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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, 2022
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 filer Accelerated filer
Non-accelerated filer Smaller 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 4, 2023
Common Stock, par value $0.50   158,023,499
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, 2022 and 2021
3
       
    Consolidated Statements of Comprehensive Income (Unaudited) –  
    Three and Nine Months Ended November 30, 2022 and 2021
4
       
    Consolidated Balance Sheets (Unaudited) –  
    November 30, 2022 and February 28, 2022
5
       
    Consolidated Statements of Cash Flows (Unaudited) –  
    Nine Months Ended November 30, 2022 and 2021
6
       
Consolidated Statements of Shareholders’ Equity (Unaudited) –
Three and Nine Months Ended November 30, 2022 and 2021
7
    Notes to Consolidated Financial Statements (Unaudited)
9
Item 2. Management’s Discussion and Analysis of Financial Condition and
  Results of Operations
 31
  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 30 Nine Months Ended November 30
(In thousands except per share data) 2022
%(1)
2021
%(1)
2022
%(1)
2021
%(1)
SALES AND OPERATING REVENUES:        
Used vehicle sales $ 5,204,584  80.0  $ 6,435,590  75.5  $ 18,503,159  77.2  $ 18,697,300  77.2 
Wholesale vehicle sales 1,152,207  17.7  1,922,283  22.5  4,959,050  20.7  4,998,212  20.6 
Other sales and revenues 149,165  2.3  169,886  2.0  500,171  2.1  518,205  2.1 
NET SALES AND OPERATING REVENUES 6,505,956  100.0  8,527,759  100.0  23,962,380  100.0  24,213,717  100.0 
COST OF SALES:
Used vehicle cost of sales 4,801,790  73.8  5,927,237  69.5  17,041,898  71.1  17,085,416  70.6 
Wholesale vehicle cost of sales 1,037,534  15.9  1,710,103  20.1  4,512,053  18.8  4,411,175  18.2 
Other cost of sales 89,944  1.4  53,859  0.6  219,205  0.9  140,573  0.6 
TOTAL COST OF SALES 5,929,268  91.1  7,691,199  90.2  21,773,156  90.9  21,637,164  89.4 
GROSS PROFIT  576,688  8.9  836,560  9.8  2,189,224  9.1  2,576,553  10.6 
CARMAX AUTO FINANCE INCOME  152,196  2.3  165,968  1.9  539,538  2.3  607,732  2.5 
Selling, general and administrative expenses 591,727  9.1  575,930  6.8  1,914,508  8.0  1,704,285  7.0 
Depreciation and amortization 57,377  0.9  54,428  0.6  170,717  0.7  157,107  0.6 
Interest expense 30,150  0.5  24,303  0.3  91,670  0.4  67,247  0.3 
Other income (363)   (8,094) (0.1) (2,303)   (35,453) (0.1)
Earnings before income taxes 49,993  0.8  355,961  4.2  554,170  2.3  1,291,099  5.3 
Income tax provision 12,413  0.2  86,523  1.0  138,420  0.6  299,638  1.2 
NET EARNINGS  $ 37,580  0.6  $ 269,438  3.2  $ 415,750  1.7  $ 991,461  4.1 
WEIGHTED AVERAGE COMMON SHARES:        
Basic 158,003  162,006  159,044    162,710   
Diluted 158,536  164,873  160,195    165,606   
NET EARNINGS PER SHARE:        
Basic $ 0.24  $ 1.66  $ 2.61    $ 6.09   
Diluted $ 0.24  $ 1.63  $ 2.60    $ 5.99   
 
(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 30 Nine Months Ended November 30
(In thousands) 2022 2021 2022 2021
NET EARNINGS $ 37,580  $ 269,438  $ 415,750  $ 991,461 
Other comprehensive income, net of taxes:      
Net change in retirement benefit plan unrecognized actuarial losses 482  659  1,444  1,976 
Net change in cash flow hedge unrecognized gains 24,939  11,383  102,398  16,414 
Other comprehensive income, net of taxes 25,421  12,042  103,842  18,390 
TOTAL COMPREHENSIVE INCOME $ 63,001  $ 281,480  $ 519,592  $ 1,009,851 
 
  
 





































See accompanying notes to consolidated financial statements.
Page 4


CARMAX, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
  As of November 30 As of February 28
(In thousands except share data) 2022 2022
ASSETS    
CURRENT ASSETS:    
Cash and cash equivalents $ 688,618  $ 102,716 
Restricted cash from collections on auto loans receivable 466,525  548,099 
Accounts receivable, net 246,794  560,984 
Inventory 3,414,937  5,124,569 
Other current assets 167,143  212,922 
TOTAL CURRENT ASSETS  4,984,017  6,549,290 
Auto loans receivable, net of allowance for loan losses of $491,047 and $433,030 as of November 30, 2022 and February 28, 2022, respectively 16,240,832  15,289,701 
Property and equipment, net of accumulated depreciation of $1,585,271 and $1,437,548 as of November 30, 2022 and February 28, 2022, respectively 3,375,001  3,209,068 
Deferred income taxes 87,262  120,931 
Operating lease assets 529,781  537,357 
Goodwill 141,258  141,258 
Other assets 580,790  490,659 
TOTAL ASSETS  $ 25,938,941  $ 26,338,264 
LIABILITIES AND SHAREHOLDERS’ EQUITY    
CURRENT LIABILITIES:    
Accounts payable $ 802,780  $ 937,717 
Accrued expenses and other current liabilities 496,202  533,271 
Current portion of operating lease liabilities 51,215  44,197 
Current portion of long-term debt 112,708  11,203 
Current portion of non-recourse notes payable 474,147  521,069 
TOTAL CURRENT LIABILITIES  1,937,052  2,047,457 
Long-term debt, excluding current portion 1,903,223  3,255,304 
Non-recourse notes payable, excluding current portion 15,737,459  14,919,715 
Operating lease liabilities, excluding current portion 509,106  523,269 
Other liabilities 364,528  357,080 
TOTAL LIABILITIES  20,451,368  21,102,825 
Commitments and contingent liabilities
SHAREHOLDERS’ EQUITY:
Common stock, $0.50 par value; 350,000,000 shares authorized; 158,019,398 and 161,053,983 shares issued and outstanding as of November 30, 2022 and February 28, 2022, respectively 79,010  80,527 
Capital in excess of par value 1,697,062  1,677,268 
Accumulated other comprehensive income (loss) 57,420  (46,422)
Retained earnings 3,654,081  3,524,066 
TOTAL SHAREHOLDERS’ EQUITY  5,487,573  5,235,439 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $ 25,938,941  $ 26,338,264 


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) 2022 2021
OPERATING ACTIVITIES:    
Net earnings $ 415,750  $ 991,461 
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:    
Depreciation and amortization 202,655  200,819 
Share-based compensation expense 64,974  108,962 
Provision for loan losses 218,967  87,342 
Provision for cancellation reserves 79,924  91,607 
Deferred income tax (benefit) provision (2,178) 19,564 
Other 8,879  (26,808)
Net decrease (increase) in:    
Accounts receivable, net 314,190  (290,346)
Inventory 1,709,632  (1,502,323)
Other current assets 149,777  (13,615)
Auto loans receivable, net (1,170,098) (1,764,693)
Other assets (43,502) (18,309)
Net (decrease) increase in:    
Accounts payable, accrued expenses and other    
  current liabilities and accrued income taxes (195,154) 170,474 
Other liabilities (91,739) (136,780)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,662,077  (2,082,645)
INVESTING ACTIVITIES:    
Capital expenditures (319,486) (226,903)
Proceeds from disposal of property and equipment 3,806  260 
Proceeds from sale of business   12,284 
Purchases of investments (6,460) (13,676)
Sales and returns of investments 3,486  36,915 
Business acquisition, net of cash acquired   (241,563)
NET CASH USED IN INVESTING ACTIVITIES (318,654) (432,683)
FINANCING ACTIVITIES:    
Proceeds from issuances of long-term debt 2,863,500  5,804,200 
Payments on long-term debt (4,116,775) (4,524,973)
Cash paid for debt issuance costs (13,987) (14,473)
Payments on finance lease obligations (10,056) (8,822)
Issuances of non-recourse notes payable 11,351,696  11,217,298 
Payments on non-recourse notes payable (10,581,076) (9,565,649)
Repurchase and retirement of common stock (333,814) (475,950)
Equity issuances 13,504  76,310 
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (827,008) 2,507,941 
Increase (decrease) in cash, cash equivalents, and restricted cash 516,415  (7,387)
Cash, cash equivalents, and restricted cash at beginning of year 803,618  771,947 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD $ 1,320,033  $ 764,560 
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS:
Cash and cash equivalents $ 688,618  $ 62,598 
Restricted cash from collections on auto loans receivable 466,525  552,487 
Restricted cash included in other assets 164,890  149,475 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD $ 1,320,033  $ 764,560 



See accompanying notes to consolidated financial statements.
Page 6


CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
(Unaudited)
Nine Months Ended November 30, 2022
          Accumulated  
  Common   Capital in   Other  
  Shares Common Excess of Retained Comprehensive  
(In thousands) Outstanding Stock Par Value Earnings Income (Loss) Total
Balance as of February 28, 2022 161,054  $ 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 options 49  24  3,418  —  —  3,442 
Stock incentive plans, net shares issued 155  78  (6,901) —  —  (6,823)
Balance as of May 31, 2022 159,614  $ 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 options 155  78  9,762  —  —  9,840 
Stock incentive plans, net shares issued (309) —  —  (307)
Balance as of August 31, 2022 158,044  $ 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 options 218  —  —  220 
Stock incentive plans, net shares issued (41) —  —  (40)
Balance as of November 30, 2022 158,019  $ 79,010  $ 1,697,062  $ 3,654,081  $ 57,420  $ 5,487,573 



























See accompanying notes to consolidated financial statements.
Page 7


CARMAX, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
(Unaudited)
Nine Months Ended November 30, 2021
          Accumulated  
  Common   Capital in   Other  
  Shares Common Excess of Retained Comprehensive  
(In thousands) Outstanding Stock Par Value Earnings Loss Total
Balance as of February 28, 2021 163,172  $ 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 options 375  187  21,403  —  —  21,590 
Stock incentive plans, net shares issued 254  127  (18,102) —  —  (17,975)
Balance as of May 31, 2021 162,803  $ 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 acquisition 776  388  90,183  —  —  90,571 
Repurchases of common stock (1,754) (877) (17,164) (202,004) —  (220,045)
Exercise of common stock options 621  311  38,185  —  —  38,496 
Stock incentive plans, net shares issued 24  12  (130) —  —  (118)
Balance as of August 31, 2021 162,470  $ 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 options 253  126  16,097  —  —  16,223 
Stock incentive plans, net shares issued —  —  (87) —  —  (87)
Balance as of November 30, 2021 161,872  $ 80,936  $ 1,672,728  $ 3,456,433  $ (100,301) $ 5,109,796 


























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 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 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, 2022 (the “2022 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 2022 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 and the resulting adverse impacts to global economic conditions, as well as our operations, 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. 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


Recent Accounting Pronouncements.
Effective in Future Periods
In September 2022, the Financial Accounting Standards Board (“FASB”) issued an accounting pronouncement (ASU 2022-04) related to disclosure requirements for buyers in supplier finance programs. The amendments in the update require that buyers disclose qualitative and quantitative information about their supplier finance programs. Interim and annual requirements include disclosure of outstanding amounts under the obligations as of the end of the reporting period, and annual requirements include a rollforward of those obligations for the annual reporting period, as well as a description of payment and other key terms of the programs. This update is effective for annual periods beginning after December 15, 2022, and interim periods within those fiscal years, except for the requirement to disclose rollforward information, which is effective for fiscal years beginning after December 15, 2023. 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.

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 Original Equipment Manufacturer (“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 relationship 60,200 
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 was included in other income in the consolidated statements of earnings for the second quarter of fiscal 2022.

Page 10


The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition:

(In thousands) Fair Value
Cash $ 9,484 
Accounts receivable, net 33,719 
Other current assets 2,397 
Property and equipment, net 20,741 
Goodwill (1)
141,258 
Intangible assets 218,000 
Operating lease assets 97,250 
Other assets 191 
Total assets acquired 523,040 
Accounts payable 5,063 
Accrued expenses and other current liabilities 11,277 
Current portion of operating lease liabilities 12,795 
Deferred income taxes (1)
3,823 
Operating lease liabilities, excluding current portion 88,264 
Total liabilities assumed 121,222 
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 was primarily attributed to expected synergies and the assembled workforce of the acquired business and was not deductible for tax purposes. The fair values assigned to the net identifiable assets and liabilities assumed were based on management’s estimates and assumptions.

Identifiable intangible assets were recognized at their estimated acquisition date fair values. The fair value of identifiable intangible assets was determined by using certain estimates and assumptions that were not observable in the market. The fair values of the trade name asset and the internally developed software asset were determined using the relief-from-royalty method, and the 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 estimated fair value and estimated remaining useful lives of identifiable intangible assets as of the acquisition date were as follows:

(In thousands) Useful Life (Years) Fair Value
Trade name Indefinite $ 31,900 
Internally developed software 7 52,900 
Customer relationships 17 133,200 
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 were 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 30 Nine Months Ended November 30
(In millions) 2022 2021 2022 2021
Used vehicle sales $ 5,204.6  $ 6,435.6  $ 18,503.2  $ 18,697.3 
Wholesale vehicle sales 1,152.2  1,922.3  4,959.1  4,998.2 
Other sales and revenues:
Extended protection plan revenues 91.8  106.6  318.1  353.8 
Third-party finance income/(fees), net 1.0  1.6  7.1  (0.3)
Advertising & subscription revenues (1)
33.3  33.3  101.9  67.9 
Service revenues 19.6  19.7  60.8  62.9 
Other 3.5  8.7  12.3  33.9 
Total other sales and revenues 149.2  169.9  500.2  518.2 
Total net sales and operating revenues $ 6,506.0  $ 8,527.8  $ 23,962.4  $ 24,213.7 

(1)     Excludes intersegment sales and operating 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
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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, 2022 and February 28, 2022, 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 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 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 30 Nine Months Ended November 30
(In millions) 2022
(1)
2021
(1)
2022
(1)
2021
(1)
Interest margin:    
Interest and fee income $ 365.4  8.8  $ 330.0  8.6  $ 1,069.3  8.8  $ 964.4  8.7 
Interest expense (88.8) (2.1) (53.6) (1.4) (200.1) (1.6) (180.0) (1.6)
Total interest margin 276.6  6.7  276.4  7.2  869.2  7.2  784.4  7.1 
Provision for loan losses (85.7) (2.1) (76.2) (2.0) (219.0) (1.8) (87.3) (0.8)
Total interest margin after provision for loan losses 190.9  4.6  200.2  5.2  650.2  5.4  697.1  6.3 
Direct expenses:    
Payroll and fringe benefit expense (16.1) (0.4) (12.7) (0.3) (46.7) (0.4) (37.7) (0.3)
Depreciation and amortization (4.0) (0.1) (2.4) (0.1) (11.6) (0.1) (2.8) — 
Other direct expenses (18.7) (0.5) (19.2) (0.5) (52.4) (0.4) (48.9) (0.4)
Total direct expenses (38.8) (0.9) (34.3) (0.9) (110.7) (0.9) (89.4) (0.8)
CarMax Auto Finance income $ 152.2  3.7  $ 166.0  4.3  $ 539.5  4.4  $ 607.7  5.5 
Total average managed receivables $ 16,540.2  $ 15,288.8  $ 16,177.8  $ 14,706.9   

(1)     Annualized percentage of total average managed receivables.     

5. 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 $16.24 billion as of November 30, 2022, and $15.47 billion as of February 28, 2022. See Note 10 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 4 for additional information on CAF income.

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Auto Loans Receivable, Net
  As of November 30 As of February 28
(In millions) 2022 2022
Asset-backed term funding $ 12,342.0  $ 11,653.8 
Warehouse facilities 3,420.9  3,291.9 
Overcollateralization (1)
688.1  489.1 
Other managed receivables (2)
201.7  217.5 
Total ending managed receivables 16,652.7  15,652.3 
Accrued interest and fees 83.3  67.3 
Other (4.2) 3.1 
Less: allowance for loan losses (491.0) (433.0)
Auto loans receivable, net $ 16,240.8  $ 15,289.7 

(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, 2022
Fiscal Year of Origination (1)
(In millions) 2023 2022 2021 2020 2019 Prior to 2019 Total
% (2)
Core managed receivables (3):
A $ 3,154.3  $ 2,815.6  $ 1,252.9  $ 800.6  $ 290.0  $ 63.4  $ 8,376.8  50.3 
B 2,079.9  2,020.1  907.2  564.1  268.0  87.4  5,926.7  35.6 
C and other 595.5  667.8  350.1  194.4  90.7  38.3  1,936.8  11.6 
Total core managed receivables 5,829.7  5,503.5  2,510.2  1,559.1  648.7  189.1  16,240.3  97.5 
Other managed receivables (4):
C and other 222.4  127.2  16.9  23.8  15.5  6.6  412.4  2.5 
Total ending managed receivables $ 6,052.1  $ 5,630.7  $ 2,527.1  $ 1,582.9  $ 664.2  $ 195.7  $ 16,652.7  100.0 

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As of February 28, 2022
Fiscal Year of Origination (1)
(In millions) 2022 2021 2020 2019 2018 Prior to 2018 Total
% (2)
Core managed receivables (3):
A $ 3,885.5  $ 1,788.3  $ 1,266.1  $ 574.1  $ 203.4  $ 32.3  $ 7,749.7  49.5 
B 2,795.2  1,288.5  857.7  473.1  205.2  50.4  5,670.1  36.2 
C and other 919.1  496.2  294.8  156.7  73.8  29.6  1,970.2  12.6 
Total core managed receivables 7,599.8  3,573.0  2,418.6  1,203.9  482.4  112.3  15,390.0  98.3 
Other managed receivables (4):
C and other 165.2  23.9  34.7  23.8  10.0  4.7  262.3  1.7 
Total ending managed receivables $ 7,765.0  $ 3,596.9  $ 2,453.3  $ 1,227.7  $ 492.4  $ 117.0  $ 15,652.3  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, 2022 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, 2022
(In millions) Core Other Total
(1)
Balance as of beginning of period $ 396.1  $ 81.4  $ 477.5  2.92 
Charge-offs (96.3) (16.3) (112.6)
Recoveries 35.7  4.7  40.4 
Provision for loan losses 60.9  24.8  85.7 
Balance as of end of period $ 396.4  $ 94.6  $ 491.0  2.95 

Three Months Ended November 30, 2021
(In millions) Core Other Total
% (1)
Balance as of beginning of period $ 360.0  $ 38.1  $ 398.1  2.66 
Charge-offs (61.6) (6.6) (68.2)
Recoveries 18.8  1.6  20.4 
Provision for loan losses 68.5  7.7  76.2 
Balance as of end of period $ 385.7  $ 40.8  $ 426.5  2.75 

Nine Months Ended November 30, 2022
(In millions) Core Other Total
(1)
Balance as of beginning of period $ 377.5  $ 55.5  $ 433.0  2.77 
Charge-offs (241.9) (35.0) (276.9)
Recoveries 104.7  11.2  115.9 
Provision for loan losses 156.1  62.9  219.0 
Balance as of end of period $ 396.4  $ 94.6  $ 491.0  2.95 

Nine Months Ended November 30, 2021
(In millions) Core Other Total
(1)
Balance as of beginning of period $ 379.4  $ 31.7  $ 411.1  2.97 
Charge-offs (140.6) (13.1) (153.7)
Recoveries 76.1  5.7  81.8 
Provision for loan losses 70.8  16.5  87.3 
Balance as of end of period $ 385.7  $ 40.8  $ 426.5  2.75 

(1)     Percent of total ending managed receivables.
(2)     Net of costs incurred to recover vehicle.
 
During the first nine months of fiscal 2023, the allowance for loan losses increased $58.0 million, primarily reflecting growth in receivables. The increase in the allowance as a percent of total ending managed receivables was primarily driven by the previously disclosed expansion of our Tier 2 and Tier 3 originations within CAF's portfolio. While loss performance was unfavorable compared to the prior year period, the prior year performance fluctuated outside normal expectations. The allowance for loan losses as of November 30, 2022 reflects the historical loss performance experienced prior to the pandemic as well as increases for our Tier 3 expansion and growing Tier 2 portfolio.

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, 2022
Core Receivables Other Receivables Total
(In millions) A B C & Other Total C & Other $
% (1)
Current $ 8,340.4  $ 5,570.5  $ 1,605.2  $ 15,516.1  $ 304.8  $ 15,820.9  95.01 
Delinquent loans:
31-60 days past due 21.7  211.9  183.2  416.8  57.3  474.1  2.85 
61-90 days past due 11.6  116.4  122.7  250.7  41.4  292.1  1.75 
Greater than 90 days past due 3.1  27.9  25.7  56.7  8.9  65.6  0.39 
Total past due 36.4  356.2  331.6  724.2  107.6  831.8  4.99 
Total ending managed receivables $ 8,376.8  $ 5,926.7  $ 1,936.8  $ 16,240.3  $ 412.4  $ 16,652.7  100.00 

As of February 28, 2022
Core Receivables Other Receivables Total
(In millions) A B C & Other Total C & Other $
% (1)
Current $ 7,711.9  $ 5,401.3  $ 1,702.7  $ 14,815.9  $ 206.4  $ 15,022.3  95.98 
Delinquent loans:
31-60 days past due 25.4  173.3  160.4  359.1  33.0  392.1  2.50 
61-90 days past due 9.2  75.6  85.2  170.0  19.1  189.1  1.21 
Greater than 90 days past due 3.2  19.9  21.9  45.0  3.8  48.8  0.31 
Total past due 37.8  268.8  267.5  574.1  55.9  630.0  4.02 
Total ending managed receivables $ 7,749.7  $ 5,670.1  $ 1,970.2  $ 15,390.0  $ 262.3  $ 15,652.3  100.00 

(1)     Percent of total ending managed receivables. 

6. 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 LIBOR 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 (loss) (“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 $47.2 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 nine months ended November 30, 2022, we recognized income of $5.0 million and $23.6 million, respectively, in CAF income representing these changes in fair value.

As of November 30, 2022 and February 28, 2022, we had interest rate swaps outstanding with a combined notional amount of $4.68 billion and $3.64 billion, respectively, that were designated as cash flow hedges of interest rate risk. As of November 30,
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2022 and February 28, 2022, we had interest rate swaps with a combined notional amount of $1.11 billion and $578.3 million, respectively, outstanding that were not designated as cash flow hedges for accounting purposes.

See Note 7 for discussion of fair values of financial instruments and Note 13 for the effect on comprehensive income.

7. 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 November 30, 2022
(In thousands) Level 1 Level 2 Total
Assets:      
Money market securities $ 1,261,183  $ —  $ 1,261,183 
Mutual fund investments 21,485  —  21,485 
Derivative instruments designated as hedges —  89,485  89,485 
Derivative instruments not designated as hedges —  32,923  32,923 
Total assets at fair value $ 1,282,668  $ 122,408  $ 1,405,076 
Percent of total assets at fair value 91.3   % 8.7  % 100.0  %
Percent of total assets 4.9   % 0.5  % 5.4  %
Liabilities:      
Derivative instruments designated as hedges $ —  $ (3,599) $ (3,599)
Total liabilities at fair value $ —  $ (3,599) $ (3,599)
Percent of total liabilities —   % —  % —  %

  As of February 28, 2022
(In thousands) Level 1 Level 2 Total
Assets:      
Money market securities $ 701,865  $ —  $ 701,865 
Mutual fund investments 24,022  —  24,022 
Derivative instruments designated as hedges —  39,452  39,452 
Derivative instruments not designated as hedges —  9,339  9,339 
Total assets at fair value $ 725,887  $ 48,791  $ 774,678 
Percent of total assets at fair value 93.7   % 6.3   % 100.0   %
Percent of total assets 2.8   % 0.2   % 2.9   %
Liabilities:      
Derivative instruments designated as hedges $ —  $ (1,379) $ (1,379)
Total liabilities at fair value $ —  $ (1,379) $ (1,379)
Percent of total liabilities —   % —  % —  %

Fair Value of Financial Instruments

The carrying value of our cash and cash equivalents, accounts receivable, other restricted cash deposits and accounts payable approximates fair value due to the short-term nature and/or variable rates associated with these financial instruments. Auto loans receivable are presented net of an allowance for estimated loan losses, which we believe approximates fair value. We believe that the carrying value of our revolving credit facility and term loans approximates fair value due to the variable rates associated with these obligations. The fair value of our senior unsecured notes, which are not carried at fair value on our consolidated balance sheets, was determined using Level 2 inputs based on quoted market prices. The carrying value and fair value of the senior unsecured notes as of November 30, 2022 and February 28, 2022, respectively, are as follows:
(In thousands) As of November 30, 2022 As of February 28, 2022
Carrying value $ 500,000  $ 500,000 
Fair value $ 474,771  $ 517,396 

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8. Cancellation Reserves
 
We recognize revenue for EPP products, on a net basis, at the time of sale. We also record a reserve, or refund liability, for estimated contract cancellations.  Cancellations of these services may result from early termination by the customer, or default or prepayment on the finance contract.  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. 
Cancellation Reserves
  Three Months Ended November 30 Nine Months Ended November 30
(In millions) 2022 2021 2022 2021
Balance as of beginning of period $ 148.8  $ 144.3  $ 144.7  $ 124.5 
Cancellations (25.2) (25.2) (80.3) (68.3)
Provision for future cancellations 20.7  28.7  79.9  91.6 
Balance as of end of period $ 144.3  $ 147.8  $ 144.3  $ 147.8 
 
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. As of November 30, 2022 and February 28, 2022, the current portion of cancellation reserves was $80.4 million and $78.7 million, respectively.

9. Income Taxes
 
We had $26.7 million of gross unrecognized tax benefits as of November 30, 2022, and $24.8 million as of February 28, 2022.  There were no significant changes to the gross unrecognized tax benefits as reported for the fiscal year ended February 28, 2022.

On August 16, 2022, federal legislation commonly referred to as the Inflation Reduction Act of 2022 (“IRA”), was enacted. We have evaluated the tax provisions of the IRA, the most significant of which are the corporate alternative minimum tax and the share repurchase tax. We do not expect the legislation to have a material impact on our results of operations. As the IRS issues additional guidance related to the IRA, we will evaluate any impact to our consolidated financial statements.

10. Debt
(In thousands) As of November 30 As of February 28
Debt Description (1)
Maturity Date 2022 2022
Revolving credit facility (2)
June 2024 $   $ 1,243,500 
Term loan (2)
June 2024 300,000  300,000 
Term loan (2)
October 2026 699,458  699,352 
3.86% Senior notes April 2023 100,000  100,000 
4.17% Senior notes April 2026 200,000  200,000 
4.27% Senior notes April 2028 200,000  200,000 
Financing obligations Various dates through February 2059 517,349  524,766 
Non-recourse notes payable Various dates through April 2029 16,237,419  15,466,799 
Total debt 18,254,226  18,734,417 
Less: current portion (586,855) (532,272)
Less: unamortized debt issuance costs (26,689) (27,126)
Long-term debt, net $ 17,640,682  $ 18,175,019 

 (1)    Interest is payable monthly, with the exception of our senior notes, which are payable semi-annually.
 (2)    Borrowings accrue interest at variable rates based on the Eurodollar rate (LIBOR), or the successor benchmark rate, the federal funds rate, or the prime rate, depending on the type of borrowing.

Revolving Credit Facility. Borrowings under our $2.00 billion unsecured revolving credit facility (the “credit facility”) are available for working capital and general corporate purposes.  We pay a commitment fee on the unused portions of the available funds. Borrowings under the credit facility are either due “on demand” or at maturity depending on the type of
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borrowing.  Borrowings with “on demand” repayment terms are presented as short-term debt, while amounts due at maturity are presented as long-term debt.  As of November 30, 2022, the unused capacity of $2.00 billion was fully available to us.

Term Loans. Borrowings under our $300 million and $700 million term loans are available for working capital and general corporate purposes. The interest rate on our term loans was 4.67% as of November 30, 2022, and the loans were classified as long-term debt as no repayments are scheduled to be made within the next 12 months.

Senior Notes. Borrowings under our unsecured senior notes totaling $500 million are available for working capital and general corporate purposes. The 3.86% senior note matures in April 2023 and is therefore classified as current. The remaining notes were classified as long-term debt as no repayments are scheduled to be made within the next 12 months.
 
Financing Obligations.  Financing obligations relate to stores subject to sale-leaseback transactions that do not qualify for sale accounting.  The financing obligations were structured at varying interest rates and generally have initial lease terms ranging from 15 to 20 years with payments made monthly.  We have not entered into any new sale-leaseback transactions since fiscal 2009. In the event the agreements are modified or extended beyond their original term, the related obligation is adjusted based on the present value of the revised future payments, with a corresponding change to the assets subject to these transactions. Upon modification, the amortization of the obligation is reset, resulting in more of the payments being applied to interest expense in the initial years following the modification.
 
Non-Recourse Notes Payable.  The non-recourse notes payable relate to auto loans receivable funded through non-recourse funding vehicles.  The timing of principal payments on the non-recourse notes payable is based on the timing of principal collections and defaults on the related auto loans receivable. The current portion of non-recourse notes payable represents principal payments that are due to be distributed in the following period.
 
Notes payable related to our asset-backed term funding transactions accrue interest predominantly at fixed rates and have scheduled maturities through April 2029, but may mature earlier, depending upon the repayment rate of the underlying auto loans receivable. 

Information on our funding vehicles of non-recourse notes payable as of November 30, 2022 are as follows:
(In billions) Capacity
Warehouse facilities:
December 2022 expiration $ 0.25 
February 2023 expiration 2.85 
August 2023 expiration 2.30 
Combined warehouse facility limit $ 5.40 
Unused capacity $ 1.98 
Non-recourse notes payable outstanding:
Warehouse facilities $ 3.42 
Asset-backed term funding transactions 12.82 
Non-recourse notes payable $ 16.24 

We generally enter into warehouse facility agreements for one-year terms and typically renew the agreements annually. The return requirements of warehouse facility investors could fluctuate significantly depending on market conditions.  At renewal, the cost, structure and capacity of the facilities could change.  These changes could have a significant impact on our funding costs.
 
See Note 5 for additional information on the related auto loans receivable.
 
Capitalized Interest.  We capitalize interest in connection with the construction of certain facilities.  For the nine months ended November 30, 2022 and 2021, we capitalized interest of $3.6 million and $5.0 million, respectively.
 
Financial Covenants.  The credit facility, term loans and senior note agreements contain representations and warranties, conditions and covenants.  We must also meet financial covenants in conjunction with certain financing obligations.  The agreements governing our non-recourse funding vehicles contain representations and warranties, financial covenants and
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performance triggers.  As of November 30, 2022, we were in compliance with all financial covenants and our non-recourse funding vehicles were in compliance with the related performance triggers.

11. Stock and Stock-Based Incentive Plans
 
(A)Share Repurchase Program
In April 2022, our board of directors (“board”) increased our share repurchase authorization by $2.0 billion. As of November 30, 2022, a total of $4.0 billion of board authorizations for repurchases of our common stock was outstanding, with no expiration date, of which $2.45 billion remained available for repurchase. Share repurchases were paused during the third quarter of fiscal 2023.

Common Stock Repurchases
  Three Months Ended Nine Months Ended
  November 30 November 30
  2022 2021 2022 2021
Number of shares repurchased (in thousands)
30.0  851.1  3,403.9  3,602.8 
Average cost per share $ 87.70  $ 135.52  $ 94.95  $ 127.65 
Available for repurchase, as of end of period (in millions)
$ 2,451.3  $ 876.2  $ 2,451.3  $ 876.2 

(B)Share-Based Compensation

Composition of Share-Based Compensation Expense
  Three Months Ended Nine Months Ended
  November 30 November 30
(In thousands) 2022 2021 2022 2021
Cost of sales $ 333  $ 1,896  $ 1,474  $ 5,719 
CarMax Auto Finance income 981  1,560  1,394  4,749 
Selling, general and administrative expenses 17,213  33,328  63,983  100,453 
Share-based compensation expense, before income taxes $ 18,527  $ 36,784  $ 66,851  $ 110,921 

Composition of Share-Based Compensation Expense – By Grant Type
  Three Months Ended Nine Months Ended
  November 30 November 30
(In thousands) 2022 2021 2022 2021
Nonqualified stock options $ 8,968  $ 7,846  $ 29,648  $ 27,375 
Cash-settled restricted stock units (RSUs) 5,167  23,836  15,521  62,398 
Stock-settled market stock units (MSUs) 3,358  3,171  12,234  11,260 
Other share-based incentives:
Stock-settled performance stock units (PSUs) 209  964  5,150  5,334 
Restricted stock (RSAs) 262  365  571  670 
Stock-settled deferred stock units (DSUs)   —  1,850  1,925 
Employee stock purchase plan 563  602  1,877  1,959 
Total other share-based incentives $ 1,034  $ 1,931  $ 9,448  $ 9,888 
Share-based compensation expense, before income taxes $ 18,527  $ 36,784  $ 66,851  $ 110,921 

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(C)Stock Incentive Plan Information

Share/Unit Activity
Nine Months Ended November 30, 2022
Equity Classified Liability Classified
(Shares/units in thousands) Options MSUs Other RSUs
Outstanding as of February 28, 2022 5,796  393  170  1,163 
Granted 1,285  137  50  677 
Exercised or vested and converted (208) (122) (80) (748)
Cancelled (48) (6) (5) (68)
Outstanding as of November 30, 2022 6,825  402  135  1,024 
Weighted average grant date fair value per share/unit:
Granted $ 33.35  $ 126.59  $ 95.58  $ 91.20 
Ending outstanding $ 25.69  $ 120.96  $ 99.04  $ 97.23 
As of November 30, 2022
Unrecognized compensation (in millions)
$ 59.0  $ 18.2  $ 2.4 

12. Net Earnings Per Share
 
Basic net earnings per share is computed by dividing net earnings available for basic common shares by the weighted average number of shares of common stock outstanding.  Diluted net earnings per share is computed by dividing net earnings available for diluted common shares by the sum of weighted average number of shares of common stock outstanding and dilutive potential common stock.  Diluted net earnings per share is calculated using the “if-converted” treasury stock method.

Basic and Dilutive Net Earnings Per Share Reconciliations
  Three Months Ended Nine Months Ended
  November 30 November 30
(In thousands except per share data) 2022 2021 2022 2021
Net earnings $ 37,580  $ 269,438  $ 415,750  $ 991,461 
Weighted average common shares outstanding 158,003  162,006  159,044  162,710 
Dilutive potential common shares:    
Stock options 268  2,373  857  2,391 
Stock-settled stock units and awards 265  494  294  505 
Weighted average common shares and dilutive potential common shares 158,536  164,873  160,195  165,606 
Basic net earnings per share $ 0.24  $ 1.66  $ 2.61  $ 6.09 
Diluted net earnings per share $ 0.24  $ 1.63  $ 2.60  $ 5.99 
 
Certain options to purchase shares of common stock were outstanding and not included in the calculation of diluted net earnings per share because their inclusion would have been antidilutive.  On a weighted average basis, for the three months ended November 30, 2022 and 2021, options to purchase 4,934,554 shares and 776,853 shares of common stock, respectively, were not included. For the nine months ended November 30, 2022 and 2021, options to purchase 1,917,727 shares and 701,970 shares of common stock, respectively, were not included.

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13. Accumulated Other Comprehensive Income (Loss)
 
Changes in Accumulated Other Comprehensive Income (Loss) By Component
      Total
  Net Net Accumulated
  Unrecognized Unrecognized Other