Stock and Stock-Based Incentive Plans Stock And Stock-Based Incentive Plans

3 Months Ended

May 31, 2021

Share-based Payment Arrangement, Noncash Expense [Abstract]

Stock and Stock-Based Incentive Plans

Stock and Stock-Based Incentive Plans

(A) Share Repurchase Program

As of May 31, 2021, a total of $2.0 billion of board authorizations for repurchases of our common stock was outstanding, with no expiration date, of which $1.21 billion remained available for repurchase.  

Common Stock Repurchases

	Three Months Ended
	May 31
	2021		2020
Number of shares repurchased (in thousands)	997.6		515.5
Average cost per share	$	124.83	$	78.96
Available for repurchase, as of end of period (in millions)	$	1,211.5	$	1,511.6

(B)Stock Incentive Plans

We maintain long-term incentive plans for management, certain employees and the nonemployee members of our board of directors ("board").  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.

The majority of associates who receive share-based compensation awards primarily receive cash-settled restricted stock units.  Senior management and other key associates receive awards of nonqualified stock options, stock-settled restricted stock units and/or restricted stock awards.  Nonemployee directors receive awards of nonqualified stock options, stock grants, stock-settled restricted stock units and/or restricted stock awards.  Excluding stock grants and stock-settled deferred stock units, all share-based compensation awards, including any associated dividend rights, are subject to forfeiture.

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 four years.  These options expire seven 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.  For grants prior to fiscal 2021, conversion generally occurs at the end of a three-year vesting period.  RSUs granted in fiscal 2021 and later vest annually in equal amounts over three years. 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.  The initial grant date fair values are based on the volume-weighted average prices or closing prices of our common stock on the grant dates. RSUs are liability-classified awards and do not have voting rights.

Stock-Settled Market Stock Units.  Also referred to as market stock units, or MSUs, these are restricted stock unit awards with market conditions granted 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 40 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.  The grant date fair values are determined using a Monte-Carlo simulation and are based on the expected market price of our common stock on the vesting date and the expected number of converted common shares. MSUs do not have voting rights.

Other Share-Based Incentives

Stock-Settled Performance Stock Units.  Also referred to as performance stock units, or PSUs, these are restricted stock unit awards with performance conditions granted 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. For the fiscal 2020 and fiscal 2022 grants, the conversion ratio is based on the company reaching certain performance target levels set by the board of directors at the beginning of each one-year period, with the resulting quotients subject to meeting a minimum 25% threshold and capped at 200%. These quotients are then multiplied by the number of PSUs granted to yield the number of shares awarded. For the first-year period of the fiscal 2020 awards, these targets were based on annual pretax diluted earnings per share excluding any unrealized gains or losses on equity investments in private companies; the board certified a performance adjustment factor of 117%. For the second-year period of the fiscal 2020 awards, the performance goals included quantitative and qualitative metrics including covenant compliance, market share and COVID-19 recovery; the board certified a performance adjustment factor of 100%. For the third-year period of the fiscal 2020 awards and the first-year period of the fiscal 2022 awards, the performance targets are based on annual pretax diluted earnings per share excluding any unrealized gains or losses on equity investments in private companies. For the second- and third-year periods of the fiscal 2022 awards, the remaining awarded 25,397 PSUs do not qualify as grants under ASC 718 as mutual understanding of the target performance levels have not been set. The grant date fair values are based on the volume-weighted average prices or closing prices of our common stock on the grant dates. PSUs do not have voting rights. No PSUs were awarded in fiscal 2021. As of May 31, 2021, 75,845 granted units were outstanding at a weighted average grant date fair value per share of $118.72.

Stock-Settled Deferred Stock Units.  Also referred to as deferred stock units, or DSUs, these are restricted stock unit awards granted to non-employee members of our board of directors that are converted into one share of common stock for each unit granted. Conversion occurs at the end of the one-year vesting period unless the director has exercised the option to defer conversion until separation of service to the company. The grant date fair values are based on the volume-weighted average prices or closing prices of our common stock on the grant dates. DSUs have no voting rights. As of May 31, 2021, 56,921 units were outstanding at a weighted average grant date fair value of $82.23.

Restricted Stock Awards.  Restricted stock awards, or RSAs, are awards of our common stock that are subject to specified restrictions that generally lapse after a one- to three-year period from the date of the grant.  The grant date fair values are based on the volume-weighted average prices or closing prices of our common stock on the grant dates. Participants holding restricted stock are entitled to vote on matters submitted to holders of our common stock for a vote. As of May 31, 2021, there were 5,591 shares outstanding at a grant date value of $89.41.

(C)Share-Based Compensation

Composition of Share-Based Compensation Expense

	Three Months Ended
	May 31
(In thousands)	2021		2020
Cost of sales	$	1,729	$	679
CarMax Auto Finance income	1,708		1,270
Selling, general and administrative expenses	38,420		23,651
Share-based compensation expense, before income taxes	$	41,857	$	25,600

Composition of Share-Based Compensation Expense – By Grant Type

	Three Months Ended
	May 31
(In thousands)	2021		2020
Nonqualified stock options	$	11,821	$	11,619
Cash-settled restricted stock units (RSUs)	20,972		7,405
Stock-settled market stock units (MSUs)	4,845		5,846
Other share-based incentives:
Stock-settled performance stock units (PSUs)	3,394		153
Restricted stock (RSAs)	42		34
Stock-settled deferred stock units (DSUs)	—		—
Employee stock purchase plan	783		543
Total other share-based incentives	$	4,219	$	730
Share-based compensation expense, before income taxes	$	41,857	$	25,600

Unrecognized Share-Based Compensation Expense – By Grant Type

	As of May 31, 2021
			Weighted Average
	Unrecognized		Remaining
	Compensation		Recognition Life
(Costs in millions)	Costs		(Years)
Nonqualified stock options	$	70.1	2.5
Stock-settled market stock units	23.8		1.8
Other share-based incentives:
Stock-settled performance stock units	4.5		1.3
Stock-settled deferred stock units	—		—
Restricted stock	0.2		1.7
Total other share-based incentives	$	4.7	1.3
Total	$	98.6	2.3

 

We recognize compensation expense for stock options, MSUs, PSUs, DSUs and RSAs on a straight-line basis (net of estimated forfeitures) over the requisite service period, which is generally the vesting period of the award.  The PSU expense is adjusted for any change in management’s assessment of the performance target level that is probable of being achieved. 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 or closing 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 or for the three months ended May 31, 2021 or 2020.

Stock Option Activity

				Weighted
		Weighted		Average
		Average		Remaining	Aggregate
	Number of	Exercise		Contractual	Intrinsic
(Shares and intrinsic value in thousands)	Shares	Price		Life (Years)	Value
Outstanding as of February 28, 2021	6,266	$	67.57
Options granted	917	$	136.93
Options exercised	(375)	$	57.60
Options forfeited or expired	(6)	$	81.99
Outstanding as of May 31, 2021	6,802	$	77.46	4.7	$	382,783
Exercisable as of May 31, 2021	3,646	$	65.49	3.8	$	247,007

Stock Option Information

	Three Months Ended May 31
	2021		2020
Options granted	917,455		1,570,889
Weighted average grant date fair value per share	$	42.33	$	22.61
Cash received from options exercised (in millions)	$	21.6	$	1.7
Intrinsic value of options exercised (in millions)	$	28.0	$	0.9
Realized tax benefits (in millions)	$	6.9	$	0.2

 

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.

Assumptions Used to Estimate Option Values

	Three Months Ended May 31
	2021					2020
Dividend yield				0.0	%				0.0	%
Expected volatility factor (1)	31.8	%	-	37.0	%	36.1	%	-	56.1	%
Weighted average expected volatility				36.2	%				38.3	%
Risk-free interest rate (2)	—	%	-	1.3	%	0.1	%	-	0.5	%
Expected term (in years) (3)				4.6					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 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, 2021	1,606	$	70.88
Stock units granted	361	$	136.94
Stock units vested and converted	(701)	$	65.41
Stock units cancelled	(27)	$	80.61
Outstanding as of May 31, 2021	1,239	$	93.01

Cash-Settled Restricted Stock Unit Information

	Three Months Ended May 31
	2021		2020
Stock units granted	361,115		669,053
Initial weighted average grant date fair value per share	$	136.94	$	71.07
Payments (before payroll tax withholdings) upon vesting (in millions)	$	89.8	$	34.8
Realized tax benefits (in millions)	$	24.6	$	9.4

 

Expected Cash Settlement Range Upon Restricted Stock Unit Vesting

	As of May 31, 2021
(In thousands)	Minimum (1)		Maximum (1)
Fiscal 2023	$	45,337	$	120,899
Fiscal 2024	18,834		50,225
Fiscal 2025	10,143		27,048
Total expected cash settlements	$	74,314	$	198,172

 

(1)Net of estimated forfeitures.

Stock-Settled Market Stock Unit Activity

		Weighted
		Average
	Number of	Grant Date
(Units in thousands)	Units	Fair Value
Outstanding as of February 28, 2021	520	$	90.53
Stock units granted	81	$	178.31
Stock units vested and converted	(194)	$	81.86
Stock units cancelled	(1)	$	114.02
Outstanding as of May 31, 2021	406	$	112.12

Stock-Settled Market Stock Unit Information

	Three Months Ended May 31
	2021		2020
Stock units granted	80,910		194,766
Weighted average grant date fair value per share	$	178.31	$	93.11
Realized tax benefits (in millions)	$	10.9	$	3.0