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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended November 30, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number:  1-31420
 
CARMAX, INC.
(Exact name of registrant as specified in its charter)
 
Virginia
54-1821055
(State or other jurisdiction of incorporation)
(I.R.S. Employer Identification No.)
12800 Tuckahoe Creek Parkway
23238
Richmond,
Virginia
(Address of Principal Executive Offices)
(Zip Code)
(804) 747-0422
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
KMX
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes      No   
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes       No  
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class Outstanding as of December 31, 2021
Common Stock, par value $0.50 161,679,866
Page 1


CARMAX, INC. AND SUBSIDIARIES
 
TABLE OF CONTENTS
 
 
Page
No.
PART I.FINANCIAL INFORMATION  
 Item 1.Financial Statements: 
  Consolidated Statements of Earnings (Unaudited) – 
  Three and Nine Months Ended November 30, 2021 and 2020
    
  Consolidated Statements of Comprehensive Income (Unaudited) – 
  Three and Nine Months Ended November 30, 2021 and 2020
    
  Consolidated Balance Sheets (Unaudited) – 
  November 30, 2021 and February 28, 2021
    
  Consolidated Statements of Cash Flows (Unaudited) – 
  Nine Months Ended November 30, 2021 and 2020
    
Consolidated Statements of Shareholders’ Equity (Unaudited) –
Three and Nine Months Ended November 30, 2021 and 2020
  Notes to Consolidated Financial Statements (Unaudited)
Item 2.Management’s Discussion and Analysis of Financial Condition and
 Results of Operations
 30
 Item 3.Quantitative and Qualitative Disclosures About Market Risk
 Item 4.Controls and Procedures
PART II.OTHER INFORMATION 
 Item 1.Legal Proceedings
 Item 1A.Risk Factors
 Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
 Item 6.Exhibits
SIGNATURES

Page 2


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Unaudited)
 
 
 
 Three Months Ended November 30Nine Months Ended November 30
(In thousands except per share data)2021
%(1)
2020
%(1)
2021
%(1)
2020
%(1)
SALES AND OPERATING REVENUES:    
Used vehicle sales$6,435,590 75.5 $4,209,748 81.2 $18,697,300 77.2 $11,385,183 82.6 
Wholesale vehicle sales1,922,283 22.5 828,362 16.0 4,998,212 20.6 1,990,296 14.4 
Other sales and revenues169,886 2.0 146,834 2.8 518,205 2.1 410,413 3.0 
NET SALES AND OPERATING REVENUES8,527,759 100.0 5,184,944 100.0 24,213,717 100.0 13,785,892 100.0 
COST OF SALES:
Used vehicle cost of sales5,927,237 69.5 3,791,134 73.1 17,085,416 70.6 10,223,875 74.2 
Wholesale vehicle cost of sales1,710,103 20.1 713,961 13.8 4,411,175 18.2 1,669,595 12.1 
Other cost of sales53,859 0.6 48,419 0.9 140,573 0.6 154,666 1.1 
TOTAL COST OF SALES7,691,199 90.2 4,553,514 87.8 21,637,164 89.4 12,048,136 87.4 
GROSS PROFIT 836,560 9.8 631,430 12.2 2,576,553 10.6 1,737,756 12.6 
CARMAX AUTO FINANCE INCOME 165,968 1.9 176,445 3.4 607,732 2.5 374,590 2.7 
Selling, general and administrative expenses575,930 6.8 430,781 8.3 1,704,285 7.0 1,197,595 8.7 
Depreciation and amortization54,428 0.6 48,016 0.9 157,107 0.6 145,126 1.1 
Interest expense24,303 0.3 19,462 0.4 67,247 0.3 65,889 0.5 
Other (income) expense(8,094)(0.1)(887) (35,453)(0.1)728  
Earnings before income taxes355,961 4.2 310,503 6.0 1,291,099 5.3 703,008 5.1 
Income tax provision86,523 1.0 75,203 1.5 299,638 1.2 166,034 1.2 
NET EARNINGS $269,438 3.2 $235,300 4.5 $991,461 4.1 $536,974 3.9 
WEIGHTED AVERAGE COMMON SHARES:    
Basic162,006 163,732 162,710  163,278  
Diluted164,873 165,773 165,606  164,976  
NET EARNINGS PER SHARE:    
Basic$1.66 $1.44 $6.09  $3.29  
Diluted$1.63 $1.42 $5.99  $3.25  
 
(1)    Percents are calculated as a percentage of net sales and operating revenues and may not total due to rounding. 
  








See accompanying notes to consolidated financial statements.
Page 3


CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
 
 Three Months Ended November 30Nine Months Ended November 30
(In thousands)2021202020212020
NET EARNINGS$269,438 $235,300 $991,461 $536,974 
Other comprehensive income (loss), net of taxes:   
Net change in retirement benefit plan unrecognized actuarial losses659 727 1,976 2,183 
Net change in cash flow hedge unrecognized losses11,383 6,775 16,414 (5,036)
Other comprehensive income (loss), net of taxes12,042 7,502 18,390 (2,853)
TOTAL COMPREHENSIVE INCOME$281,480 $242,802 $1,009,851 $534,121 
 
  
 




































See accompanying notes to consolidated financial statements.
Page 4


CARMAX, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
 As of November 30As of February 28
(In thousands except share data)20212021
ASSETS  
CURRENT ASSETS:  
Cash and cash equivalents$62,598 $132,319 
Restricted cash from collections on auto loans receivable552,487 496,415 
Accounts receivable, net563,135 239,070 
Inventory4,659,460 3,157,159 
Other current assets117,390 91,833 
TOTAL CURRENT ASSETS 5,955,070 4,116,796 
Auto loans receivable, net of allowance for loan losses of $426,507 and $411,150 as of November 30, 2021 and February 28, 2021, respectively15,167,170 13,489,819 
Property and equipment, net of accumulated depreciation of $1,542,238 and $1,414,264 as of November 30, 2021 and February 28, 2021, respectively3,175,577 3,055,563 
Deferred income taxes134,382 164,261 
Operating lease assets543,645 431,652 
Goodwill141,258 653 
Other assets458,117 282,797 
TOTAL ASSETS $25,575,219 $21,541,541 
LIABILITIES AND SHAREHOLDERS’ EQUITY  
CURRENT LIABILITIES:  
Accounts payable$936,556 $799,333 
Accrued expenses and other current liabilities530,592 415,465 
Accrued income taxes518 218 
Current portion of operating lease liabilities43,151 30,953 
Current portion of long-term debt10,889 9,927 
Current portion of non-recourse notes payable535,146 442,652 
TOTAL CURRENT LIABILITIES 2,056,852 1,698,548 
Long-term debt, excluding current portion2,602,598 1,322,415 
Non-recourse notes payable, excluding current portion14,856,266 13,297,504 
Operating lease liabilities, excluding current portion529,821 423,618 
Other liabilities419,886 434,843 
TOTAL LIABILITIES 20,465,423 17,176,928 
Commitments and contingent liabilities
SHAREHOLDERS’ EQUITY:
Common stock, $0.50 par value; 350,000,000 shares authorized; 161,871,923 and 163,172,333 shares issued and outstanding as of November 30, 2021 and February 28, 2021, respectively80,936 81,586 
Capital in excess of par value1,672,728 1,513,821 
Accumulated other comprehensive loss(100,301)(118,691)
Retained earnings3,456,433 2,887,897 
TOTAL SHAREHOLDERS’ EQUITY 5,109,796 4,364,613 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $25,575,219 $21,541,541 

See accompanying notes to consolidated financial statements.
Page 5


CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
 Nine Months Ended November 30
(In thousands)20212020
OPERATING ACTIVITIES:  
Net earnings$991,461 $536,974 
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:  
Depreciation and amortization200,819 180,495 
Share-based compensation expense108,962 73,946 
Provision for loan losses87,342 156,147 
Provision for cancellation reserves91,607 53,511 
Deferred income tax provision (benefit)19,564 (19,529)
Other(26,808)5,966 
Net (increase) decrease in:  
Accounts receivable, net(290,346)22,111 
Inventory(1,502,323)66,211 
Other current assets(13,615)29,478 
Auto loans receivable, net(1,764,693)(73,827)
Other assets(18,309)(8,151)
Net increase (decrease) in:  
Accounts payable, accrued expenses and other  
  current liabilities and accrued income taxes170,474 (124,092)
Other liabilities(136,780)(30,854)
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES(2,082,645)868,386 
INVESTING ACTIVITIES:  
Capital expenditures(226,903)(123,952)
Proceeds from disposal of property and equipment260 1,846 
Proceeds from sale of business12,284  
Purchases of investments(13,676)(2,709)
Sales and returns of investments36,915 2,739 
Business acquisition, net of cash acquired(241,563) 
NET CASH USED IN INVESTING ACTIVITIES(432,683)(122,076)
FINANCING ACTIVITIES:  
Increase in short-term debt, net 968 
Proceeds from issuances of long-term debt5,804,200 1,562,300 
Payments on long-term debt(4,524,973)(2,022,586)
Cash paid for debt issuance costs(14,473)(12,797)
Payments on finance lease obligations(8,822)(4,871)
Issuances of non-recourse notes payable11,217,298 7,947,313 
Payments on non-recourse notes payable(9,565,649)(7,940,254)
Repurchase and retirement of common stock(475,950)(158,625)
Equity issuances76,310 94,295 
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES2,507,941 (534,257)
(Decrease) increase in cash, cash equivalents, and restricted cash(7,387)212,053 
Cash, cash equivalents, and restricted cash at beginning of year771,947 656,390 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD$764,560 $868,443 
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS:
Cash and cash equivalents$62,598 $236,643 
Restricted cash from collections on auto loans receivable552,487 492,610 
Restricted cash included in other assets149,475 139,190 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD$764,560 $868,443 


See accompanying notes to consolidated financial statements.
Page 6


CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
(Unaudited)
Nine Months Ended November 30, 2021
     Accumulated 
 Common Capital in Other 
 SharesCommonExcess ofRetainedComprehensive 
(In thousands)OutstandingStockPar ValueEarningsLossTotal
Balance as of February 28, 2021163,172 $81,586 $1,513,821 $2,887,897 $(118,691)$4,364,613 
Net earnings— — — 436,756 — 436,756 
Other comprehensive income— — — — 2,937 2,937 
Share-based compensation expense— — 20,102 — — 20,102 
Repurchases of common stock(998)(499)(9,348)(114,695)— (124,542)
Exercise of common stock options375 187 21,403 — — 21,590 
Stock incentive plans, net shares issued254 127 (18,102)— — (17,975)
Balance as of May 31, 2021162,803 $81,401 $1,527,876 $3,209,958 $(115,754)$4,703,481 
Net earnings— — — 285,267 — 285,267 
Other comprehensive income— — — — 3,411 3,411 
Share-based compensation expense— — 14,116 — — 14,116 
Shares issued for acquisition776 388 90,183 — — 90,571 
Repurchases of common stock(1,754)(877)(17,164)(202,004)— (220,045)
Exercise of common stock options621 311 38,185 — — 38,496 
Stock incentive plans, net shares issued24 12 (130)— — (118)
Balance as of August 31, 2021162,470 $81,235 $1,653,066 $3,293,221 $(112,343)$4,915,179 
Net earnings— — — 269,438 — 269,438 
Other comprehensive income— — — — 12,042 12,042 
Share-based compensation expense— — 12,347 — — 12,347 
Repurchases of common stock(851)(425)(8,695)(106,226)— (115,346)
Exercise of common stock options253 126 16,097 — — 16,223 
Stock incentive plans, net shares issued  (87)— — (87)
Balance as of November 30, 2021161,872 $80,936 $1,672,728 $3,456,433 $(100,301)$5,109,796 


























See accompanying notes to consolidated financial statements.
Page 7


CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
(Unaudited)
Nine Months Ended November 30, 2020
     Accumulated 
 Common Capital in Other 
 SharesCommonExcess ofRetainedComprehensive 
(In thousands)OutstandingStockPar ValueEarningsLossTotal
Balance as of February 29, 2020163,081 $81,541 $1,348,988 $2,488,417 $(150,071)$3,768,875 
Adoption of CECL— — — (153,306)— (153,306)
Net earnings— — — 4,978 — 4,978 
Other comprehensive loss— — — — (15,334)(15,334)
Share-based compensation expense— — 17,652 — — 17,652 
Repurchases of common stock(515)(258)(4,271)(36,180)— (40,709)
Exercise of common stock options35 18 1,688 — — 1,706 
Stock incentive plans, net shares issued154 77 (5,629)— — (5,552)
Balance as of May 31, 2020162,755 $81,378 $1,358,428 $2,303,909 $(165,405)$3,578,310 
Net earnings— — — 296,696 — 296,696 
Other comprehensive income— — — — 4,979 4,979 
Share-based compensation expense— — 12,568 — — 12,568 
Repurchases of common stock    —  
Exercise of common stock options1,403 701 89,318 — — 90,019 
Stock incentive plans, net shares issued4 2 (14)— — (12)
Balance as of August 31, 2020164,162 $82,081 $1,460,300 $2,600,605 $(160,426)$3,982,560 
Net earnings— — — 235,300 — 235,300 
Other comprehensive income— — — — 7,502 7,502 
Share-based compensation expense— — 9,942 — — 9,942 
Repurchases of common stock(1,176)(588)(10,509)(98,152)— (109,249)
Exercise of common stock options43 21 2,549 — — 2,570 
Stock incentive plans, net shares issued5 3 (152)— — (149)
Balance as of November 30, 2020163,034 $81,517 $1,462,130 $2,737,753 $(152,924)$4,128,476 
























See accompanying notes to consolidated financial statements.
Page 8


CARMAX, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)

1.Background

Business. CarMax, Inc. (“we,” “our,” “us,” “CarMax” and “the company”), including its wholly owned subsidiaries, is the nation’s largest and most profitable retailer of used vehicles. 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. On June 1, 2021, we completed the acquisition of Edmunds Holding Company (“Edmunds”), which does not meet the quantitative thresholds to be considered a reportable segment. See Note 17 for additional information on our reportable segments and Note 2 for additional information regarding our acquisition of Edmunds.

We deliver an unrivaled customer experience by offering a broad selection of quality used vehicles and related products and services at competitive, no-haggle prices using a customer-friendly sales process.  Our omni-channel platform, which gives us the largest addressable market in the used car industry, empowers our retail customers to buy a car on their terms – online, in-store or a seamless combination of both. Customers can choose to complete the car-buying experience in-person at one of our stores; or buy the car online and receive delivery through express pickup, available nationwide, or home delivery, available to most customers. We offer customers a range of related products and services, including the appraisal and purchase of vehicles directly from consumers; the financing of retail vehicle purchases through CAF and third-party finance 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 or virtual wholesale auctions.

Basis of Presentation and Use of Estimates. The accompanying interim unaudited consolidated financial statements include the accounts of CarMax and our wholly owned subsidiaries.  All significant intercompany balances and transactions have been eliminated in consolidation.  These consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  In the opinion of management, such interim consolidated financial statements reflect all normal recurring adjustments considered necessary to present fairly the financial position and the results of operations and cash flows for the interim periods presented.  The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year.  

The accounting policies followed in the presentation of our interim financial results are consistent with those included in the company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2021 (the “2021 Annual Report”), with the exception of those related to recent accounting pronouncements adopted in the current fiscal year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in our 2021 Annual Report.
 
The preparation of financial statements in conformity with U.S. 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.  In particular, the novel coronavirus (“COVID-19”) pandemic continues to have an adverse impact on global economic conditions and may impact future estimates including, but not limited to, our allowance for loan losses, inventory valuations, fair value measurements, downward adjustments to investments in equity securities, asset impairment charges, the effectiveness of the company’s hedging instruments, deferred tax valuation allowances, cancellation reserves, actuarial losses on our retirement benefit plans and discount rate assumptions.

Depreciation and amortization previously included in selling, general, and administrative expenses is now separately presented on the consolidated statements of earnings. Prior period amounts have been reclassified to conform to the current period’s presentation. Depreciation and amortization related to other areas of our business, including cost of sales and CAF, is included in its respective line item on the consolidated statements of earnings. Certain other prior year amounts have been reclassified to conform to the current year’s presentation.  Amounts and percentages may not total due to rounding.


Page 9


Recent Accounting Pronouncements.

Effective in Future Periods
In October 2021, the Financial Accounting Standards Board (“FASB”) issued an accounting pronouncement (ASU 2021-08) related to accounting for acquired revenue contracts with customers in a business combination. The amendments in this update address diversity in practice and inconsistency related to recognition of an acquired contract liability and the effect of payment terms on subsequent revenue recognition for the acquirer. This update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We plan to adopt this pronouncement for our fiscal year beginning March 1, 2023, and we do not expect it to have a material effect on our consolidated financial statements.

In November 2021, the FASB issued an accounting pronouncement (ASU 2021-10) related to government assistance disclosures. The amendments in this update increase the transparency surrounding government assistance by requiring disclosure of 1) the types of assistance received, 2) an entity’s accounting for the assistance, and 3) the effect of the assistance on the entity’s financial statements. The update is effective for annual periods beginning after December 15, 2021. We plan to adopt this pronouncement for our fiscal year beginning March 1, 2022, and we do not expect it to have a material effect on our consolidated financial statements.

2. Acquisition of Edmunds

On June 1, 2021, we completed the acquisition of Edmunds Holding Company, one of the most well established and trusted online guides for automotive information and a recognized leader in digital car shopping innovations. With this acquisition, CarMax has enhanced its digital capabilities and further strengthened its role and reach across the used auto ecosystem while adding exceptional technology and creative talent. Edmunds continues to operate independently and remains focused on delivering confidence to consumers and excellent value to its dealer and OEM clients. Additionally, this acquisition allows both businesses to accelerate their respective capabilities to deliver an enhanced digital experience to their customers by leveraging Edmunds’ compelling content and technology, CarMax’s unparalleled national scale and infrastructure, and the combined talent of both businesses.

The acquisition was accounted for in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, and, accordingly, Edmunds’ results of operations have been consolidated in our financial statements since the date of acquisition. We recorded a preliminary allocation of the purchase price to assets acquired and liabilities assumed based on their estimated fair values as of June 1, 2021. The transaction costs associated with the acquisition were approximately $8.0 million and were expensed as incurred within selling, general and administrative expenses.

The following table summarizes the total purchase consideration:

(In thousands)
Total cash consideration for outstanding shares$251,047 
Fair value of common stock (1)
90,571 
Fair value of preexisting relationship60,200 
Total$401,818 

(1)     Represents the issuance of 776,097 shares of CarMax common stock to Edmunds equity holders, the fair value of which was based on the market value of CarMax common stock as of market close on the acquisition date (June 1, 2021).

In January 2020, we acquired a minority stake in Edmunds for $50 million. The noncontrolling equity investment in Edmunds was remeasured at a fair value of $60.2 million prior to the acquisition of the remaining ownership stake on June 1, 2021, which resulted in the recognition of a gain of $8.7 million. The gain is included in other income in the consolidated statements of earnings.

Page 10


The following table summarizes the estimated preliminary fair values of the assets acquired and liabilities assumed at the date of the acquisition and is subject to final fair value determination:

(In thousands)Fair Value
Cash$9,484 
Accounts receivable, net33,719 
Other current assets2,397 
Property and equipment, net20,741 
Goodwill (1)
141,258 
Intangible assets218,000 
Operating lease assets97,250 
Other assets191 
Total assets acquired523,040 
Accounts payable5,063 
Accrued expenses and other current liabilities11,277 
Current portion of operating lease liabilities12,795 
Deferred income taxes (1)
3,823 
Operating lease liabilities, excluding current portion88,264 
Total liabilities assumed121,222 
Net assets acquired$401,818 

(1)     During the third quarter of fiscal 2022, we obtained new information about facts and circumstances that existed as of the acquisition date, which resulted in a change in the fair value of assets and liabilities recognized. The adjustments were primarily related to research and development tax credits, which resulted in a decrease in goodwill and a decrease in deferred income taxes of $8.4 million.

The excess of purchase consideration over the fair value of net identifiable assets acquired and liabilities assumed was recorded as goodwill, which is primarily attributed to expected synergies and the assembled workforce of the acquired business and is not deductible for tax purposes. The fair values assigned to the net identifiable assets and liabilities assumed are based on management’s estimates and assumptions and may be subject to change as additional information is received. The primary areas that remain preliminary relate to the fair values of intangible assets acquired, certain identifiable assets and liabilities acquired, and income and non-income based taxes and residual goodwill. We expect to finalize the valuation as soon as practicable, but not later than one year from the acquisition date.

Identifiable intangible assets were recognized at their estimated acquisition date fair values. The preliminary fair value of identifiable intangible assets was determined by using certain estimates and assumptions that are not observable in the market. The preliminary fair values of the trade name asset and the internally developed software asset were determined using the relief-from-royalty method, and the preliminary fair value of the customer relationships asset was determined using the excess earnings method. These income-based approaches included significant assumptions such as the amount and timing of projected cash flows, growth rates, customer attrition rates, discount rates, and the assessment of the asset’s life cycle. The preliminary estimated fair value and estimated remaining useful lives of identifiable intangible assets are as follows:

Preliminary
(In thousands)Useful Life (Years)Fair Value
Trade nameIndefinite$31,900 
Internally developed software752,900 
Customer relationships17133,200 
Identifiable intangible assets$218,000 

The operating results of Edmunds have been included in our consolidated financial statements since the date of the acquisition. Net sales and operating revenues and net earnings attributable to Edmunds were not material for the reporting periods presented. Our pro forma results as if the acquisition had taken place on the first day of fiscal 2021 would not be materially different from the amounts reflected in the accompanying consolidated financial statements, and therefore are not presented.
Page 11


3. Revenue
 
We recognize revenue when control of the good or service has been transferred to the customer, generally either at the time of sale or upon delivery to a customer.  Our contracts have a fixed contract price and revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. We collect sales taxes and other taxes from customers on behalf of governmental authorities at the time of sale.  These taxes are accounted for on a net basis and are not included in net sales and operating revenues or cost of sales. We generally expense sales commissions when incurred because the amortization period would have been less than one year. These costs are recorded within selling, general and administrative expenses. We do not have any significant payment terms as payment is received at or shortly after the point of sale.

Disaggregation of Revenue
Three Months Ended November 30Nine Months Ended November 30
(In millions)2021202020212020
Used vehicle sales$6,435.6 $4,209.7 $18,697.3 $11,385.2 
Wholesale vehicle sales1,922.3 828.4 4,998.2 1,990.3 
Other sales and revenues:
Extended protection plan revenues106.6 101.7 353.8 294.5 
Third-party finance fees, net1.6 (10.6)(0.3)(36.7)
Advertising & subscription revenues (1)
33.3  67.9  
Service revenues19.7 24.6 62.9 70.6 
Other8.7 31.1 33.9 82.0 
Total other sales and revenues169.9 146.8 518.2 410.4 
Total net sales and operating revenues$8,527.8 $5,184.9 $24,213.7 $13,785.9 

(1)     Excludes intersegment revenues that have been eliminated in consolidation. See Note 17 for further details.

Used Vehicle Sales. Revenue from the sale of used vehicles is recognized upon transfer of control of the vehicle to the customer. As part of our customer service strategy, we guarantee the retail vehicles we sell with a 30-day/1,500 mile, money-back guarantee.  We record a reserve for estimated returns based on historical experience and trends. The reserve for estimated returns is presented gross on the consolidated balance sheets, with a return asset recorded in other current assets and a refund liability recorded in accrued expenses and other current liabilities. We also guarantee the used vehicles we sell with a 90-day/4,000 mile limited warranty. These warranties are deemed assurance-type warranties and are accounted for as warranty obligations. See Note 16 for additional information on this warranty and its related obligation.

Wholesale Vehicle Sales. Wholesale vehicles are sold at our auctions, and revenue from the sale of these vehicles is recognized upon transfer of control of the vehicle to the customer. Dealers also pay a fee to us based on the sale price of the vehicles they purchase. This fee is recognized as revenue at the time of sale. While we provide condition disclosures on each wholesale vehicle sold, the vehicles are subject to a limited right of return. We record a reserve for estimated returns based on historical experience and trends. The reserve for estimated returns is presented gross on the consolidated balance sheets, with a return asset recorded in other current assets and a refund liability recorded in accrued expenses and other current liabilities.

EPP Revenues. We also sell ESP and GAP products on behalf of unrelated third parties, who are primarily responsible for fulfilling the contract, to customers who purchase a retail vehicle.  The ESPs we currently offer on all used vehicles provide coverage up to 60 months (subject to mileage limitations), while GAP covers the customer for the term of their finance contract. We recognize revenue, on a net basis, at the time of sale. We also record a reserve, or refund liability, for estimated contract cancellations. The reserve for cancellations is evaluated for each product and is based on forecasted forward cancellation curves utilizing historical experience, recent trends and credit mix of the customer base.  Our risk related to contract cancellations is limited to the revenue that we receive.  Cancellations fluctuate depending on the volume of EPP sales, customer financing default or prepayment rates, and shifts in customer behavior, including those related to changes in the coverage or term of the product.  The current portion of estimated cancellation reserves is recognized as a component of accrued expenses and other current liabilities with the remaining amount recognized in other liabilities.  See Note 8 for additional information on cancellation reserves.

We are contractually entitled to receive profit-sharing revenues based on the performance of the ESPs administered by third parties. These revenues are a form of variable consideration included in EPP revenues to the extent that it is probable that it
Page 12


will not result in a significant revenue reversal. An estimate of the amount to which we expect to be entitled, subject to various constraints, is recognized upon satisfying the performance obligation of selling the ESP. These constraints include factors that are outside of the company’s influence or control and the length of time until settlement. We apply the expected value method, utilizing historical claims and cancellation data from CarMax customers, as well as external data and other qualitative assumptions. This estimate is reassessed each reporting period with changes reflected in other sales and revenues on our consolidated statements of earnings and other assets on our consolidated balance sheets. As of November 30, 2021 and February 28, 2021, no current or long-term contract asset was recognized related to cumulative profit-sharing payments to which we expect to be entitled.

Third-Party Finance Fees. Customers applying for financing who are not approved or are conditionally approved by CAF are generally evaluated by other third-party finance providers.  These providers generally either pay us or are paid a fixed, pre-negotiated fee per contract.   We recognize these fees at the time of sale.

Advertising and Subscription Revenues. Advertising and subscription revenues consist of revenues earned by our Edmunds business. Advertising revenues are derived from advertising contracts with automotive manufacturers based on fixed fees per impression and fees for certain activities completed by customers on the manufacturers' websites. These fees are recognized in the period the impressions are delivered or certain activities occurred. Subscription revenues are derived from packages sold to automotive dealers that include car leads, inventory listings and enhanced placement in Edmunds' dealer locator and are recognized over the period that the services are made available to the dealers. Subscription revenues also include a digital marketing subscription service, which allows dealers to gain exposure on third party partner websites. Revenues for this service are recognized on a net basis.

Service Revenues. Service revenue consists of labor and parts income related to vehicle repair service, including repairs of vehicles covered under an ESP we sell or warranty program. Service revenue is recognized at the time the work is completed.

Other Revenues. Other revenues consist primarily of new vehicle sales and sales of accessories. Revenue in this category is recognized upon transfer of control to the customer.

4. CarMax Auto Finance
 
CAF provides financing to qualified retail customers purchasing vehicles from CarMax.  CAF provides us the opportunity to capture additional profits, cash flows and sales while managing our reliance on third-party finance sources.  Management regularly analyzes CAF’s operating results by assessing profitability, the performance of the auto loans receivable, including trends in credit losses and delinquencies, and CAF direct expenses.  This information is used to assess CAF’s performance and make operating decisions, including resource allocation.

We typically use securitizations or other funding arrangements to fund loans originated by CAF.  CAF income primarily reflects the interest and fee income generated by the auto loans receivable less the interest expense associated with the debt issued to fund these receivables, a provision for estimated loan losses and direct CAF expenses.

CAF income does not include any allocation of indirect costs.  Although CAF benefits from certain indirect overhead expenditures, we have not allocated indirect costs to CAF to avoid making subjective allocation decisions.  Examples of indirect costs not allocated to CAF include retail store expenses and corporate expenses.  In addition, except for auto loans receivable, which are disclosed in Note 5, CAF assets are not separately reported nor do we allocate assets to CAF because such allocation would not be useful to management in making operating decisions.

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Components of CAF Income
Three Months Ended November 30Nine Months Ended November 30
(In millions)2021
(1)
2020
(1)
2021
(1)
2020
(1)
Interest margin:  
Interest and fee income$330.0 8.6