CarMax 2016 Annual Report Download - page 48
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND BACKGROUND
CarMax, Inc. (“we,” “our,” “us,” “CarMax” and “the company”), including its wholly owned subsidiaries, is the largest retailer
of used vehicles in the United States. We operate in two reportable segments: CarMax Sales Operations and CarMax Auto Finance
(“CAF”). Our CarMax Sales Operations segment consists of all aspects of our auto merchandising and service operations,
excluding financing provided by CAF. Our CAF segment consists solely of our own finance operation that provides financing to
customers buying retail vehicles from CarMax.
We seek to deliver an unrivaled customer experience by offering a broad selection of high quality used vehicles and related products
and services at low, no-haggle prices using a customer-friendly sales process in an attractive, modern sales facility. We provide
customers with a full range of related products and services, including the appraisal and purchase of vehicles directly from
consumers; the financing of vehicle purchases through CAF and third-party financing providers; the sale of extended protection
plan (“EPP”) products, which include extended service plans (“ESPs”) and guaranteed asset protection (“GAP”); and vehicle
repair service. Vehicles purchased through the appraisal process that do not meet our retail standards are sold to licensed dealers
through on-site wholesale auctions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Basis of Presentation and Use of Estimates
The consolidated financial statements include the accounts of CarMax and our wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation. The preparation of financial statements in
conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and
liabilities. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform to the
current year’s presentation. Amounts and percentages may not total due to rounding.
In fiscal 2016, we reclassified New Vehicle Sales to Other Sales and Revenues and no longer separately present New Vehicle
Sales. New Vehicle Sales represented approximately 1% of total sales in fiscal 2016. All periods presented have been revised for
this new presentation.
(B) Cash and Cash Equivalents
Cash equivalents of approximately $109,000 as of February 29, 2016, and $48,000 as of February 28, 2015, consisted of highly
liquid investments with original maturities of three months or less.
(C) Restricted Cash from Collections on Auto Loan Receivables
Cash equivalents totaling $343.8 million as of February 29, 2016, and $294.1 million as of February 28, 2015, consisted of
collections of principal, interest and fee payments on securitized auto loan receivables that are restricted for payment to the
securitization investors pursuant to the applicable securitization agreements.
(D) Marketable Securities
The Company classifies its marketable securities as trading. These securities consisted primarily of mutual funds reported at fair
value with unrealized gains and losses reflected as a component of other expense. Marketable securities as of February 29, 2016
and February 28, 2015 pertain to the Company’s restricted investments held in a rabbi trust and are reported in other assets.
(E) Accounts Receivable, Net
Accounts receivable, net of an allowance for doubtful accounts, includes certain amounts due from third-party finance providers
and customers and other miscellaneous receivables. The allowance for doubtful accounts is estimated based on historical
experience and trends.
(F) Securitizations
We maintain a revolving securitization program composed of two warehouse facilities (“warehouse facilities”) that we use to fund
auto loan receivables originated by CAF until we elect to fund them through a term securitization or alternative funding
arrangement. We sell the auto loan receivables to one of two wholly owned, bankruptcy-remote, special purpose entities that
transfer an undivided percentage ownership interest in the receivables, but not the receivables themselves, to entities formed by
third-party investors. These entities issue asset-backed commercial paper or utilize other funding sources supported by the
transferred receivables, and the proceeds are used to finance the securitized receivables.