CarMax 2005 Annual Report Download - page 21

CARMAX 2005 19
Revenue Recognition
We recognize revenue when the earnings process is complete,
generally either at the time of sale to a customer or upon
delivery to a customer. The majority of our revenue is
generated from the sale of used vehicles. We recognize vehicle
revenue when a sales contract has been executed and the
vehicle has been delivered, net of a reserve for returns under our
5-day or 250-mile, money-back guarantee. A reserve for vehicle
returns is recorded based on historical experience and trends.
We also sell extended service plans on behalf of unrelated
third parties to customers who purchase a vehicle. Because
these third parties are the primary obligors under these
programs, we recognize commission revenue on the extended
service plans at the time of the sale, net of a reserve for
estimated service plan returns. The estimated reserve for returns
is based on historical experience and trends.
The estimated reserves for returns could be affected if future
occurrences differ from historical averages.
Income Taxes
Estimates and judgments are used in the calculation of certain
tax liabilities and in the determination of the recoverability of
certain of the deferred tax assets. In the ordinary course of
business, many transactions occur for which the ultimate tax
outcome is uncertain at the time of the transactions. We adjust
our income tax provision in the period in which we determine
that it is probable that our actual results will differ from our
estimates. Tax law and rate changes are reflected in the income
tax provision in the period in which such changes are enacted.
We evaluate the need to record valuation allowances that
would reduce deferred tax assets to the amount that will more
likely than not be realized. When assessing the need for
valuation allowances, we consider future reversals of existing
temporary differences and future taxable income. We believe
that all of our recorded deferred tax assets as of February 28,
2005, will more likely than not be realized. However, if a change
in circumstances results in a change in our ability to realize our
deferred tax assets, our tax provision would increase in the
period when the change in circumstances occurs.
In addition, the calculation of our tax liabilities involves
dealing with uncertainties in the application of complex tax
regulations. We recognize potential liabilities for anticipated tax
audit issues in the U.S. and other tax jurisdictions based on our
estimate of whether, and the extent to which, additional taxes
will be due. If payments of these amounts ultimately prove to
be unnecessary, the reversal of the liabilities would result in tax
benefits being recognized in the period when we determine the
liabilities are no longer necessary. If our estimate of tax
liabilities proves to be less than the ultimate assessment, a further
charge to expense would result in the period of determination.
Information regarding income taxes is presented in Note 7
to the company’s consolidated financial statements.
Defined Benefit Retirement Plan
The plan obligations and related assets of our defined benefit
retirement plan are presented in Note 8 to the company’s
consolidated financial statements. Plan assets, which consist
primarily of marketable equity and debt instruments, are valued
using current market quotations. Plan obligations and the
annual pension expense are determined by independent
actuaries using a number of assumptions provided by the
company. Key assumptions used to measure the plan obligations
include the discount rate, the rate of salary increases, and the
estimated future return on plan assets. In determining the
discount rate, we use the current yield on high-quality, fixed-
income investments that have maturities corresponding to the
anticipated timing of the benefit payments. Salary increase
assumptions are based upon historical experience and
anticipated future board and management actions. Asset returns
are estimated based upon the anticipated average yield on the
plan assets. We do not believe that any significant changes in
assumptions used to measure the plan obligations are likely to
occur that would have a material impact on the company’s
financial position or results of operations.
RESULTS OF OPERATIONS
Certain prior year amounts have been reclassified to conform to
the current year’s presentation.
Net Sales and Operating Revenues
The components of net sales and operating revenues are
presented in Table 1.
TABLE 1 — NET SALES AND OPERATING REVENUES
Years Ended February 28 or 29
(In millions) 2005 % 2004 % 2003 %
Used vehicle sales $3,997.2 76.0 $3,470.6 75.5 $2,912.1 73.4
New vehicle sales 492.1 9.4 515.4 11.2 519.8 13.1
Wholesale vehicle sales 589.7 11.2 440.6 9.6 366.6 9.2
Other sales and revenues:
Extended service plan revenues 84.6 1.6 77.1 1.7 68.1 1.7
Service department sales 82.3 1.6 69.1 1.5 58.6 1.5
Third-party finance fees, net 14.4 0.3 19.6 0.4 16.2 0.4
Appraisal purchase processing fees —— 5.3 0.1 28.5 0.7
Total other sales and revenues 181.3 3.4 171.1 3.7 171.4 4.3
Total net sales and operating revenues $5,260.3 100.0 $4,597.7 100.0 $3,969.9 100.0