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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 August 31, 2024
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 September 25, 2024
Common Stock, par value $0.50 154,924,341
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 Six Months Ended August 31, 2024 and 2023
    
  Consolidated Statements of Comprehensive Income (Unaudited) – 
  Three and Six Months Ended August 31, 2024 and 2023
    
  Consolidated Balance Sheets (Unaudited) – 
  August 31, 2024 and February 29, 2024
    
  Consolidated Statements of Cash Flows (Unaudited) – 
  Six Months Ended August 31, 2024 and 2023
    
Consolidated Statements of Shareholders’ Equity (Unaudited) –
Three and Six Months Ended August 31, 2024 and 2023
  Notes to Consolidated Financial Statements (Unaudited)
Item 2.Management’s Discussion and Analysis of Financial Condition and
 Results of Operations
 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 August 31Six Months Ended August 31
(In thousands except per share data)2024
%(1)
2023
%(1)
2024
%(1)
2023
%(1)
SALES AND OPERATING REVENUES:    
Used vehicle sales$5,677,081 80.9 $5,591,143 79.0 $11,354,557 80.4 $11,592,614 78.5 
Wholesale vehicle sales1,154,465 16.5 1,321,975 18.7 2,410,904 17.1 2,836,338 19.2 
Other sales and revenues181,983 2.6 160,718 2.3 361,465 2.6 331,947 2.2 
NET SALES AND OPERATING REVENUES7,013,529 100.0 7,073,836 100.0 14,126,926 100.0 14,760,899 100.0 
COST OF SALES:
Used vehicle cost of sales5,198,315 74.1 5,139,034 72.6 10,380,294 73.5 10,625,880 72.0 
Wholesale vehicle cost of sales1,016,590 14.5 1,185,359 16.8 2,115,901 15.0 2,531,897 17.2 
Other cost of sales38,157 0.5 52,678 0.7 78,369 0.6 88,967 0.6 
TOTAL COST OF SALES6,253,062 89.2 6,377,071 90.2 12,574,564 89.0 13,246,744 89.7 
GROSS PROFIT 760,467 10.8 696,765 9.8 1,552,362 11.0 1,514,155 10.3 
CARMAX AUTO FINANCE INCOME 115,580 1.6 134,987 1.9 262,550 1.9 272,345 1.8 
Selling, general and administrative expenses610,562 8.7 585,694 8.3 1,249,140 8.8 1,145,531 7.8 
Depreciation and amortization63,901 0.9 58,817 0.8 125,770 0.9 117,236 0.8 
Interest expense27,021 0.4 31,585 0.4 58,383 0.4 62,051 0.4 
Other income(3,281) (2,630) (2,865) (3,844) 
Earnings before income taxes177,844 2.5 158,286 2.2 384,484 2.7 465,526 3.2 
Income tax provision45,035 0.6 39,651 0.6 99,235 0.7 118,593 0.8 
NET EARNINGS $132,809 1.9 $118,635 1.7 $285,249 2.0 $346,933 2.4 
WEIGHTED AVERAGE COMMON SHARES:    
Basic155,866 158,479 156,513  158,298  
Diluted156,526 159,238 157,116  158,900  
NET EARNINGS PER SHARE:    
Basic$0.85 $0.75 $1.82  $2.19  
Diluted$0.85 $0.75 $1.82  $2.18  
 
(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 August 31Six Months Ended August 31
(In thousands)2024202320242023
NET EARNINGS$132,809 $118,635 $285,249 $346,933 
Other comprehensive (loss) income, net of taxes:   
Net change in retirement benefit plan unrecognized actuarial losses85 98 169 196 
Net change in cash flow hedge unrecognized gains(52,706)17,169 (50,391)(19,468)
Other comprehensive (loss) income, net of taxes(52,621)17,267 (50,222)(19,272)
TOTAL COMPREHENSIVE INCOME$80,188 $135,902 $235,027 $327,661 
 
  
 





































See accompanying notes to consolidated financial statements.
Page 4


CARMAX, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
 As of August 31As of February 29
(In thousands except share data)20242024
ASSETS  
CURRENT ASSETS:  
Cash and cash equivalents$524,667 $574,142 
Restricted cash from collections on auto loans receivable572,630 506,648 
Accounts receivable, net228,112 221,153 
Inventory3,397,746 3,678,070 
Other current assets135,901 246,581 
TOTAL CURRENT ASSETS 4,859,056 5,226,594 
Auto loans receivable, net of allowance for loan losses of $500,834 and $482,790 as of August 31, 2024 and February 29, 2024, respectively17,413,589 17,011,844 
Property and equipment, net of accumulated depreciation of $1,940,005 and $1,813,783 as of August 31, 2024 and February 29, 2024, respectively3,763,089 3,665,530 
Deferred income taxes126,883 98,790 
Operating lease assets495,783 520,717 
Goodwill141,258 141,258 
Other assets496,160 532,064 
TOTAL ASSETS $27,295,818 $27,196,797 
LIABILITIES AND SHAREHOLDERS’ EQUITY  
CURRENT LIABILITIES:  
Accounts payable$1,008,044 $933,708 
Accrued expenses and other current liabilities483,922 523,971 
Accrued income taxes34,063  
Current portion of operating lease liabilities57,959 57,161 
Current portion of long-term debt21,771 313,282 
Current portion of non-recourse notes payable550,045 484,167 
TOTAL CURRENT LIABILITIES 2,155,804 2,312,289 
Long-term debt, excluding current portion1,588,260 1,602,355 
Non-recourse notes payable, excluding current portion16,516,943 16,357,301 
Operating lease liabilities, excluding current portion473,158 496,210 
Other liabilities382,044 354,902 
TOTAL LIABILITIES 21,116,209 21,123,057 
Commitments and contingent liabilities
SHAREHOLDERS’ EQUITY:
Common stock, $0.50 par value; 350,000,000 shares authorized; 155,332,046 and 157,611,939 shares issued and outstanding as of August 31, 2024 and February 29, 2024, respectively77,666 78,806 
Capital in excess of par value1,856,385 1,808,746 
Accumulated other comprehensive income9,057 59,279 
Retained earnings4,236,501 4,126,909 
TOTAL SHAREHOLDERS’ EQUITY 6,179,609 6,073,740 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $27,295,818 $27,196,797 

See accompanying notes to consolidated financial statements.
Page 5


CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
 Six Months Ended August 31
(In thousands)20242023
OPERATING ACTIVITIES:  
Net earnings$285,249 $346,933 
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:  
Depreciation and amortization141,964 126,971 
Share-based compensation expense82,703 69,445 
Provision for loan losses193,798 170,672 
Provision for cancellation reserves49,302 45,199 
Deferred income tax benefit(11,789)(24,845)
Other2,039 3,868 
Net (increase) decrease in:  
Accounts receivable, net(6,959)26,909 
Inventory280,324 (113,144)
Other current assets111,438 33,431 
Auto loans receivable, net(595,543)(828,631)
Other assets(9,486)(6,668)
Net increase (decrease) in:  
Accounts payable, accrued expenses and other  
  current liabilities and accrued income taxes23,474 132,566 
Other liabilities(45,100)(43,826)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES501,414 (61,120)
INVESTING ACTIVITIES:  
Capital expenditures(213,123)(210,167)
Proceeds from disposal of property and equipment130 1,247 
Purchases of investments(3,091)(3,236)
Sales and returns of investments621 405 
NET CASH USED IN INVESTING ACTIVITIES(215,463)(211,751)
FINANCING ACTIVITIES:  
Proceeds from issuances of long-term debt 134,600 
Payments on long-term debt(306,274)(240,093)
Cash paid for debt issuance costs(12,985)(10,650)
Payments on finance lease obligations(9,056)(7,810)
Issuances of non-recourse notes payable6,971,000 6,179,929 
Payments on non-recourse notes payable(6,742,743)(5,532,403)
Repurchase and retirement of common stock(213,305)(4,143)
Equity issuances30,296 27,534 
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES(283,067)546,964 
Increase in cash, cash equivalents, and restricted cash2,884 274,093 
Cash, cash equivalents, and restricted cash at beginning of year1,250,410 951,004 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD $1,253,294 $1,225,097 
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS:
Cash and cash equivalents$524,667 $521,098 
Restricted cash from collections on auto loans receivable572,630 534,792 
Restricted cash included in other assets155,997 169,207 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD$1,253,294 $1,225,097 







See accompanying notes to consolidated financial statements.
Page 6


CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
(Unaudited)
Six Months Ended August 31, 2024
     Accumulated 
 Common Capital in Other 
 SharesCommonExcess ofRetainedComprehensive 
(In thousands)OutstandingStockPar ValueEarningsIncomeTotal
Balance as of February 29, 2024157,612 $78,806 $1,808,746 $4,126,909 $59,279 $6,073,740 
Net earnings— — — 152,440 — 152,440 
Other comprehensive income— — — — 2,399 2,399 
Share-based compensation expense— — 36,708 — — 36,708 
Repurchases of common stock(1,446)(723)(17,615)(86,551)— (104,889)
Exercise of common stock options138 69 8,140 — — 8,209 
Stock incentive plans, net shares issued49 24 (1,761)— — (1,737)
Balance as of May 31, 2024156,353 $78,176 $1,834,218 $4,192,798 $61,678 $6,166,870 
Net earnings— — — 132,809 — 132,809 
Other comprehensive loss— — — — (52,621)(52,621)
Share-based compensation expense— — 17,328 — — 17,328 
Repurchases of common stock(1,376)(688)(17,059)(89,106)— (106,853)
Exercise of common stock options347 173 21,914 — — 22,087 
Stock incentive plans, net shares issued8 5 (16)— — (11)
Balance as of August 31, 2024155,332 $77,666 $1,856,385 $4,236,501 $9,057 $6,179,609 


































See accompanying notes to consolidated financial statements.

Page 7


CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
(Unaudited)
Six Months Ended August 31, 2023
Accumulated
CommonCapital inOther
SharesCommonExcess ofRetainedComprehensive
(In thousands)OutstandingStockPar ValueEarningsIncomeTotal
Balance as of February 28, 2023158,079 $79,040 $1,713,074 $3,723,094 $97,869 $5,613,077 
Net earnings— — — 228,298 — 228,298 
Other comprehensive loss— — — — (36,539)(36,539)
Share-based compensation expense— — 21,274 — — 21,274 
Exercise of common stock options18 9 979 — — 988 
Stock incentive plans, net shares issued112 56 (3,986)— — (3,930)
Balance as of May 31, 2023158,209 $79,105 $1,731,341 $3,951,392 $61,330 $5,823,168 
Net earnings— — — 118,635 — 118,635 
Other comprehensive income— — — — 17,267 17,267 
Share-based compensation expense— — 20,256 — — 20,256 
Exercise of common stock options446 223 26,323 — — 26,546 
Stock incentive plans, net shares issued1  (213)— — (213)
Balance as of August 31, 2023158,656 $79,328 $1,777,707 $4,070,027 $78,597 $6,005,659 











































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 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”). At that time, Edmunds was identified as a non-reportable operating segment and has been presented as “Other” in the Segment Information footnote in our prior period financial statements. Since the acquisition, Edmunds’ business strategy has become increasingly integrated with that of CarMax Sales Operations. Beginning in the first quarter of fiscal 2025, the chief operating decision maker (“CODM”) assessed the financial performance related to Edmunds’ operations together with the rest of the CarMax Sales Operations segment. As a result, as of May 31, 2024, the company realigned its operating segments to be consistent with the manner in which the CODM assesses performance and makes resource allocations. The company now operates in two operating segments, CarMax Sales Operations and CAF, both of which continue to be reportable segments.
The operating segment change did not impact the company’s consolidated financial statements but did impact our previous segment footnote disclosure. The Segment Information footnote is no longer presented, as the previous disclosures were for the purpose of presenting the Edmunds operating segment separate from CarMax Sales Operations. The current and prior period required disclosures related to our reportable segments are included elsewhere within the consolidated financial statements and related footnotes. The performance of our CarMax Sales Operations segment is reviewed by our CODM at the gross profit level, the components of which are presented within the consolidated statement of earnings. The required segment information related to our CAF segment is presented in Note 3. Additionally, asset information by segment is not utilized for purposes of assessing performance or allocating resources and, as a result, such information has not been presented.
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 an integrated combination of both. We offer customers a range of related products and services, including the appraisal and purchase of vehicles directly from consumers and dealers; 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”); advertising and subscription services; 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 interim unaudited 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 29, 2024 (the “2024 Annual Report”), with the exception of those related to recent accounting pronouncements adopted in the current fiscal year. These interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in our 2024 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.  Certain 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


2. 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 August 31Six Months Ended August 31
(In millions)2024202320242023
Used vehicle sales$5,677.1 $5,591.1 $11,354.6 $11,592.6 
Wholesale vehicle sales1,154.5 1,322.0 2,410.9 2,836.3 
Other sales and revenues:
Extended protection plan revenues121.4 101.7 240.2 212.9 
Third-party finance income/(fees), net1.4 (1.5)(0.2)(1.2)
Advertising & subscription revenues (1)
34.3 33.5 69.0 64.9 
Service revenues21.7 21.4 44.4 43.5 
Other3.2 5.6 8.1 11.8 
Total other sales and revenues182.0 160.7 361.5 331.9 
Total net sales and operating revenues$7,013.5 $7,073.8 $14,126.9 $14,760.9 

(1)    Excludes intercompany sales and operating revenues that have been eliminated in consolidation.

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 10-day 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 15 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 7 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 10


will not result in a significant revenue reversal. An estimate of the amount to which we expect to be entitled is determined upon satisfying the performance obligation of selling the ESP. This estimate is subject to various constraints; primarily, factors that are outside of the company’s influence or control. We have determined that these constraints generally preclude any profit-sharing revenues from being recognized before they are paid. As of August 31, 2024 and February 29, 2024, no current or long-term contract asset was recognized related to cumulative profit-sharing payments to which we expect to be entitled. The estimate of the amount to which we expect to be entitled is reassessed each reporting period and any changes are reflected in other sales and revenues on our consolidated statements of earnings and other assets on our consolidated balance sheets.
Third-Party Finance Income/(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 include miscellaneous goods and services, which are immaterial to our consolidated financial statements.
3. 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 4, 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.
Page 11


Components of CAF Income
Three Months Ended August 31Six Months Ended August 31
(In millions)2024
(1)
2023
(1)
2024
(1)
2023
(1)
Interest margin:
Interest and fee income$464.5 10.5 $416.9 9.6 $917.0 10.4 $817.4 9.5 
Interest expense(193.7)(4.4)(152.0)(3.5)(376.0)(4.3)(294.6)(3.4)
Total interest margin270.8 6.1 264.9 6.1 541.0 6.1 522.8 6.1 
Provision for loan losses(112.6)(2.5)(89.8)(2.1)(193.8)(2.2)(170.7)(2.0)
Total interest margin after provision for loan losses158.2 3.6 175.1 4.0 347.2 3.9 352.1 4.1 
Direct expenses:
Payroll and fringe benefit expense(19.0)(0.4)(16.8)(0.4)(37.6)(0.4)(33.4)(0.4)
Depreciation and amortization(4.3)(0.1)(4.1)(0.1)(8.5)(0.1)(8.2)(0.1)
Other direct expenses(19.3)(0.4)(19.3)(0.4)(38.5)(0.4)(38.2)(0.4)
Total direct expenses(42.6)(1.0)(40.2)(0.9)(84.6)(1.0)(79.8)(0.9)
CarMax Auto Finance income$115.6 2.6 $135.0 3.1 $262.6 3.0 $272.3 3.2 
Total average managed receivables$17,728.8 $17,315.6 $17,640.0 $17,159.5 

(1)    Annualized percentage of total average managed receivables.     

4. Auto Loans Receivable
Auto loans receivable include amounts due from customers related to retail vehicle sales financed through CAF and are presented net of an allowance for estimated loan losses.  These auto loans represent a large group of smaller-balance homogeneous loans, which we consider to be part of one class of financing receivable and one portfolio segment for purposes of determining our allowance for loan losses. We generally use warehouse facilities to fund auto loans receivable originated by CAF until we elect to fund them through an asset-backed term funding transaction, such as a term securitization or alternative funding arrangement.  We recognize transfers of auto loans receivable into the warehouse facilities and asset-backed term funding transactions (together, “non-recourse funding vehicles”) as secured borrowings, which result in recording the auto loans receivable and the related non-recourse notes payable on our consolidated balance sheets. The majority of the auto loans receivable serve as collateral for the related non-recourse notes payable of $17.10 billion as of August 31, 2024, and $16.87 billion as of February 29, 2024. See Note 9 for additional information on securitizations and non-recourse notes payable.
Interest income and expenses related to auto loans are included in CAF income.  Interest income on auto loans receivable is recognized when earned based on contractual loan terms.  All loans continue to accrue interest until repayment or charge-off.  When a charge-off occurs, accrued interest is written off by reversing interest income. Direct costs associated with loan originations are not considered material, and thus, are expensed as incurred.  See Note 3 for additional information on CAF income.
Page 12


Auto Loans Receivable, Net
 As of August 31As of February 29
(In millions)20242024
Asset-backed term funding$12,801.5 $12,638.2 
Warehouse facilities3,743.6 3,744.6 
Overcollateralization (1)
775.9 790.9 
Other managed receivables (2)
448.4 218.1 
Total ending managed receivables17,769.4 17,391.8 
Accrued interest and fees103.6 90.9 
Other41.4 11.9 
Less: allowance for loan losses(500.8)(482.8)
Auto loans receivable, net$17,413.6 $17,011.8 

(1)    Represents receivables restricted as excess collateral for the non-recourse funding vehicles.
(2)    Other managed receivables includes receivables not funded through the non-recourse funding vehicles.

Credit Quality.  When customers apply for financing, CAF’s proprietary scoring models utilize the customers’ credit history and certain application information to evaluate and rank their risk.  We obtain credit histories and other credit data that includes information such as number, age, type of and payment history for prior or existing credit accounts.  The application information that is used includes income, collateral value and down payment.  The scoring models yield credit grades that represent the relative likelihood of repayment.  Customers with the highest probability of repayment are A-grade customers. Customers assigned a lower grade are determined to have a lower probability of repayment.  For loans that are approved, the credit grade influences the terms of the agreement, such as the required loan-to-value ratio and interest rate. After origination, credit grades are generally not updated.
CAF uses a combination of the initial credit grades and historical performance to monitor the credit quality of the auto loans receivable on an ongoing basis.  We validate the accuracy of the scoring models periodically.  Loan performance is reviewed on a recurring basis to identify whether the assigned grades adequately reflect the customers’ likelihood of repayment.
Ending Managed Receivables by Major Credit Grade
As of August 31, 2024
Fiscal Year of Origination (1)
(In millions)20252024202320222021Prior to 2021Total
% (2)
Core managed receivables (3):
A$2,432.5 $3,204.6 $2,137.6 $1,237.3 $410.1 $139.3 $9,561.4 53.8 
B1,194.6 1,987.3 1,432.4 968.0 358.6 155.7 6,096.6 34.3 
C and other252.0 330.0 404.1 314.3 141.6 66.8 1,508.8 8.5 
Total core managed receivables3,879.1 5,521.9 3,974.1 2,519.6 910.3 361.8 17,166.8 96.6 
Other managed receivables (4):
C and other167.8 214.0 144.2 58.3 7.1 11.2 602.6 3.4 
Total ending managed receivables$4,046.9 $5,735.9 $4,118.3 $2,577.9 $917.4 $373.0 $17,769.4 100.0 
Gross charge-offs$3.9 $97.7 $106.5 $59.6 $16.9 $12.3 $296.9 

Page 13


As of February 29, 2024
Fiscal Year of Origination (1)
(In millions)20242023202220212020Prior to 2020Total
% (2)
Core managed receivables (3):
A$3,922.7 $2,660.6 $1,635.1 $614.0 $268.7 $40.0 $9,141.1 52.6 
B2,370.8 1,738.8 1,225.9 493.3 233.4 61.3 6,123.5 35.2 
C and other344.1 498.6 400.3 192.2 86.6 26.9 1,548.7 8.9 
Total core managed receivables6,637.6 4,898.0 3,261.3 1,299.5 588.7 128.2 16,813.3 96.7 
Other managed receivables (4):
C and other299.0 176.3 72.6 9.3 12.1 9.2 578.5 3.3 
Total ending managed receivables$6,936.6 $5,074.3 $3,333.9 $1,308.8 $600.8 $137.4 $17,391.8 100.0 
Gross charge-offs$111.0 $248.6 $129.8 $41.0 $19.7 $11.4 $561.5 

(1)    Classified based on credit grade assigned when customers were initially approved for financing.
(2)    Percent of total ending managed receivables.
(3)    Represents CAF’s Tier 1 originations.
(4)    Represents CAF’s Tier 2 and Tier 3 originations.

Allowance for Loan Losses.  The allowance for loan losses at August 31, 2024 represents the net credit losses expected over the remaining contractual life of our managed receivables. The allowance for loan losses is determined using a net loss timing curve method (“method”), primarily based on the composition of the portfolio of managed receivables and historical gross loss and recovery trends. Due to the fact that losses for receivables with less than 18 months of performance history can be volatile, our net loss estimate weights both historical losses by credit grade at origination and actual loss data on the receivables to-date, along with forward loss curves, in estimating future performance. Once the receivables have 18 months of performance history, the net loss estimate reflects actual loss experience of those receivables to-date, along with forward loss curves, to predict future performance. The forward loss curves are constructed using historical performance data and show the average timing of losses over the course of a receivable’s life. The net loss estimate is calculated by applying the loss rates developed using the methods described above to the amortized cost basis of the managed receivables at inception of the loan.
The output of the method is adjusted to take into account reasonable and supportable forecasts about the future. Specifically, the change in U.S. unemployment rates and the National Automobile Dealers Association used vehicle price index are used to predict changes in gross loss and recovery rates, respectively. An economic adjustment factor, based upon a single macroeconomic scenario, is developed to capture the relationship between changes in these forecasts and changes in gross loss and recovery rates. This factor is applied to the output of the method for the reasonable and supportable forecast period of two years. After the end of this two-year period, we revert to historical experience on a straight-line basis over a period of 12 months. We periodically consider whether the use of alternative metrics would result in improved model performance and revise the models when appropriate. We also consider whether qualitative adjustments are necessary for factors that are not reflected in the quantitative methods but impact the measurement of estimated credit losses. Such adjustments include the uncertainty of the impacts of recent economic trends on customer behavior. The change in the allowance for loan losses is recognized through an adjustment to the provision for loan losses.
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Allowance for Loan Losses

Three Months Ended August 31, 2024
(In millions)CoreOtherTotal
(1)
Balance as of beginning of period$396.6 $96.5 $493.1 2.79 
Charge-offs(131.1)(32.7)(163.8)
Recoveries (2)
52.1 6.8 58.9 
Provision for loan losses99.7 12.9 112.6 
Balance as of end of period$417.3 $83.5 $500.8 2.82 

Three Months Ended August 31, 2023
(In millions)CoreOtherTotal
% (1)
Balance as of beginning of period$427.5 $107.9 $535.4 3.11 
Charge-offs(118.7)(24.5)(143.2)
Recoveries (2)
48.5 7.5 56.0 
Provision for loan losses75.7 14.1 89.8 
Balance as of end of period$433.0 $105.0 $538.0 3.08 

Six Months Ended August 31, 2024
(In millions)CoreOtherTotal
(1)
Balance as of beginning of period$389.7 $93.1 $482.8 2.78 
Charge-offs(244.1)(52.8)(296.9)
Recoveries (2)
106.0 15.1 121.1 
Provision for loan losses165.7 28.1 193.8 
Balance as of end of period$417.3 $83.5 $500.8 2.82 

Six Months Ended August 31, 2023
(In millions)CoreOtherTotal
(1)
Balance as of beginning of period$401.5 $105.7 $507.2 3.02 
Charge-offs(211.8)(41.2)(253.0)
Recoveries (2)
99.0 14.1 113.1 
Provision for loan losses144.3 26.4 170.7 
Balance as of end of period$433.0 $105.0 $538.0 3.08 

(1)    Percent of total ending managed receivables.
(2)    Net of costs incurred to recover vehicle.
 
During the first six months of fiscal 2025, the allowance for loan losses as a percent of total ending managed receivables increased by 4 basis points. The increase was primarily due to unfavorable loss performance related to CAF’s core receivables as well as CAF’s expanded investment in Tier 2, partially offset by the previously implemented tightened underwriting standards in response to the current environment. The increase in net charge-offs primarily reflects continued customer hardship in the current economic environment. The allowance for loan losses as of August 31, 2024 reflects our best estimate of expected future losses based on recent trends in delinquencies, loss performance, recovery rates and the economic environment.
Past Due Receivables. An account is considered delinquent when the related customer fails to make a substantial portion of a scheduled payment on or before the due date. In general, accounts are charged-off on the last business day of the month during which the earliest of the following occurs: the receivable is 120 days or more delinquent as of the last business day of the month, the related vehicle is repossessed and liquidated, or the receivable is otherwise deemed uncollectable. For purposes of
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determining impairment, auto loans are evaluated collectively, as they represent a large group of smaller-balance homogeneous loans, and therefore, are not individually evaluated for impairment.
Past Due Receivables
As of August 31, 2024
Core ReceivablesOther ReceivablesTotal
(In millions)ABC & OtherTotalC & Other$
% (1)
Current$9,506.6 $5,609.7 $1,204.3 $16,320.6 $465.1 $16,785.7 94.47 
Delinquent loans:
31-60 days past due33.1 279.3 160.2 472.6 68.6 541.2 3.04 
61-90 days past due16.6 170.4 122.0 309.0 58.3 367.3 2.07 
Greater than 90 days past due5.1 37.2 22.3 64.6 10.6 75.2 0.42 
Total past due54.8 486.9 304.5 846.2 137.5 983.7 5.53 
Total ending managed receivables$9,561.4 $6,096.6 $1,508.8 $17,166.8 $602.6 $17,769.4 100.00 

As of February 29, 2024
Core ReceivablesOther ReceivablesTotal
(In millions)ABC & OtherTotalC & Other$
% (1)
Current$9,088.1 $5,666.3 $1,243.7 $15,998.1 $447.1 $16,445.2 94.56 
Delinquent loans:
31-60 days past due32.1 271.3 162.9 466.3 68.1 534.4 3.07 
61-90 days past due15.1 149.4 118.5 283.0 53.0 336.0 1.93 
Greater than 90 days past due5.8 36.5 23.6 65.9 10.3 76.2 0.44 
Total past due53.0 457.2 305.0 815.2 131.4 946.6 5.44 
Total ending managed receivables$9,141.1 $6,123.5 $1,548.7 $16,813.3 $578.5 $17,391.8 100.00 

(1)    Percent of total ending managed receivables. 

5. Derivative Instruments and Hedging Activities
We use derivatives to manage certain risks arising from both our business operations and economic conditions, particularly with regard to issuances of debt.  Primary exposures include SOFR and other rates used as benchmarks in our securitizations and other debt financing.  We enter into derivative instruments to manage exposures related to the future known receipt or payment of uncertain cash amounts, the values of which are impacted by interest rates, and generally designate these derivative instruments as cash flow hedges for accounting purposes.  In certain cases, we may choose not to designate a derivative instrument as a cash flow hedge for accounting purposes due to uncertainty around the probability that future hedged transactions will occur. Our derivative instruments are used to manage (i) differences in the amount of our known or expected cash receipts and our known or expected cash payments principally related to the funding of our auto loans receivable, and (ii) exposure to variable interest rates associated with our term loans.
For the derivatives associated with our non-recourse funding vehicles that are designated as cash flow hedges, the changes in fair value are initially recorded in accumulated other comprehensive income (“AOCI”).  For the majority of these derivatives, the amounts are subsequently reclassified into CAF income in the period that the hedged forecasted transaction affects earnings, which occurs as interest expense is recognized on those future issuances of debt. During the next 12 months, we estimate that an additional $35.0 million will be reclassified from AOCI as an increase to CAF income. Changes in fair value related to derivatives that have not been designated as cash flow hedges for accounting purposes are recognized in the income statement in the period in which the change occurs. For the three and six months ended August 31, 2024, we recognized expense of $4.6 million and $7.7 million, respectively, in CAF income representing these changes in fair value.
As of August 31, 2024 and February 29, 2024, we had interest rate swaps outstanding with a combined notional amount of $5.12 billion and $5.21 billion, respectively, that were designated as cash flow hedges of interest rate risk. As of August 31,
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2024 and February 29, 2024, we had interest rate swaps with a combined notional amount of $386.1 million and $704.0 million, respectively, outstanding that were not designated as cash flow hedges for accounting purposes.
See Note 6 for discussion of fair values of financial instruments and Note 12 for the effect on comprehensive income.
6. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market or, if none exists, the most advantageous market, for the specific asset or liability at the measurement date (referred to as the “exit price”).  The fair value should be based on assumptions that market participants would use, including a consideration of nonperformance risk. 
We assess the inputs used to measure fair value using the three-tier hierarchy.  The hierarchy indicates the extent to which inputs used in measuring fair value are observable in the market. 
Level 1     Inputs include unadjusted quoted prices in active markets for identical assets or liabilities that we can access at the measurement date.
 
Level 2     Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets in active markets, quoted prices from identical or similar assets in inactive markets, observable inputs, such as interest rates and yield curves, and assumptions about risk.
 
Level 3     Inputs that are significant to the measurement that are not observable in the market and include management’s judgments about the assumptions market participants would use in pricing the asset or liability (including assumptions about risk).

Our fair value processes include controls that are designed to ensure that fair values are appropriate.  Such controls include model validation, review of key model inputs, analysis of period-over-period fluctuations and reviews by senior management.
Valuation Methodologies 
Money Market Securities.  Money market securities are cash equivalents, which are included in cash and cash equivalents, restricted cash from collections on auto loans receivable and other assets.  They consist of highly liquid investments with original maturities of three months or less and are classified as Level 1. 
Mutual Fund Investments.  Mutual fund investments consist of publicly traded mutual funds that primarily include diversified equity investments in large-, mid- and small-cap domestic and international companies or investment grade debt securities.  The investments, which are included in other assets, are held in a rabbi trust established to fund informally our executive deferred compensation plan and are classified as Level 1.
Derivative Instruments.  The fair values of our derivative instruments are included in either other current assets, other assets, accounts payable or other liabilities.  Our derivatives are not exchange-traded and are over-the-counter customized derivative instruments.  All of our derivative exposures are with highly rated bank counterparties.
We measure derivative fair values assuming that the unit of account is an individual derivative instrument and that derivatives are sold or transferred on a stand-alone basis.  We estimate the fair value of our derivatives using quotes determined by the derivative counterparties and third-party valuation services.  Quotes from third-party valuation services and quotes received from bank counterparties project future cash flows and discount the future amounts to a present value using market-based expectations for interest rates and the contractual terms of the derivative instruments.  The models do not require significant judgment and model inputs can typically be observed in a liquid market; however, because the models include inputs other than quoted prices in active markets, all derivatives are classified as Level 2. 
Our derivative fair value measurements consider assumptions about counterparty and our own nonperformance risk.  We monitor counterparty and our own nonperformance risk and, in the event that we determine that a party is unlikely to perform under terms of the contract, we would adjust the derivative fair value to reflect the nonperformance risk.
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Items Measured at Fair Value on a Recurring Basis
 As of August 31, 2024
(In thousands)Level 1Level 2Total
Assets:   
Money market securities$1,166,588 $ $1,166,588 
Mutual fund investments28,185  28,185 
Derivative instruments designated as hedges 16,100 16,100 
Derivative instruments not designated as hedges 5,351 5,351 
Total assets at fair value$1,194,773 $21,451 $1,216,224 
Percent of total assets at fair value98.2  %1.8 %100.0 %
Percent of total assets4.4  %0.1 %4.5 %
Liabilities:   
Derivative instruments designated as hedges$ $(23,868)$(23,868)
Total liabilities at fair value$ $(23,868)$