CarMax 2012 Annual Report Download - page 42

Download and view the complete annual report

Please find page 42 of the 2012 CarMax annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 92

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92

36
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Auto Loan Receivables
As of February 29, 2012 and February 28, 2011, all loans in our portfolio of managed receivables were fixed-rate
installment contracts. Financing for these receivables was achieved through asset securitization programs that, in
turn, issued both fixed- and floating-rate securities. Our derivative instruments are used to manage differences in the
amount of our known or expected cash receipts and our known or expected cash payments principally related to the
funding of our auto loan receivables. Disruptions in the credit markets could impact the effectiveness of our
hedging strategies. Other receivables are financed with working capital. Generally, changes in interest rates
associated with underlying swaps will not have a material impact on earnings; however, they could have a material
impact on cash and cash flows.
Credit risk is the exposure to nonperformance of another party to an agreement. We mitigate credit risk by dealing
with highly rated bank counterparties. The market and credit risks associated with derivative instruments are similar
to those relating to other types of financial instruments. See Notes 6 and 7 for additional information on derivative
instruments and hedging activities.
COMPOSITION OF AUTO LOAN RECEIVABLES
(In millions)
Principal amount of:
Fixed-rate securitizations 1 4,183.8$ 3,083.6$
Floating-rate securitizations synthetically altered to fixed (1)(2) 28.0 109.5
Floating-rate securitizations (1) 553.0 943.0
Other receivables (3) 217.0 198.5
Total 4,981.8$ 4,334.6$
As of February 29 or 28
2012 2011
(1) We have entered into derivatives designated as cash flow hedges of forecasted interest payments in anticipation of permanent
funding for these receivables in the term securitization market. The current notional amount of these derivatives was $603.0
million as of February 29, 2012, and $972.0 million as of February 28, 2011. See Note 6.
(2) Represents variable-rate securities issued in connection with certain term securitizations that were synthetically altered to
fixed at the bankruptcy-remote special purpose entity.
(3) Other receivables include receivables not funded through the warehouse facilities.
Interest Rate Exposure
We also have interest rate risk from changing interest rates related to borrowings under our revolving credit facility.
Substantially all of these borrowing are floating-rate debt based on LIBOR. A 100-basis point increase in market
interest rates would have decreased our fiscal 2012 net earnings per share by less than $0.01.
Borrowings under our warehouse facilities are also floating rate debt, generally based on commercial paper rates,
and are secured by auto loan receivables on which we collect interest at fixed rates. The receivables are funded
through the warehouse facilities until they can be funded through a term securitization or alternative funding
arrangement. This floating-rate risk is mitigated by funding the receivables through a term securitization or other
funding arrangement, and by entering into derivative instruments.