CarMax 2007 Annual Report Download - page 65

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(C) Share-Based Compensation
Effective March 1, 2006, we adopted the provisions of SFAS 123(R), which established accounting for share-based
awards exchanged for employee services. Under the provisions of SFAS 123(R), share-based compensation cost is
measured at the grant date, based on the estimated fair value of the award. We recognize the compensation cost as
an expense on a straight-line basis over the requisite service period of the entire award, which is generally the
vesting period of the equity grant. Prior to March 1, 2006, we applied Accounting Principles Board (APB) Opinion
No. 25, “Accounting for Stock Issued to Employees,” and related interpretations for share-based awards, and
provided the pro forma disclosures required by SFAS 123, “Accounting for Stock-Based Compensation.” We
elected to apply the modified retrospective application method as provided by SFAS 123(R), and, accordingly,
financial statement amounts for the prior periods presented in this report have been restated to report the fair value
method of expensing share-based compensation on a basis consistent with the pro forma disclosures required for
those periods by SFAS 123.
In accordance with SFAS 123(R), we are required to base initial compensation cost on the estimated number of
awards expected to vest. Historically, and as permitted under SFAS 123, we chose to reduce pro forma
compensation expense in the periods the awards were forfeited. The cumulative effect on prior periods of the
change to an estimated number of awards expected to vest was a $0.6 million reduction of selling, general, and
administrative expenses recorded in fiscal 2007.
COMPOSITION OF SHARE-BASED COMPENSATION EXPENSE
Years Ended February 28
(In thousands) 2007 2006 2005
Cost of sales............................................................................... $ 1,392
CarMax Auto Finance income................................................... 917
Selling, general, and administrative expenses ........................... 30,379 $ 22,436 $ 18,810
Share-based compensation expense, before income taxes ......... $ 32,688 $ 22,436 $ 18,810
For periods prior to fiscal 2007, all share-based compensation expense has been presented in selling, general, and
administrative expenses, because amounts that would have been presented in cost of sales and CAF were
immaterial. We recognize compensation expense for stock options and restricted stock on a straight-line basis over
the requisite service period. Consistent with the provisions of SFAS 123, our employee stock purchase plan is
considered a liability-classified compensatory plan under SFAS 123(R); the associated costs of $0.9 million in fiscal
2007, $0.8 million in fiscal 2006, and $0.7 million in fiscal 2005 are included in share-based compensation expense.
There were no capitalized share-based compensation costs at February 28, 2007, 2006, or 2005.
IMPACT OF SFAS 123(R) ON FISCAL 2006 AND 2005
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended February 28
2006 2005
(In thousands, except per share data) As Restated
Previously
Reported As Restated
Previously
Reported
Selling, general, and administrative expenses .. $ 674,370 $ 651,988 $ 565,279 $ 546,577
Earnings before income taxes........................... $ 217,601 $ 239,983 $ 165,821 $ 184,523
Net earnings...................................................... $ 134,220 $ 148,055 $ 101,315 $ 112,928
Basic earnings per share ................................... $ 0.64 $ 0.71 $ 0.49 $ 0.54
Diluted earnings per share ................................ $ 0.63 $ 0.70 $ 0.48 $ 0.53
Net cash provided by operating activities......... $ 117,513 $ 122,295 $ 41,846 $ 45,736
Net cash provided by (used in) financing
activities ........................................................ $ 3,215 $ (1,567) $ 67,691 $ 63,801
As of February 28, 2006
(In thousands) As Restated Previously Reported
Deferred income taxes ................................................................. $ 24,576 $ 4,211
Total assets .................................................................................. $ 1,509,612 $ 1,489,247
Capital in excess of par value ...................................................... $ 501,599 $ 447,069
Retained earnings ........................................................................ $ 373,550 $ 407,715
Total shareholders’ equity ........................................................... $ 980,103 $ 959,738
Total liabilities and shareholders’ equity..................................... $ 1,509,612 $ 1,489,247