of fiscal 2003, compared with net cash used of $146.3
million in the first ninesix months of last fiscal year. InThe increase in net cash
used is attributed to the first quarterpaying down of fiscal 2003, CarMax entered into a $200 million credit agreement with
DaimlerChrysler Services North America, LLC and Toyota Financial Services. This
agreement, which is secured by vehicle inventory, includes a $100 millionthe revolving loan commitment and a $100 million term loan. The terms for both
commitments are LIBOR-based and have initial two-year terms. As of November 30,
2002, the amounts outstanding under this credit agreement were $4.5 million for
the revolver and $100 million for the term loan.
Page 22 of 30
CarMax used a portion of the proceeds from the term loan for the repayment of
debt allocated by Circuit City Stores, the payment of a one-time special
dividend to Circuit City Stores of $28.4 million, the payment of transaction
expenses incurred in connectionbalance with the separation and general corporate
purposes.excess
cash.
At November 30, 2002,August 31, 2003, the aggregate principal amount of securitized automobile
loan receivables totaled $1.76$2.08 billion. During the fourth quarter of fiscalAt August 31, 2003, the company completed its fifth public automobile loan receivable
securitization. The total value of automobile loan receivables securitized
through this public offering was $500 million. At November 30, 2002, the unused capacity
of the warehouse facility was $107.0$226.0 million. This programIn June 2003, the warehouse
facility was renewed and now matures in June 2003.2004. Also, the facility limit was
increased to $825.0 million from $750.0 million. CarMax anticipates that it will
be able to expand or enter into new securitization arrangements to meet the
future needs of the automobile loan finance operation.
CarMax maintains a $300 million credit facility secured by vehicle inventory. As
of August 31, 2003, the amount outstanding under this credit facility was $103.4
million, with the remainder fully available to the company. CarMax expects that
proceeds from theits credit agreement secured by vehicle
inventory,facility, additional credit facilities, if needed,
sale-leaseback transactions and cash generated by operations will be sufficient
to fund capital expenditures and working capital of the CarMax businesscompany for the
foreseeable future.
Forward-Looking Statements
--------------------------
This report on Form 10-Q contains "forward-looking statements," which are
subject to risks and uncertainties, including, but not limited to, risks
associated with the separation of the CarMax business from Circuit City Stores,
Inc. Additional discussion of factors that could cause actual results to differ
materially from management's projections, forecasts, estimates and expectations
is contained in the company's SEC filings, including the Form S-4 related to the
separation.
Page 23 of 3029
ITEM 3.
QUANTITATIVE AND QUALITATIVE
----------------------------
DISCLOSURES ABOUT MARKET RISK
-----------------------------
ReceivablesMarket Risk
CarMax manages the market risk associated with the automobile installment loan
portfolio of its finance operation. A portion of this portfolio has been
securitized in transactions accounted for as sales in accordance with SFAS No.
140 and, therefore, is not presented on the consolidated balance sheets.
Automobile Installment Loan Receivables. At November 30, 2002,August 31, 2003, and February 28,
2002,- ---------------------------------------
2003, 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. The total principal amount of receivables securitized or held for investment or
sale as of November 30, 2002, and February 28, 2002, was as follows:
(Amounts in millions) November 30 February 28
-------------------------------------------------------------------------------
Fixed-rate securitizations................. $ 1,117 $ 1,075
Floating-rate securitizations
synthetically altered to fixed.......... 102 413
Floating-rate securitizations.............. 541 1
Held for investment (1).................... 18 12
Held for sale (1).......................... 16 2
--------------------------------
Total...................................... $ 1,794 $ 1,503
================================
(1) Held by a bankruptcy-remote special purpose subsidiary.
Interest Rate Exposure. Interest rate exposure relating to the securitized
automobile loan receivables represents a market risk exposure that we manage
with matched funding and interest rate swaps matched to projected payoffs.
CarMax does not anticipate market risk from swaps because they are used on a
monthly basis to match funding costs to the use of the funding. Market risk is
the exposure created by potential fluctuations in interest rates. Generally,
changes only in interest rates doassociated with underlying swaps will not have a
material impact on CarMax's results
of operations.
CarMax also has interest rate risk from changingearnings. However, changes in interest rates related to our
outstanding debt. Substantially all of our debt is floating rate debt based on
LIBOR. A 100 basis point increase in market interest rates would notassociated with
underlying swaps may have a material effectimpact on our fiscal 2003 results of operations orcash 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. Refer to Note 7 to the
CarMax, Inc.company's consolidated financial statements for a description of these items.
Page 24 of 30
Item 4.
Controls and Procedures
-----------------------
CarMax'sThe total principal executive officer and principal financial officer have
evaluated the effectiveness of CarMax's "disclosure controls and procedures," as
such term is defined in Rule 13a-14(c) of the Securities Exchange Act of 1934,
as amended, within 90 days prior to the filing date of this Quarterly Report on
Form 10-Q. Based upon their evaluation, the principal executive officer and
principal financial officer concluded that CarMax's disclosure controls and
procedures are effective. There were no significant changes in CarMax's internal
controls or in other factors that could significantly affect these controls
since the date the controls were evaluated.
Page 25 of 30
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 5. Other Information
In December 2002, the company completed its fifth public
automobile loan receivable securitization. The total value of
automobile loanending managed receivables securitized through this public
offering was $500 million.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3) (i) Articles of Incorporation
(a) CarMax, Inc. Amended and Restated Articles of
Incorporation, effective June 6, 2002, filed as Exhibit
3.1 to CarMax's Current Report on Form 8-K, filed on
October 3, 2002 (File No. 1-31420), expressly
incorporated herein by this reference.
(b) CarMax, Inc. Articles of Amendment to the Amended and
Restated Articles of Incorporation, effective June 6,
2002, filed as Exhibit 3.2 to CarMax's Current Report
on Form 8-K, filed on October 3, 2002 (File No.
1-31420), expressly incorporated herein by this
reference.
(3) (ii) Bylaws
(a) CarMax, Inc. Bylaws, as amended and restated October 1,
2002, filed as Exhibit 3.3 to CarMax's Current Report
on Form 8-K, filed on October 3, 2002 (File No.
1-31420), expressly incorporated herein by this
reference.
(99) (i) Certification of the Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(99) (ii) Certification of the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
Page 26 of 30
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CARMAX, INC.
By: /s/ W. Austin Ligon
--------------------------------------
W. Austin Ligon
President and
Chief Executive Officer
By: /s/ Keith D. Browning
--------------------------------------
Keith D. Browning
Executive Vice President and
Chief Financial Officer
January 14, 2003
Page 27 of 30
I, W. Austin Ligon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CarMax, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrantheld for
investment or sale as of August 31, 2003, and February 28, 2003, was as follows:
(Amounts in millions) August 31 February 28
------------------------------------------------------------------------------------
Fixed-rate securitizations................. $ 1,478.0 $ 1,385.1
Floating-rate securitizations
synthetically altered to fixed.......... 548.7 473.2
Floating-rate securitizations............. 50.3 0.8
Held for the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsibleinvestment (1)................... 24.8 16.0
Held for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 14, 2003
/s/ W. Austin Ligon
-----------------------------------
W. Austin Ligon
President and
Chief Executive Officer
Page 28 of 30
I, Keith D. Browning, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CarMax, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: January 14, 2003
/s/ Keith D. Browning
-----------------------------------
Keith D. Browning
Executive Vice President and
Chief Financial Officer
Page 29 of 30
EXHIBIT INDEX
-------------
(3) (i) Articles of Incorporation
(a) CarMax, Inc. Amended and Restated Articles of
Incorporation, effective June 6, 2002, filed as Exhibit
3.1 to CarMax's Current Report on Form 8-K, filed on
October 3, 2002 (File No. 1-31420), expressly
incorporated herein by this reference.
(b) CarMax, Inc. Articles of Amendment to the Amended and
Restated Articles of Incorporation, effective June 6,
2002, filed as Exhibit 3.2 to CarMax's Current Report
on Form 8-K, filed on October 3, 2002 (File No.
1-31420), expressly incorporated herein by this
reference.
(3) (ii) Bylaws
(a) CarMax, Inc. Bylaws, as amended and restated October 1,
2002, filed as Exhibit 3.3 to CarMax's Current Report
on Form 8-K, filed on October 3, 2002 (File No.
1-31420), expressly incorporated herein by this
reference.
(99)(i) Certification of the Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(99) (ii) Certification of the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.sale (2)......................... 20.4 3.6
-------------------------------------
Total..................................... $ 2,122.2 $ 1,878.7
=====================================
(1) The majority is held by a bankruptcy-remote special purpose entity.
(2) Held by a bankruptcy-remote special purpose entity.
Interest Rate Exposure. CarMax also has 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 second quarter results of
operations or cash flows.
Page 3024 of 3029
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 Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the U.S. Securities and Exchange
Commission's ("SEC") 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 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
evaluation date. There was no change in the company's internal control over
financial reporting that occurred during the quarter ended August 31, 2003 that
has materially affected, or is reasonably likely to materially affect, the
company's internal control over financial reporting.
Page 25 of 29
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
The company held an annual meeting of shareholders on June 24,
2003. Information on the matters voted upon and the votes cast
with respect to each matter was previously disclosed in the
company's Quarterly Report on Form 10-Q for the quarter ended May
31, 2003.
Item 5. Other Information
Effective July 28, 2003, James F. Clingman was elected to serve as
a director of the company for a term that will expire at the
annual meeting of shareholders to be held in 2004.
Effective September 23, 2003, Thomas G. Stemberg was elected to
serve as a director of the company for a term that will expire at
the annual meeting of shareholders to be held in 2004.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 CarMax, Inc. Amended and Restated Articles of
Incorporation, effective June 6, 2002, filed as
Exhibit 3.1 to CarMax's Current Report on Form
8-K, filed October 3, 2002 (File No. 1-31420),
incorporated herein by this reference.
3.2 CarMax, Inc. Bylaws, as amended and restated
September 23, 2003, filed herewith.
10 Amendment No.1 to Transition Services Agreement
("Agreement") dated as of August 21, 2003,
between Circuit City Stores, Inc. and
CarMax, Inc., filed herewith.
31.1 Certification of the Chief Executive Officer
Pursuant to Rule 13a-14(a), filed herewith.
31.2 Certification of the Chief Financial Officer
Pursuant to Rule 13a-14(a), filed herewith.
32.1 Certification of the Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, filed
herewith.
32.2 Certification of the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, filed
herewith.
Page 26 of 29
(b) Reports on Form 8-K
The company did not file any reports on Form 8-K during
the period covered by this report; however, during the
quarter the company furnished a report on Form 8-K
pursuant to Items 7 and 9 (reporting information required
by Item 12) on June 5, 2003, and furnished one report on
Form 8-K pursuant to Item 9 on July 11, 2003.
Page 27 of 29
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
October 15, 2003
Page 28 of 29
EXHIBIT INDEX
-------------
3.2 CarMax, Inc. Bylaws, as amended and restated
September 23, 2003, filed herewith
10 Amendment No. 1 to Transition Services Agreement
("Agreement") dated as of August 21, 2003, between
Circuit City Stores, Inc. and CarMax, Inc, filed herewith
31.1 Certification of the Chief Executive Officer Pursuant to
Rule 13a-14(a), filed herewith
31.2 Certification of the Chief Financial Officer Pursuant to
Rule 13a-14(a), filed herewith
32.1 Certification of the Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, filed herewith
32.2 Certification of the Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, filed herewith
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