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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, 2023
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 January 3, 2024
Common Stock, par value $0.50 157,921,209
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, 2023 and 2022
    
  Consolidated Statements of Comprehensive Income (Unaudited) – 
  Three and Nine Months Ended November 30, 2023 and 2022
    
  Consolidated Balance Sheets (Unaudited) – 
  November 30, 2023 and February 28, 2023
    
  Consolidated Statements of Cash Flows (Unaudited) – 
  Nine Months Ended November 30, 2023 and 2022
    
Consolidated Statements of Shareholders’ Equity (Unaudited) –
Three and Nine Months Ended November 30, 2023 and 2022
  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 November 30Nine Months Ended November 30
(In thousands except per share data)2023
%(1)
2022
%(1)
2023
%(1)
2022
%(1)
SALES AND OPERATING REVENUES:    
Used vehicle sales$4,832,077 78.6 $5,204,584 80.0 $16,424,691 78.6 $18,503,159 77.2 
Wholesale vehicle sales1,165,204 19.0 1,152,207 17.7 4,001,542 19.1 4,959,050 20.7 
Other sales and revenues151,257 2.5 149,165 2.3 483,204 2.3 500,171 2.1 
NET SALES AND OPERATING REVENUES6,148,538 100.0 6,505,956 100.0 20,909,437 100.0 23,962,380 100.0 
COST OF SALES:
Used vehicle cost of sales4,434,165 72.1 4,801,790 73.8 15,060,045 72.0 17,041,898 71.1 
Wholesale vehicle cost of sales1,042,303 17.0 1,037,534 15.9 3,574,200 17.1 4,512,053 18.8 
Other cost of sales59,207 1.0 89,944 1.4 148,174 0.7 219,205 0.9 
TOTAL COST OF SALES5,535,675 90.0 5,929,268 91.1 18,782,419 89.8 21,773,156 90.9 
GROSS PROFIT 612,863 10.0 576,688 8.9 2,127,018 10.2 2,189,224 9.1 
CARMAX AUTO FINANCE INCOME 148,659 2.4 152,196 2.3 421,004 2.0 539,538 2.3 
Selling, general and administrative expenses559,962 9.1 591,727 9.1 1,705,493 8.2 1,914,508 8.0 
Depreciation and amortization60,623 1.0 57,377 0.9 177,859 0.9 170,717 0.7 
Interest expense31,265 0.5 30,150 0.5 93,316 0.4 91,670 0.4 
Other income(886) (363) (4,730) (2,303) 
Earnings before income taxes110,558 1.8 49,993 0.8 576,084 2.8 554,170 2.3 
Income tax provision28,555 0.5 12,413 0.2 147,148 0.7 138,420 0.6 
NET EARNINGS $82,003 1.3 $37,580 0.6 $428,936 2.1 $415,750 1.7 
WEIGHTED AVERAGE COMMON SHARES:    
Basic158,446 158,003 158,347  159,044  
Diluted158,799 158,536 158,866  160,195  
NET EARNINGS PER SHARE:    
Basic$0.52 $0.24 $2.71  $2.61  
Diluted$0.52 $0.24 $2.70  $2.60  
 
(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)2023202220232022
NET EARNINGS$82,003 $37,580 $428,936 $415,750 
Other comprehensive (loss) income, net of taxes:   
Net change in retirement benefit plan unrecognized actuarial losses98 482 294 1,444 
Net change in cash flow hedge unrecognized gains(18,028)24,939 (37,496)102,398 
Other comprehensive (loss) income, net of taxes(17,930)25,421 (37,202)103,842 
TOTAL COMPREHENSIVE INCOME$64,073 $63,001 $391,734 $519,592 
 
  
 





































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)20232023
ASSETS  
CURRENT ASSETS:  
Cash and cash equivalents$605,375 $314,758 
Restricted cash from collections on auto loans receivable483,570 470,889 
Accounts receivable, net212,406 298,783 
Inventory3,638,946 3,726,142 
Other current assets169,653 230,795 
TOTAL CURRENT ASSETS 5,109,950 5,041,367 
Auto loans receivable, net of allowance for loan losses of $511,924 and $507,201 as of November 30, 2023 and February 28, 2023, respectively17,081,891 16,341,791 
Property and equipment, net of accumulated depreciation of $1,782,087 and $1,614,924 as of November 30, 2023 and February 28, 2023, respectively3,623,697 3,430,914 
Deferred income taxes121,219 80,740 
Operating lease assets533,387 545,677 
Goodwill141,258 141,258 
Other assets561,848 600,989 
TOTAL ASSETS $27,173,250 $26,182,736 
LIABILITIES AND SHAREHOLDERS’ EQUITY  
CURRENT LIABILITIES:  
Accounts payable$762,594 $826,592 
Accrued expenses and other current liabilities494,365 478,964 
Accrued income taxes10,581  
Current portion of operating lease liabilities56,410 53,287 
Current portion of long-term debt312,744 111,859 
Current portion of non-recourse notes payable446,544 467,609 
TOTAL CURRENT LIABILITIES 2,083,238 1,938,311 
Long-term debt, excluding current portion1,605,638 1,909,361 
Non-recourse notes payable, excluding current portion16,558,053 15,865,776 
Operating lease liabilities, excluding current portion509,141 523,828 
Other liabilities372,815 332,383 
TOTAL LIABILITIES 21,128,885 20,569,659 
Commitments and contingent liabilities
SHAREHOLDERS’ EQUITY:
Common stock, $0.50 par value; 350,000,000 shares authorized; 158,021,407 and 158,079,033 shares issued and outstanding as of November 30, 2023 and February 28, 2023, respectively79,011 79,040 
Capital in excess of par value1,786,924 1,713,074 
Accumulated other comprehensive income60,667 97,869 
Retained earnings4,117,763 3,723,094 
TOTAL SHAREHOLDERS’ EQUITY 6,044,365 5,613,077 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $27,173,250 $26,182,736 

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)20232022
OPERATING ACTIVITIES:  
Net earnings$428,936 $415,750 
Adjustments to reconcile net earnings to net cash provided by operating activities:  
Depreciation and amortization193,528 202,655 
Share-based compensation expense90,479 64,974 
Provision for loan losses238,952 218,967 
Provision for cancellation reserves62,587 79,924 
Deferred income tax benefit(28,290)(2,178)
Other8,534 8,879 
Net decrease (increase) in:  
Accounts receivable, net86,377 314,190 
Inventory87,196 1,709,632 
Other current assets91,793 149,777 
Auto loans receivable, net(979,052)(1,170,098)
Other assets(8,775)(43,502)
Net decrease in:  
Accounts payable, accrued expenses and other  
  current liabilities and accrued income taxes(60,365)(195,154)
Other liabilities(62,921)(91,739)
NET CASH PROVIDED BY OPERATING ACTIVITIES148,979 1,662,077 
INVESTING ACTIVITIES:  
Capital expenditures(355,442)(319,486)
Proceeds from disposal of property and equipment1,299 3,806 
Purchases of investments(4,641)(6,460)
Sales and returns of investments1,562 3,486 
NET CASH USED IN INVESTING ACTIVITIES(357,222)(318,654)
FINANCING ACTIVITIES:  
Proceeds from issuances of long-term debt134,600 2,863,500 
Payments on long-term debt(242,989)(4,116,775)
Cash paid for debt issuance costs(15,576)(13,987)
Payments on finance lease obligations(12,177)(10,056)
Issuances of non-recourse notes payable9,099,929 11,351,696 
Payments on non-recourse notes payable(8,430,615)(10,581,076)
Repurchase and retirement of common stock(44,287)(333,814)
Equity issuances28,430 13,504 
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES517,315 (827,008)
Increase in cash, cash equivalents, and restricted cash309,072 516,415 
Cash, cash equivalents, and restricted cash at beginning of year951,004 803,618 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD$1,260,076 $1,320,033 
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS:
Cash and cash equivalents$605,375 $688,618 
Restricted cash from collections on auto loans receivable483,570 466,525 
Restricted cash included in other assets171,131 164,890 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD$1,260,076 $1,320,033 






See accompanying notes to consolidated financial statements.
Page 6


CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
(Unaudited)
Nine Months Ended November 30, 2023
     Accumulated 
 Common Capital in Other 
 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 
Net earnings— — — 82,003 — 82,003 
Other comprehensive loss— — — — (17,930)(17,930)
Share-based compensation expense— — 15,728 — — 15,728 
Repurchases of common stock(649)(324)(7,312)(34,267)— (41,903)
Exercise of common stock options12 6 890 — — 896 
Stock incentive plans, net shares issued2 1 (89)— — (88)
Balance as of November 30, 2023158,021 $79,011 $1,786,924 $4,117,763 $60,667 $6,044,365 



























See accompanying notes to consolidated financial statements.
Page 7


CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
(Unaudited)
Nine Months Ended November 30, 2022
     Accumulated 
 Common Capital in Other 
 SharesCommonExcess ofRetainedComprehensive 
(In thousands)OutstandingStockPar ValueEarningsIncome (Loss)Total
Balance as of February 28, 2022161,054 $80,527 $1,677,268 $3,524,066 $(46,422)$5,235,439 
Net earnings— — — 252,265 — 252,265 
Other comprehensive income— — — — 52,314 52,314 
Share-based compensation expense— — 21,594 — — 21,594 
Repurchases of common stock(1,644)(822)(17,207)(139,565)— (157,594)
Exercise of common stock options49 24 3,418 — — 3,442 
Stock incentive plans, net shares issued155 78 (6,901)— — (6,823)
Balance as of May 31, 2022159,614 $79,807 $1,678,172 $3,636,766 $5,892 $5,400,637 
Net earnings— — — 125,905 — 125,905 
Other comprehensive income— — — — 26,107 26,107 
Share-based compensation expense— — 15,062 — — 15,062 
Repurchases of common stock(1,730)(865)(18,279)(143,873)— (163,017)
Exercise of common stock options155 78 9,762 — — 9,840 
Stock incentive plans, net shares issued5 2 (309)— — (307)
Balance as of August 31, 2022158,044 $79,022 $1,684,408 $3,618,798 $31,999 $5,414,227 
Net earnings— — — 37,580 — 37,580 
Other comprehensive income— — — — 25,421 25,421 
Share-based compensation expense— — 12,797 — — 12,797 
Repurchases of common stock(30)(15)(320)(2,297)— (2,632)
Exercise of common stock options4 2 218 — — 220 
Stock incentive plans, net shares issued1 1 (41)— — (40)
Balance as of November 30, 2022158,019 $79,010 $1,697,062 $3,654,081 $57,420 $5,487,573 




























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”), which does not meet the quantitative thresholds to be considered a reportable segment. See Note 16 for additional information on our reportable segments.

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; 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 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 28, 2023 (the “2023 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 2023 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.

Recent Accounting Pronouncements.
Effective in Future Periods
In October 2023, the Financial Accounting Standards Board (FASB) issued an accounting pronouncement (ASU 2023-06) related to disclosure or presentation requirements for various subtopics in the FASB’s Accounting Standards Codification (“Codification”). The amendments in the update are intended to align the requirements in the Codification with the U.S. Securities and Exchange Commission's (“SEC”) regulations and facilitate the application of GAAP for all entities. The effective date for each amendment is the date on which the SEC removal of the related disclosure requirement from Regulation S-X or Regulation S-K becomes effective, or if the SEC has not removed the requirements by June 30, 2027, this amendment will be removed from the Codification and will not become effective for any entity. Early adoption is prohibited. We do not expect this update to have a material impact on our consolidated financial statements.

In November 2023, the FASB issued an accounting pronouncement (ASU 2023-07) related to the disclosure of incremental segment information on an annual and interim basis. This update is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and requires retrospective application to all prior periods presented in the financial statements. We plan to adopt this pronouncement beginning with our fiscal year ended February 28, 2025, and we do not expect it to have a material effect on our consolidated financial statements.
Page 9


In December 2023, the FASB issued an accounting pronouncement (ASU 2023-09) related to income tax disclosures. The amendments in this update are intended to enhance the transparency and decision usefulness of income tax disclosures primarily through changes to the rate reconciliation and income taxes paid information. This update is effective for annual periods beginning after December 15, 2024, though early adoption is permitted. We plan to adopt this pronouncement for our fiscal year beginning March 1, 2025, and we do not expect it to have a material effect on our consolidated financial statements.

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 November 30Nine Months Ended November 30
(In millions)2023202220232022
Used vehicle sales$4,832.1 $5,204.6 $16,424.7 $18,503.2 
Wholesale vehicle sales1,165.2 1,152.2 4,001.5 4,959.1 
Other sales and revenues:
Extended protection plan revenues90.8 91.8 303.8 318.1 
Third-party finance (fees)/income, net(1.2)1.0 (2.4)7.1 
Advertising & subscription revenues (1)
36.7 33.3 101.6 101.9 
Service revenues20.3 19.6 63.8 60.8 
Other4.7 3.5 16.4 12.3 
Total other sales and revenues151.3 149.2 483.2 500.2 
Total net sales and operating revenues$6,148.5 $6,506.0 $20,909.4 $23,962.4 

(1)     Excludes intersegment sales and operating revenues that have been eliminated in consolidation. See Note 16 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 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
Page 10


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 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 November 30, 2023 and February 28, 2023, 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 (Fees)/Income. 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 November 30Nine Months Ended November 30
(In millions)2023
(1)
2022
(1)
2023
(1)
2022
(1)
Interest margin:
Interest and fee income$426.9 9.8 $365.4 8.8 $1,244.3 9.6 $1,069.3 8.8 
Interest expense(170.2)(3.9)(88.8)(2.1)(464.8)(3.6)(200.1)(1.6)
Total interest margin256.7 5.9 276.6 6.7 779.5 6.0 869.2 7.2 
Provision for loan losses(68.3)(1.6)(85.7)(2.1)(239.0)(1.8)(219.0)(1.8)
Total interest margin after provision for loan losses188.4 4.3 190.9 4.6 540.5 4.2 650.2 5.4 
Direct expenses:
Payroll and fringe benefit expense(16.2)(0.4)(16.1)(0.4)(49.6)(0.4)(46.7)(0.4)
Depreciation and amortization(4.1)(0.1)(4.0)(0.1)(12.3)(0.1)(11.6)(0.1)
Other direct expenses(19.4)(0.4)(18.7)(0.5)(57.6)(0.4)(52.4)(0.4)
Total direct expenses(39.7)(0.9)(38.8)(0.9)(119.5)(0.9)(110.7)(0.9)
CarMax Auto Finance income$148.7 3.4 $152.2 3.7 $421.0 3.2 $539.5 4.4 
Total average managed receivables$17,508.9 $16,540.2 $17,276.0 $16,177.8 

(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 $17.03 billion as of November 30, 2023, and $16.36 billion as of February 28, 2023. 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.

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Auto Loans Receivable, Net
 As of November 30As of February 28
(In millions)20232023
Asset-backed term funding$12,053.2 $12,242.8 
Warehouse facilities4,529.6 3,649.9 
Overcollateralization (1)
783.4 739.9 
Other managed receivables (2)
138.9 135.3 
Total ending managed receivables17,505.1 16,767.9 
Accrued interest and fees97.9 78.0 
Other(9.2)3.1 
Less: allowance for loan losses(511.9)(507.2)
Auto loans receivable, net$17,081.9 $16,341.8 

(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 November 30, 2023
Fiscal Year of Origination (1)
(In millions)20242023202220212020Prior to 2020Total
% (2)
Core managed receivables (3):
A$3,217.4 $2,922.2 $1,842.0 $725.5 $355.1 $69.4 $9,131.6 52.2 
B1,980.5 1,899.8 1,359.4 564.5 289.1 95.0 6,188.3 35.4 
C and other281.6 552.1 447.9 219.6 104.8 38.3 1,644.3 9.3 
Total core managed receivables5,479.5 5,374.1 3,649.3 1,509.6 749.0 202.7 16,964.2 96.9 
Other managed receivables (4):
C and other225.0 197.6 80.7 10.5 14.2 12.9 540.9 3.1 
Total ending managed receivables$5,704.5 $5,571.7 $3,730.0 $1,520.1 $763.2 $215.6 $17,505.1 100.0 
Gross charge-offs$26.1 $188.8 $120.2 $36.9 $18.3 $11.4 $401.7 

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As of February 28, 2023
Fiscal Year of Origination (1)
(In millions)20232022202120202019Prior to 2019Total
% (2)
Core managed receivables (3):
A$3,890.9 $2,555.3 $1,112.0 $677.1 $218.3 $36.3 $8,489.9 50.6 
B2,497.5 1,839.9 816.2 488.9 215.1 56.0 5,913.6 35.3 
C and other732.7 609.5 314.5 169.3 74.1 25.6 1,925.7 11.5 
Total core managed receivables7,121.1 5,004.7 2,242.7 1,335.3 507.5 117.9 16,329.2 97.4 
Other managed receivables (4):
C and other272.0 112.5 15.0 21.1 13.2 4.9 438.7 2.6 
Total ending managed receivables$7,393.1 $5,117.2 $2,257.7 $1,356.4 $520.7 $122.8 $16,767.9 100.0 

(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 November 30, 2023 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, 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 net loss timing curve 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 net loss timing curve 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 November 30, 2023
(In millions)CoreOtherTotal
(1)
Balance as of beginning of period$433.0 $105.0 $538.0 3.08 
Charge-offs(125.1)(23.6)(148.7)
Recoveries (2)
47.2 7.1 54.3 
Provision for loan losses57.3 11.0 68.3 
Balance as of end of period$412.4 $99.5 $511.9 2.92 

Three Months Ended November 30, 2022
(In millions)CoreOtherTotal
% (1)
Balance as of beginning of period$396.1 $81.4 $477.5 2.92 
Charge-offs(96.3)(16.3)(112.6)
Recoveries (2)
35.7 4.7 40.4 
Provision for loan losses60.9 24.8 85.7 
Balance as of end of period$396.4 $94.6 $491.0 2.95 

Nine Months Ended November 30, 2023
(In millions)CoreOtherTotal
% (1)
Balance as of beginning of period$401.5 $105.7 $507.2 3.02 
Charge-offs(336.9)(64.8)(401.7)
Recoveries (2)
146.2 21.2 167.4 
Provision for loan losses201.6 37.4 239.0 
Balance as of end of period$412.4 $99.5 $511.9 2.92 

Nine Months Ended November 30, 2022
(In millions)CoreOtherTotal
% (1)
Balance as of beginning of period$377.5 $55.5 $433.0 2.77 
Charge-offs(241.9)(35.0)(276.9)
Recoveries (2)
104.7 11.2 115.9 
Provision for loan losses156.1 62.9 219.0 
Balance as of end of period$396.4 $94.6 $491.0 2.95 

(1)     Percent of total ending managed receivables.
(2)     Net of costs incurred to recover vehicle.
 
During the first nine months of fiscal 2024, the allowance for loan losses as a percent of total ending managed receivables decreased by 10 basis points. The decrease was primarily driven by the impact of our tightened underwriting standards in response to the current environment, partially offset by unfavorable loss performance as well as our continued investment in the Tier 2 business. The increase in net charge-offs primarily reflects continued customer hardship in the current economic environment. The allowance for loan losses as of November 30, 2023 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 uncollectible. 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 November 30, 2023
Core ReceivablesOther ReceivablesTotal
(In millions)ABC & OtherTotalC & Other$
% (1)
Current$9,079.3 $5,715.6 $1,294.5 $16,089.4 $398.3 $16,487.7 94.19 
Delinquent loans:
31-60 days past due31.6 270.6 178.1 480.3 68.1 548.4 3.13 
61-90 days past due15.5 165.0 144.2 324.7 62.3 387.0 2.21 
Greater than 90 days past due5.2 37.1 27.5 69.8 12.2 82.0 0.47 
Total past due52.3 472.7 349.8 874.8 142.6 1,017.4 5.81 
Total ending managed receivables$9,131.6 $6,188.3 $1,644.3 $16,964.2 $540.9 $17,505.1 100.00 

As of February 28, 2023
Core ReceivablesOther ReceivablesTotal
(In millions)ABC & OtherTotalC & Other$