Stock And Stock-Based Incentive Plans

12 Months Ended

Feb. 28, 2014

Stock And Stock-Based Incentive Plans [Abstract]

Stock And Stock-Based Incentive Plans

12.Stock and Stock-Based Incentive Plans

(A) Preferred Stock

Under the terms of our Articles of Incorporation, the board of directors may determine the rights, preferences and terms of our authorized but unissued shares of preferred stock.  We have authorized 20,000,000 shares of preferred stock, $20 par value.  In 2002, we created a series of preferred stock designated as “Cumulative Participating Preferred Stock, Series A” in connection with the shareholder rights plan adopted by the company.  The number of shares constituting such series is 300,000.  The shareholders rights plan expired in 2012, and no shares of such Series A Cumulative Participating Preferred Stock or any other preferred stock are currently outstanding.

(B) Share Repurchase Program

In fiscal 2013, our board of directors authorized the repurchase of up to $800 million of our common stock.  Of the total authorized, $300 million was scheduled to expire on December 31, 2013, with the remaining$500 millionscheduled to expire on December 31, 2014.  Purchases may be made in the open market or privately negotiated transactions at management’s discretion and the timing and amount of repurchases are determined based on share price, market conditions, legal requirements and other factors.  Shares repurchased are deemed authorized but unissued shares of common stock. 

During fiscal 2014, we repurchased 6,859,518shares of common stock at an average purchase price of $44.61 per share.  During fiscal 2013, we repurchased 5,762,000 shares of common stock at an average purchase price of $36.77 per share.  As of February 28, 2014,  $282.1 millionwas available for repurchase under the authorizations.Subsequent to the end of fiscal 2014, in March 2014, our board of directors authorized the repurchase of up to an additional $1 billion of our common stock through December 31, 2015.

(C) Stock Incentive Plans

We maintain long-term incentive plans for management, key employees and the nonemployee members of our board of directors.  The plans allow for the granting of equity-based compensation awards, including nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, stock- and cash-settled restricted stock units, stock grants or a combination of awards.  To date, we have not awarded any incentive stock options.

As of February 28, 2014, a total of 50,200,000 shares of our common stock had been authorized to be issued under the long-term incentive plans.  The number of unissued common shares reserved for future grants under the long-term incentive plans was 10,637,303 as of that date.

Prior to fiscal 2007, the majority of associates who received share-based compensation awards primarily received nonqualified stock options.  From fiscal 2007 through fiscal 2009, these associates primarily received restricted stock instead of stock options, and beginning in fiscal 2010, these associates primarily receive cash-settled restricted stock units instead of restricted stock awards.  Senior management and other key associates receive awards of nonqualified stock options and, starting in fiscal 2010, stock-settled restricted stock units.  Nonemployee directors receive awards of nonqualified stock options and stock grants.

Nonqualified Stock Options.  Nonqualified stock options are awards that allow the recipient to purchase shares of our common stock at a fixed price.  Stock options are granted at an exercise price equal to the fair market value of our common stock on the grant date.  The stock options generally vest annually in equal amounts over periods of one to four years.  These options are subject to forfeiture and expire no later than ten years after the date of the grant.

Cash-Settled Restricted Stock Units.  Also referred to as restricted stock units, or RSUs, these are awards that entitle the holder to a cash payment equal to the fair market value of a share of our common stock for each unit granted.  Conversion generally occurs at the end of a three-year vesting period.  However, the cash payment per RSU will not be greater than 200% or less than 75% of the fair market value of a share of our common stock on the grant date.  RSUs are liability awards that are subject to forfeiture and do not have voting rights.

Stock-Settled Restricted Stock Units.  Also referred to as market stock units, or MSUs, these are awards to eligible key associates that are converted into between zero and two shares of common stock for each unit granted.  Conversion generally occurs at the end of a three-year vesting period.  The conversion ratio is calculated by dividing the average closing price of our stock during the final forty trading days of the three-year vesting period by our stock price on the grant date, with the resulting quotient capped at two.  This quotient is then multiplied by the number of MSUs granted to yield the number of shares awarded.  MSUs are subject to forfeiture and do not have voting rights.

Restricted Stock.  Restricted stock awards are awards of our common stock that are subject to specified restrictions and a risk of forfeiture.  The restrictions typically lapse three years from the grant date.  Participants holding restricted stock are entitled to vote on matters submitted to holders of our common stock for a vote.  No restricted stock awards have been granted since fiscal 2009, and no awards were outstanding during fiscal 2014 and 2013.  We realized related tax benefits of $10.9 million in fiscal 2012 from the vesting of restricted stock.

(D) Share-Based Compensation

Composition of Share­Based Compensation Expense

	Years Ended February 28 or 29
(In thousands)	2014		2013		2012
Cost of sales	$	3,200	$	3,010	$	1,845
CarMax Auto Finance income		2,983		2,521		1,867
Selling, general and administrative expenses		61,487		57,643		45,392
Share-based compensation expense, before income taxes	$	67,670	$	63,174	$	49,104

Composition of Share­Based Compensation Expense – By Grant Type

	Years Ended February 28 or 29
(In thousands)	2014		2013		2012
Nonqualified stock options	$	23,914	$	24,853	$	21,581
Cash-settled restricted stock units		29,551		24,268		15,435
Stock-settled restricted stock units		12,515		12,441		10,360
Employee stock purchase plan		1,190		1,062		1,015
Stock grants to non-employee directors		500		550		550
Restricted stock		―		―		163
Share-based compensation expense, before income taxes	$	67,670	$	63,174	$	49,104

We recognize compensation expense for stock options,  MSUs and restricted stock on a straight-line basis (net of estimated forfeitures) over the requisite service period, which is generally the vesting period of the award.  The variable expense associated with RSUs is recognized over their vesting period (net of estimated forfeitures) and is calculated based on the volume-weighted average price of our common stock on the last trading day of each reporting period.  The total costs for matching contributions for our employee stock purchase plan are included in share-based compensation expense.  There were no capitalized share-based compensation costs as of the end of fiscal 2014, fiscal 2013 or fiscal 2012.

Stock Option Activity

						Weighted
						Average
			Weighted			Remaining	Aggregate
	Number of		Average		Contractual		Intrinsic
(Shares and intrinsic value in thousands)	Shares		Exercise Price		Life (Years)		Value
Outstanding as of February 28, 2013		10,771	$	23.00
Options granted		1,605		42.77
Options exercised		(2,337)		19.32
Options forfeited or expired		(21)		27.58
Outstanding as of February 28, 2014		10,018	$	27.02		3.7	$	214,476
Exercisable as of February 28, 2014		5,883	$	21.06		2.6	$	161,051

We granted nonqualified options to purchase 1,605,149 shares of common stock in fiscal 2014,  2,252,124 shares in fiscal 2013 and 1,993,498 shares in fiscal 2012.  The total cash received as a result of stock option exercises was $45.1 million in fiscal 2014, $71.7 million in fiscal 2013 and $25.3 million in fiscal 2012.  We settle stock option exercises with authorized but unissued shares of our common stock.  The total intrinsic value of options exercised was $62.5 million for fiscal 2014, $68.0 million for fiscal 2013 and $23.9 million for fiscal 2012.  We realized related tax benefits of $25.1 million in fiscal 2014,  $27.2 million for fiscal 2013 and $9.5 million for fiscal 2012.

Outstanding Stock Options

					As of February 28, 2014
					Options Outstanding						Options Exercisable
							Weighted
							Average		Weighted				Weighted
							Remaining		Average				Average
(Shares in thousands)					Number of		Contractual		Exercise		Number of		Exercise
Range of Exercise Prices					Shares		Life (Years)		Price		Shares		Price
$	11.43					1,512		2.1	$	11.43		1,512	$	11.43
$	13.19	-	$	19.82		1,550		1.0	$	15.66		1,550	$	15.66
$	19.98	-	$	25.39		1,580		3.1	$	25.19		1,222	$	25.13
$	25.67	-	$	32.05		2,118		5.0	$	31.62		654	$	31.45
$	32.69	-	$	49.25		3,258		5.1	$	37.56		945	$	32.84
Total						10,018		3.7	$	27.02		5,883	$	21.06

For stock options, the fair value of each award is estimated as of the date of grant using a binomial valuation model.  In computing the value of the option, the binomial model considers characteristics of fair-value option pricing that are not available for consideration under a closed-form valuation model (for example, the Black-Scholes model), such as the contractual term of the option, the probability that the option will be exercised prior to the end of its contractual life and the probability of termination or retirement of the option holder.  For this reason, we believe that the binomial model provides a fair value that is more representative of actual experience and future expected experience than the value calculated using a closed-form model.  Estimates of fair value are not intended to predict actual future events or the value ultimately realized by the recipients of share-based awards.

The weighted average fair value per share at the date of grant for options granted was $15.59 in fiscal 2014, $12.67 in fiscal 2013 and $13.80 in fiscal 2012.  The unrecognized compensation costs related to nonvested options totaled $32.6 million as of February 28, 2014.  These costs are expected to be recognized on a straight-line basis over a weighted average period of 2.0 years.

Assumptions Used to Estimate Option Values

	Years Ended February 28 or 29
	2014					2013					2012
Dividend yield				0.0	%				0.0	%				0.0	%
Expected volatility factor (1)	27.9	%	-	46.8	%	31.1	%	-	51.4	%	34.8	%	-	52.0	%
Weighted average expected volatility				44.7	%				49.4	%				49.3	%
Risk-free interest rate (2)	0.02	%	-	2.6	%	0.02	%	-	2.0	%	0.01	%	-	3.5	%
Expected term (in years)(3)				4.7					4.7					4.6

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

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

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

Cash-Settled Restricted Stock Unit Activity

			Weighted
			Average
	Number of		Grant Date
(Units in thousands)	Units		Fair Value
Outstanding as of February 28, 2013	1,651	$	29.90
Stock units granted	542	$	42.68
Stock units vested and converted	(565)	$	25.64
Stock units cancelled	(97)	$	34.95
Outstanding as of February 28, 2014	1,531	$	35.68

We granted541,819 RSUs in fiscal 2014,  644,232 RSUs in fiscal 2013 and 575,380 RSUs in fiscal 2012.  The initial fair market value per RSU at the date of grant was $42.68 in fiscal 2014, $31.76 in fiscal 2013 and $32.69 in fiscal 2012.  The RSUs are cash-settled upon vesting.  During fiscal 2014, we paid $23.3 million (before payroll tax withholdings) to RSU holders upon the vesting of RSUs, and we realized tax benefits of$9.3 million.

Expected Cash Settlement Range Upon Restricted Stock Unit Vesting

	As of February 28, 2014
(In thousands)	Minimum(1)		Maximum (1)
Fiscal 2015	$	11,191	$	29,843
Fiscal 2016		12,439		33,172
Fiscal 2017		14,179		37,811
Total expected cash settlements	$	37,809	$	100,826

(1)Net of estimated forfeitures.

Stock-Settled Restricted Stock Unit Activity

			Weighted
			Average
	Number of		Grant Date
(Units in thousands)	Units		Fair Value
Outstanding as of February 28, 2013	904	$	40.78
Stock units granted	238	$	52.02
Stock units vested and converted	(285)	$	36.66
Stock units cancelled	(5)	$	46.79
Outstanding as of February 28, 2014	852	$	45.26

We granted 237,660 MSUs in fiscal 2014,  348,551 MSUs in fiscal 2013 and 299,102 MSUs in fiscal 2012.  The weighted average fair value per MSU at the date of grant was $52.02 in fiscal 2014, $40.33 in fiscal 2013 and $45.48 in fiscal 2012.  The fair values were determined using a Monte-Carlo simulation and were based on the expected market price of our common stock on the vesting date and the expected number of converted common shares.  We realized related tax benefits of $7.9 million during fiscal 2014, from the vesting of market stock units.  The unrecognized compensation costs related to nonvested MSUs totaled $13.4 million as of February 28, 2014.  These costs are expected to be recognized on a straight-line basis over a weighted average period of 1.0 years.

(E) Employee Stock Purchase Plan

We sponsor an employee stock purchase plan for all associates meeting certain eligibility criteria.  Associate contributions are limited to 10% of eligible compensation, up to a maximum of $7,500 per year.  For each $1.00 contributed to the plan by associates, we match $0.15.  We have authorized up to 8,000,000 shares of common stock for the employee stock purchase plan.  Shares are acquired through open-market purchases.

As of February 28, 2014, a total of 3,724,673 shares remained available under the plan.  Shares purchased in the open market on behalf of associates totaled 188,797during fiscal 2014,  251,667 during fiscal 2013 and 260,927 during fiscal 2012.  The average price per share for purchases under the plan was $47.35 in fiscal 2014, $32.05 in fiscal 2013 and $30.02 in fiscal 2012.  The total costs for matching contributions are included in share-based compensation expense.