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Accounting Policies (Policy)
 6 Months Ended
Aug. 31, 2012
Accounting Policies [Abstract]  
Basis Of Presentation

Basis of Presentation and Use of Estimates.  The accompanying interim unaudited consolidated financial statements include the accounts of CarMax and our wholly owned subsidiaries.  All significant intercompany balances and transactions have been eliminated in consolidation.  These consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  In the opinion of management, such interim consolidated financial statements reflect all normal recurring adjustments considered necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented.  The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year.  These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the fiscal year ended February 29, 2012.

Use Of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities.  Actual results could differ from those estimates.  Certain prior year amounts have been reclassified to conform to the current year’s presentation.  Amounts and percentages may not total due to rounding.

Cash And Cash Equivalents

 

Cash and Cash Equivalents.  Cash equivalents of $50.1 million as of August 31, 2012, and $429.3 million as of February 29, 2012, consisted of highly liquid investments with original maturities of three months or less.

 

Restricted Cash From Collections On Auto Loan Receivables

 

Restricted Cash from Collections on Auto Loan Receivables.  Cash accounts totaling $204.7 million as of August 31, 2012, and $204.3 million as of February 29, 2012, consisted of collections of principal and interest payments on securitized auto loan receivables that are restricted for payment to the securitization investors pursuant to the applicable securitization agreements.

 

Securitizations

 

Securitizations.    We maintain a revolving securitization program composed of two warehouse facilities (“warehouse facilities”) that we use to fund auto loan receivables originated by CAF until they are funded through a term securitization or alternative funding arrangement.  We sell the auto loan receivables to a wholly owned, bankruptcy-remote, special purpose entity that transfers an undivided percentage ownership interest in the receivables, but not the receivables themselves, to entities formed by third-party investors (“bank conduits”).  The bank conduits generally issue asset-backed commercial paper or utilize other funding sources supported by the transferred receivables, and the proceeds are used to finance the securitized receivables.

 

We typically use term securitizations to provide long-term funding for the auto loan receivables initially securitized through the warehouse facilities.  In these transactions, a pool of auto loan receivables is sold to a bankruptcy-remote, special purpose entity that, in turn, transfers the receivables to a special purpose securitization trust.  The securitization trust issues asset-backed securities, secured or otherwise supported by the transferred receivables, and the proceeds from the sale of the asset-backed securities are used to finance the securitized receivables.

 

We are required to evaluate term securitization trusts for consolidation.  In our capacity as servicer, we have the power to direct the activities of the trusts that most significantly impact the economic performance of the receivables.  In addition, we have the obligation to absorb losses (subject to limitations) and the rights to receive any returns of the trusts, which could be significant.  Accordingly, we are the primary beneficiary of the trusts and are required to consolidate them.

 

We recognize transfers of auto loan receivables into the warehouse facilities and term securitizations (“securitization vehicles”) as secured borrowings, which result in recording the auto loan receivables and the related non-recourse notes payable to the investors on our consolidated balance sheets.

 

The securitized receivables can only be used as collateral to settle obligations of the securitization vehicles.  The securitization vehicles and investors have no recourse to our assets beyond the securitized receivables, the amounts on deposit in reserve accounts and the restricted cash from collections on auto loan receivables.  We have not provided financial or other support to the securitization vehicles or investors that was not previously contractually required, and there are no additional arrangements, guarantees or other commitments that could require us to provide financial support to the securitization vehicles.

 

See Notes 4 and 9 for additional information on auto loan receivables and non-recourse notes payable.

Auto Loan Receivables, Net

Auto Loan Receivables, Net.  Auto loan receivables include amounts due from customers primarily related to used retail vehicle sales financed through CAF and are presented net of an allowance for estimated loan losses.  The allowance for loan losses represents an estimate of the amount of net losses inherent in our portfolio of managed receivables as of the applicable reporting date and anticipated to occur during the following 12 months.  The allowance is primarily based on the credit quality of the underlying receivables, historical loss trends and forecasted forward loss curves.  We also take into account recent trends in delinquencies and losses, recovery rates and the economic environment.  The provision for loan losses is the periodic expense of maintaining an adequate allowance.

 

An account is considered delinquent when the related customer fails to make a substantial portion of a scheduled payment on or before the due date.  In general, accounts are charged-off on the last business day of the month during which the earliest of the following occurs:  the receivable is 120 days or more delinquent as of the last business day of the month, the related vehicle is repossessed and liquidated or the receivable is otherwise deemed uncollectible.  For purposes of determining impairment, auto loans are evaluated collectively, as they represent a large group of smaller-balance homogeneous loans, and therefore, are not individually evaluated for impairment.  See Note 4 for additional information on auto loan receivables.

 

Interest income and expenses related to auto loans are included in CAF income. Interest income on auto loan receivables is recognized when earned based on contractual loan terms.  All loans continue to accrue interest until repayment or charge-off.  Direct costs associated with loan originations are not considered material.  See Note 3 for additional information on CAF income.

Other Assets

Other Assets.  Other assets includes amounts classified as restricted cash on deposit in reserve accounts and restricted investments.  The restricted cash on deposit in reserve accounts is for the benefit of holders of non-recourse notes payable, and these funds are not expected to be available to the company or its creditors.  In the event that the cash generated by the securitized receivables in a given period was insufficient to pay the interest, principal and other required payments, the balances on deposit in the reserve accounts would be used to pay those amounts.  Restricted cash on deposit in reserve accounts was $40.5 million as of August 31, 2012, and $45.3 million as of February 29, 2012.

 

Restricted investments includes money market securities primarily held to satisfy certain insurance program requirements, as well as mutual funds held in a rabbi trust established to fund informally our executive deferred compensation plan.  Restricted investments was $34.4 million as of August 31, 2012, and $31.4 million as of February 29, 2012.

Finance Lease Obligations

Finance Lease Obligations.  As reported in our Annual Report on Form 10-K for fiscal 2012, we revised our consolidated financial statements to correct our accounting for sale-leaseback transactions.  The revisions resulted from the misapplication of the sale-leaseback provisions of Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 840, Leases, related to transactions we entered into between fiscal 1995 and 2009. We determined that our financial statements were not materially affected by the correction.  The following tables summarize the impact of the revisions on the major financial statement line items for the three months and six months ended August 31, 2011.

 

Consolidated Statements of Earnings

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended August 31, 2011

 

Previously

 

 

 

 

 

 

(In thousands except per share data)

Reported

Adjustments

Revised

Selling, general and administrative expenses

$
236,435 

 

$
(6,548)

 

$
229,887 

 

Interest expense

$
787 

 

$
7,677 

 

$
8,464 

 

Earnings before income taxes

$
180,989 

 

$
(1,129)

 

$
179,860 

 

Income tax provision

$
69,094 

 

$
(388)

 

$
68,706 

 

Net earnings

$
111,895 

 

$
(741)

 

$
111,154 

 

 

 

 

 

 

 

 

 

 

 

Net Earnings Per Share:

 

 

 

 

 

 

 

 

 

Basic

$
0.49 

 

$

 ―

 

$
0.49 

 

Diluted

$
0.49 

 

$
(0.01)

 

$
0.48 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended August 31, 2011

 

Previously

 

 

 

 

 

 

(In thousands except per share data)

Reported

Adjustments

Revised

Selling, general and administrative expenses

$
484,640 

 

$
(13,098)

 

$
471,542 

 

Interest expense

$
1,578 

 

$
15,426 

 

$
17,004 

 

Earnings before income taxes

$
384,852 

 

$
(2,328)

 

$
382,524 

 

Income tax provision

$
146,669 

 

$
(799)

 

$
145,870 

 

Net earnings

$
238,183 

 

$
(1,529)

 

$
236,654 

 

 

 

 

 

 

 

 

 

 

 

Net Earnings Per Share:

 

 

 

 

 

 

 

 

 

Basic

$
1.05 

 

$

 ―

 

$
1.05 

 

Diluted

$
1.03 

 

$

 ―

 

$
1.03 

 

 

Consolidated Statement of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended August 31, 2011

 

Previously

 

 

 

 

 

 

(In thousands)

Reported

Adjustments

Revised

Net cash used in operating activities

$
(81,641)

 

$
5,717 

 

$
(75,924)

 

Net cash provided by financing activities

$
296,570 

 

$
(5,717)

 

$
290,853 

 

Increase in cash and cash equivalents

$
140,792 

 

$

 ―

 

$
140,792 

 

 

Derivative Instruments And Hedging Activities

Derivative Instruments and Hedging Activities.  We enter into derivative instruments to manage exposures that arise from business activities that result in the future known receipt or payment of uncertain cash amounts, the values of which are impacted by interest rates.  We recognize the derivatives at fair value as either current assets or current liabilities on the consolidated balance sheets.  Where applicable, such contracts covered by master netting agreements are reported net.  Gross positive fair values are netted with gross negative fair values by counterparty.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting.  We may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting may not apply or we do not elect to apply hedge accounting.  See Note 5 for additional information on derivative instruments and hedging activities.

 

Recent Accounting Pronouncements

Recent Accounting Pronouncements.  In December 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting pronouncement related to offsetting of assets and liabilities on the balance sheet (FASB ASC Topic 210).  The amendments require additional disclosures related to offsetting either in accordance with U.S. GAAP or master netting arrangements.  The provisions for this pronouncement are effective for fiscal years, and interim periods within those years, beginning after January 1, 2013.  We will adopt this pronouncement for our fiscal year beginning March 1, 2013.  We do not expect this pronouncement to have a material effect on our consolidated financial statements.

 

In July 2012, the FASB issued an accounting pronouncement related to intangibles – goodwill and other (FASB ASC Topic 350), which permits companies to first consider qualitative factors as a basis for assessing impairment and determining the necessity of a detailed impairment test of indefinite-lived intangible assets.  The provisions for this pronouncement are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.  We will adopt this pronouncement for our fiscal year beginning March 1, 2013.  We do not expect this pronouncement to have a material effect on our consolidated financial statements