Stock and Stock-Based Incentive Plans

(A) Share Repurchase Program

As of May 31, 2017, our board of directors has authorized the repurchase of up to $4.55 billion of our common stock. At that date, $1.41 billion was available for repurchase, with no expiration date, under the board's outstanding authorization.

Common Stock Repurchases



	Three Months Ended
	May 31
	2017		2016
Number of shares repurchased (in thousands)	3,034.7		2,569.6
Average cost per share	$	60.00	$	51.39
Available for repurchase, as of end of period (in millions)	$	1,408.3	$	1,266.0

(B) Stock Incentive Plans

We maintain long-term incentive plans for management, certain 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/or restricted stock awards. 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 4 years. These options expire 7 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. For grants prior to fiscal 2018, 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 period. For the fiscal 2018 grants, the conversion ratio is based on reaching certain target levels set by the board of directors for cumulative three-year diluted earnings per share as adjusted to exclude income taxes. The resulting quotients are 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. 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- to three-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
	May 31
(In thousands)	2017		2016
Cost of sales	$	227	$	1,360
CarMax Auto Finance income	820		904
Selling, general and administrative expenses	18,093		29,583
Share-based compensation expense, before income taxes	$	19,140	$	31,847

Composition of Share-Based Compensation Expense – By Grant Type



	Three Months Ended
	May 31
(In thousands)	2017		2016
Nonqualified stock options	$	10,370	$	13,131
Cash-settled restricted stock units	3,118		12,376
Stock-settled market stock units	3,621		3,650
Stock-settled performance stock units	1,353		2,133
Employee stock purchase plan	414		410
Restricted stock awards	264		147
Share-based compensation expense, before income taxes	$	19,140	$	31,847

Unrecognized Share-Based Compensation Expense – By Grant Type



	As of May 31, 2017
(Costs in millions)	Unrecognized Compensation Costs		Weighted Average Remaining Recognition Life (Years)
Nonqualified stock options	$	53.6	2.8
Stock-settled market stock units	17.7		1.9
Stock-settled performance stock units	5.3		1.9
Restricted stock	0.3		1.2
Total	$	76.9	2.5

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 three months ended May 31, 2017 or 2016.

Stock Option Activity



			Weighted Average
					Remaining	Aggregate
	Number of		Exercise		Contractual	Intrinsic
(Shares and intrinsic value in thousands)	Shares		Price		Life (Years)	Value
Outstanding as of February 28, 2017	7,753		$	50.00
Options granted	1,930		58.38
Options exercised	(158	)	39.64
Options cancelled	(5	)	62.05
Outstanding as of May 31, 2017	9,520		$	51.86	4.8	$	119,287

Exercisable as of May 31, 2017	4,647		$	46.55	3.5	$	83,119

Stock Option Information



	Three Months Ended May 31
	2017		2016
Options granted	1,930,362		2,154,718
Weighted average grant date fair value per share	$	16.11	$	14.19
Cash received from options exercised (in millions)	$	6.6	$	4.1
Intrinsic value of options exercised (in millions)	$	3.2	$	4.9
Realized tax benefits (in millions)	$	1.3	$	1.9

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



	Three Months Ended May 31
	2017					2016
Dividend yield				0.0	%				0.0	%
Expected volatility factor⁽¹⁾	29.4	%	—	32.7	%	30.4	%	—	33.9	%
Weighted average expected volatility				29.8	%				30.8	%
Risk-free interest rate⁽²⁾	0.7	%	—	2.1	%	0.2	%	—	1.6	%
Expected term (in years) ⁽³⁾				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 28, 2017	1,406		$	55.05
Stock units granted	627		$	58.38
Stock units vested and converted	(459	)	$	45.00
Stock units cancelled	(17	)	$	57.11
Outstanding as of May 31, 2017	1,557		$	59.33

Cash-Settled Restricted Stock Unit Information



	Three Months Ended May 31
	2017		2016
Stock units granted	627,127		631,907
Initial weighted average grant date fair value per share	$	58.38	$	51.63
Payments (before payroll tax withholdings) upon vesting (in millions)	$	25.9	$	22.9
Realized tax benefits (in millions)	$	10.4	$	9.0

Expected Cash Settlement Range Upon Restricted Stock Unit Vesting



	As of May 31, 2017
(In thousands)	Minimum⁽¹⁾		Maximum⁽¹⁾
Fiscal 2019	$	18,443	$	49,182
Fiscal 2020	19,776		52,735
Fiscal 2021	22,360		59,626
Total expected cash settlements	$	60,579	$	161,543


⁽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, 2017	504		$	65.74
Stock units granted	159		$	73.58
Stock units vested and converted	(221	)	$	55.42
Stock units cancelled	(2	)	$	74.76
Outstanding as of May 31, 2017	440		$	73.72

Stock-Settled Market Stock Unit Information



	Three Months Ended May 31
	2017		2016
Stock units granted	158,637		168,681
Weighted average grant date fair value per share	$	73.58	$	63.97
Realized tax benefits (in millions)	$	7.0	$	5.2

Stock-Settled Performance Stock Unit Activity



		Weighted Average
	Number of	Grant Date
(Units in thousands)	Units	Fair Value
Outstanding as of February 28, 2017	149	$	60.94
Stock units granted	74	$	58.38
Outstanding as of May 31, 2017	223	$	60.10

Stock-Settled Performance Stock Unit Information



	Three Months Ended May 31
	2017		2016
Stock units granted	73,648		83,032
Weighted average grant date fair value per share	$	58.38	$	51.63

Restricted Stock Awards Activity



			Weighted Average
	Number of		Grant Date
(Units in thousands)	Units		Fair Value
Outstanding as of February 28, 2017	50		$	50.94
Restricted stock vested	(1	)	$	51.63
Outstanding as of May 31, 2017	49		$	50.93

Restricted Stock Awards Information



	Three Months Ended May 31
	2017		2016
Restricted stock granted	—		19,998
Weighted average grant date fair value per share	$	—	$	51.63