Stock And Stock-Based Incentive Plans

12 Months Ended

Feb. 28, 2021

Share-based Payment Arrangement, Noncash Expense [Abstract]

STOCK AND STOCK-BASED INCENTIVE PLANS

(A)Preferred Stock

Under the terms of our Articles of Incorporation, the board of directors (“board”) may determine the rights, preferences and terms of our authorized but unissued shares of preferred stock. We have authorized 20,000,000 shares of preferred stock, $20 par value. No shares of preferred stock are currently outstanding.

(B) Share Repurchase Program

As of February 28, 2021, a total of $2 billion of board authorizations for repurchases of our common stock was outstanding, with no expiration date, of which $1.34 billion remained available for repurchase. In March 2020, our current stock repurchase program was suspended. The repurchase authorization remained effective and the program resumed in September 2020.

Common Stock Repurchases


	Years Ended February 28 or 29
	2021		2020		2019
Number of shares repurchased (in thousands)	2,379.8		6,971.1		13,634.7
Average cost per share	$	90.87	$	80.56	$	66.22
Available for repurchase, as of end of year (in millions)	$	1,336.1	$	1,552.3	$	2,113.9

(C)Stock Incentive Plans

We maintain long-term incentive plans for management, certain employees and the nonemployee members of our 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.

As of February 28, 2021, a total of 60,850,000 shares of our common stock had been authorized to be issued under the long-term incentive plans. The number of unissued common shares reserved for future grants under the long-term incentive plans was 7,734,437 as of that date.

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. For RSUs granted in fiscal 2021, conversion generally occurs 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 2018 grants, the conversion ratio is based on the company reaching certain target levels set by the board for cumulative three-year pretax diluted earnings per share at the end of the three-year period, with the resulting quotient subject to meeting a minimum 25% threshold and capped at 200%; based on the company’s results for the three-year period, the board certified a performance adjustment factor of 119%. For the fiscal 2020 grants, the conversion ratio is based on the company reaching certain performance target levels set by the board 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, 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 first-year period. For the second- and third-year periods, the remaining awarded 42,099 PSUs do not qualify as grants under ASC 718 as mutual understanding of the target performance levels are either not fully set or have not been set. The grant date fair values are based on the volume-weighted average prices of our common stock on the grant dates. PSUs do not have voting rights. No PSUs were awarded in fiscal 2021. As of February 28, 2021, 21,053 units were outstanding at a weighted average grant date fair value per share of $78.61.

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 February 28, 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 February 28, 2021, there were 5,591 shares outstanding at a grant date value of $89.41.

Employee Stock Purchase Plan. We sponsor an employee stock purchase plan for all associates meeting certain eligibility criteria. We have authorized up to 8,000,000 shares of common stock with a total of 2,425,936 shares remaining available for issuance under the plan as of February 28, 2021. Associate contributions are limited to 10% of eligible compensation, up to a maximum that was increased in January 2020 from $7,500 per year to $10,000 per year. For each $1.00 contributed to the plan by associates, we match $0.15. Shares are acquired through open-market purchases. We purchased 202,085 shares at an average price per share of $87.41 during fiscal 2021, 174,325 shares at an average price per share of $85.64 during fiscal 2020 and 185,856 shares at an average price per share of $67.66 during fiscal 2019.

(D)Share-Based Compensation

Composition of Share-Based Compensation Expense


	Years Ended February 28 or 29
(In thousands)	2021		2020		2019
Cost of sales	$	6,805	$	6,382	$	2,952
CarMax Auto Finance income	5,657		4,940		3,804
Selling, general and administrative expenses	111,749		99,435		69,928
Share-based compensation expense, before income taxes	$	124,211	$	110,757	$	76,684

Composition of Share-Based Compensation Expense – By Grant Type


	Years Ended February 28 or 29
(In thousands)	2021		2020		2019
Nonqualified stock options	$	31,500	$	30,166	$	29,992
Cash-settled restricted stock units (RSUs)	72,243		60,739		29,141
Stock-settled market stock units (MSUs)	15,596		12,874		12,683
Other share-based incentives:
Stock-settled performance stock units (PSUs)	489		2,559		1,733
Stock-settled deferred stock units (DSUs)	1,925		2,500		1,155
Restricted stock (RSAs)	147		23		307
Employee stock purchase plan	2,311		1,896		1,673
Total other share-based incentives	4,872		6,978		4,868
Share-based compensation expense, before income taxes	$	124,211	$	110,757	$	76,684

Unrecognized Share-Based Compensation Expense – By Grant Type


	As of February 28, 2021
			Weighted Average
	Unrecognized		Remaining
	Compensation		Recognition Life
(Costs in millions)	Costs		(Years)
Nonqualified stock options	$	44.0	2.1
Stock-settled market stock units	14.9		1.2
Other share-based incentives:
Stock-settled performance stock units	0.5		1.2
Stock-settled deferred stock units	—		—
Restricted stock	0.2		2.0
Total other share-based incentives	0.7		1.4
Total	$	59.6	1.9

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 years ended February 28, 2021, February 29, 2020 or February 28, 2019.

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 29, 2020	6,994	$	64.85
Options granted	1,607	71.56
Options exercised	(2,306)	62.06
Options forfeited or expired	(29)	70.39
Outstanding as of February 28, 2021	6,266	$	67.57	4.5	$	325,425

Exercisable as of February 28, 2021	2,390	$	62.58	3.5	$	136,083

Stock Option Information


	Years Ended February 28 or 29
	2021		2020		2019
Options granted	1,607,401		1,601,489		1,745,497
Weighted average grant date fair value per share	$	22.80	$	22.10	$	18.75
Cash received from options exercised (in millions)	$	143.1	$	124.4	$	58.1
Intrinsic value of options exercised (in millions)	$	94.0	$	78.6	$	37.1
Realized tax benefits (in millions)	$	25.5	$	21.8	$	10.2

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


	Years Ended February 28 or 29
	2021					2020					2019
Dividend yield				0.0	%				0.0	%				0.0	%
Expected volatility factor (1)	36.1	%	-	56.1	%	26.8	%	-	32.6	%	26.1	%	-	34.1	%
Weighted average expected volatility				38.2	%				29.2	%				29.1	%
Risk-free interest rate (2)	0.1	%	-	0.7	%	1.5	%	-	2.4	%	1.7	%	-	3.0	%
Expected term (in years) (3)				4.6					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 29, 2020	1,557	$	66.85
Stock units granted	670	71.09
Stock units vested and converted	(525)	59.25
Stock units cancelled	(96)	70.59
Outstanding as of February 28, 2021	1,606	$	70.88

Cash-Settled Restricted Stock Unit Information


	Years Ended February 28 or 29
	2021		2020		2019
Stock units granted	669,937		562,321		629,942
Initial weighted average grant date fair value per share	$	71.09	$	78.62	$	63.07
Payments (before payroll tax withholdings) upon
vesting (in millions)	$	38.1	$	37.8	$	21.0
Realized tax benefits (in millions)	$	10.5	$	10.5	$	5.8

Expected Cash Settlement Range Upon Restricted Stock Unit Vesting


	As of February 28, 2021
(In thousands)	Minimum (1)		Maximum (1)
Fiscal 2022	$	32,426	$	86,470
Fiscal 2023	36,241		96,642
Fiscal 2024	9,687		25,831
Total expected cash settlements	$	78,354	$	208,943

(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 29, 2020	477	$	84.05
Stock units granted	200	93.82
Stock units vested and converted	(149)	74.17
Stock units cancelled	(8)	91.00
Outstanding as of February 28, 2021	520	$	90.53

Stock-Settled Market Stock Unit Information


	Years Ended February 28 or 29
	2021		2020		2019
Stock units granted	199,916		131,311		205,868
Weighted average grant date fair value per share	$	93.82	$	98.67	$	82.09
Realized tax benefits (in millions)	$	3.2	$	4.0	$	1.4