Stock and Stock-Based Incentive Plans

(A) Share Repurchase Program

In fiscal 2013, our board of directors authorized the repurchase of up to $800 million of our common stock which was exhausted in fiscal 2015. In fiscal 2015, our board of directors authorized the repurchase of up to an additional $3 billion of our common stock of which $1 billion was exhausted during the quarter ended August 31, 2015, and $2 billion expires on December 31, 2016.

Common Stock Repurchases



	Three Months Ended				Nine Months Ended
	November 30				November 30
	2015		2014		2015		2014
Number of shares repurchased (in thousands)	7,680.8		6,234.8		13,336.1		14,101.5
Average cost per share	$	58.03	$	52.48	$	61.14	$	49.80
Available for repurchase, as of end of period (in millions)	$	1,553.8	$	2,579.8	$	1,553.8	$	2,579.8

(B) Stock Incentive Plans

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

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 stock-settled performance stock units. Nonemployee directors receive awards of nonqualified stock options, stock grants and/or restricted stock awards. Excluding stock grants, 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 periods of one to four years. These options expire no later than ten years after the date of the grant.

Cash-Settled Restricted Stock Units. Also referred to as restricted stock units, or RSUs, these are restricted stock unit 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. Conversion generally occurs at the end of a three-year vesting period. 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. RSUs are liability 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. MSUs do not have voting rights.

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. The conversion ratio is based on the company reaching certain target levels set by the board of directors for cumulative three-year earnings before interest and taxes at the end of the three-year vesting period, with the resulting quotient subject to meeting a minimum 25% threshold and capped at 200%. This quotient is then multiplied by the number of PSUs granted to yield the number of shares awarded. PSUs do not have voting rights.

Restricted Stock Awards. Restricted stock awards (RSAs) are awards of our common stock that are subject to specified restrictions that generally lapse after a one year period from date of grant. Participants holding restricted stock are entitled to vote on matters submitted to holders of our common stock for a vote.

Composition of Share-Based Compensation Expense



	Three Months Ended				Nine Months Ended
	November 30				November 30
(In thousands)	2015		2014		2015		2014
Cost of sales	$	394	$	1,159	$	1,459	$	2,733
CarMax Auto Finance income	502		889		1,100		2,526
Selling, general and administrative expenses	11,178		17,637		43,728		52,846
Share-based compensation expense, before income taxes	$	12,074	$	19,685	$	46,287	$	58,105

Composition of Share-Based Compensation Expense – By Grant Type



	Three Months Ended				Nine Months Ended
	November 30				November 30
(In thousands)	2015		2014		2015		2014
Nonqualified stock options	$	5,794	$	6,223	$	20,064	$	21,230
Cash-settled restricted stock units	2,960		10,121		14,358		24,342
Stock-settled market stock units	2,586		3,004		8,123		10,597
Stock-settled performance stock units	341		—		1,579		—
Employee stock purchase plan	296		271		1,003		913
Restricted stock awards to non-employee directors	97		66		1,160		1,023
Share-based compensation expense, before income taxes	$	12,074	$	19,685	$	46,287	$	58,105

We recognize compensation expense for stock options, MSUs, PSUs 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 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 nine months ended November 30, 2015 or 2014.

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 28, 2015	7,645		$	35.59
Options granted	1,391		$	73.68
Options exercised	(1,596	)	$	28.10
Options cancelled	(21	)	$	69.68
Outstanding as of November 30, 2015	7,419		$	44.25	4.4	$	119,328

Exercisable as of November 30, 2015	3,600		$	34.51	3.3	$	82,110

During the nine months ended November 30, 2015 and 2014, we granted nonqualified options to purchase 1,390,948 and 2,050,919 shares of common stock, respectively. The total cash received as a result of stock option exercises for the nine months ended November 30, 2015 and 2014, was $44.9 million and $54.3 million, respectively. We settle stock option exercises with authorized but unissued shares of our common stock. The total intrinsic value of options exercised for the nine months ended November 30, 2015 and 2014, was $67.0 million and $99.9 million, respectively. We realized related tax benefits of $26.8 million and $40.2 million during the nine months ended November 30, 2015 and 2014, respectively.

Outstanding Stock Options



						As of November 30, 2015
						Options Outstanding				Options Exercisable
							Weighted	Weighted			Weighted
							Average Remaining	Average			Average
(Shares in thousands)						Number of	Contractual	Exercise		Number of	Exercise
Range of Exercise Prices						Shares	Life (Years)	Price		Shares	Price
	$	11.43	-	$	14.49	149	0.4	$	11.90	149	$	11.90
	$	19.98	-	$	31.76	1,953	3.0	$	30.41	1,531	$	30.06
	$	32.69	-	$	42.68	2,050	3.7	$	39.30	1,390	$	37.69
	$	44.96	-	$	59.75	1,892	5.4	$	45.07	525	$	45.12
	$	67.82	-	$	73.76	1,375	6.4	$	73.68	5	73.76
Total						7,419	4.4	$	44.25	3,600	$	34.51

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.

The weighted average fair value per share at the date of grant for options granted during the nine months ended November 30, 2015 and 2014, was $20.59 and $13.25, respectively. The unrecognized compensation costs related to nonvested options totaled $39.3 million as of November 30, 2015. These costs are expected to be recognized on a straight-line basis over a weighted average period of 2.2 years.

Assumptions Used to Estimate Option Values



	Nine Months Ended November 30
	2015					2014
Dividend yield				0.0	%				0.0	%
Expected volatility factor ⁽¹⁾	25.8	%	—	31.8	%	25.2	%	—	32.7	%
Weighted average expected volatility				30.6	%				31.8	%
Risk-free interest rate⁽²⁾	0.00	%	—	2.1	%	0.01	%	—	2.7	%
Expected term (in years)⁽³⁾				4.7					4.7


⁽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 28, 2015	1,530		$	39.81
Stock units granted	418		$	73.76
Stock units vested and converted	(522	)	$	32.08
Stock units cancelled	(74	)	$	50.51
Outstanding as of November 30, 2015	1,352		$	52.71

During the nine months ended November 30, 2015 and 2014, we granted 418,281 and 587,990 RSUs, respectively. The initial fair market value per RSU at the date of grant for the RSUs granted during the nine months ended November 30, 2015 and 2014, was $73.76 and $44.96, respectively. The RSUs are cash-settled upon vesting. During the nine months ended November 30, 2015 and 2014, we paid $33.2 million and $21.6 million, respectively (before payroll tax withholdings), to RSU holders upon the vesting of RSUs. We realized tax benefits of $13.3 million and $8.7 million during the nine months ended November 30, 2015 and 2014, respectively.

Expected Cash Settlement Range Upon Restricted Stock Unit Vesting



	As of November 30, 2015
(In thousands)	Minimum⁽¹⁾		Maximum ⁽¹⁾
Fiscal 2017	$	13,765	$	36,707
Fiscal 2018	16,036		42,762
Fiscal 2019	18,922		50,457
Total expected cash settlements	$	48,723	$	129,926

⁽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 28, 2015	774		$	48.30
Stock units granted	107		$	90.31
Stock units vested and converted	(341	)	$	41.40
Stock units cancelled	(2	)	$	90.46
Outstanding as of November 30, 2015	538		$	60.89

During the nine months ended November 30, 2015 and 2014, we granted 107,274 and 249,291 MSUs, respectively. The weighted average fair value per MSU at the date of grant during the nine months ended November 30, 2015 and 2014, was $90.31 and $55.42, respectively. The fair values were determined using a Monte-Carlo simulation and were based on the expected market price of our common stock on the vesting date and the expected number of converted common shares. We realized related tax benefits of $17.1 million and $7.5 million for the nine months ended November 30, 2015 and 2014, respectively, from the vesting of market stock units. The unrecognized compensation costs related to nonvested MSUs totaled $14.1 million as of November 30, 2015. These costs are expected to be recognized on a straight-line basis over a weighted average period of 1.1 years.

Stock-Settled Performance Stock Unit Activity



		Weighted
		Average
	Number of	Grant Date
(Units in thousands)	Units	Fair Value
Outstanding as of February 28, 2015	—	$	—
Stock units granted	66	$	72.58
Stock units vested	—	$	—
Stock units cancelled	—	$	—
Outstanding as of November 30, 2015	66	$	72.58

During the nine months ended November 30, 2015, we granted 66,446 PSUs. No PSUs were granted in fiscal 2015. The weighted average fair value per PSU at the date of grant for PSUs granted during the nine months ended November 30, 2015, was $72.58. The fair value was the fair market value of a share of common stock on the date of the grant. The unrecognized compensation costs related to nonvested PSUs totaled $3.2 million as of November 30, 2015. These costs are expected to be recognized on a straight-line basis over a weighted average period of 2.4 years.

Restricted Stock Awards



			Weighted
			Average
	Number of		Grant Date
(Units in thousands)	Units		Fair Value
Outstanding as of February 28, 2015	23		$	51.18
Restricted stock granted	19		$	68.16
Restricted stock vested	(25	)	$	52.49
Restricted stock cancelled	—		—
Outstanding as of November 30, 2015	17		$	68.16

During the nine months ended November 30, 2015 and 2014, we granted 19,070 and 22,860 shares of RSAs, respectively. The fair value per RSA at the grant date for RSAs granted during the nine months ended November 30, 2015 and 2014, was $68.16 and $51.18, respectively. We realized related tax benefits of $0.7 million for the nine months ended November 30, 2015. No shares vested during fiscal 2015. The unrecognized compensation costs related to nonvested RSAs totaled $0.2 million as of November 30, 2015. These costs are expected to be recognized on a straight-line basis over a weighted average period of 0.6 years.