10-Q 1 q3fy1910-q.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-Q
 
[ X ]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended November 30, 2018
 
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
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
12800 TUCKAHOE CREEK PARKWAY, RICHMOND, VIRGINIA
23238
(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)
 
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 x
 
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 x
 
No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 x
 
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 Act).
Yes ¨
 
No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding as of December 31, 2018
Common Stock, par value $0.50
 
170,087,134

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, 2018 and 2017
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income (Unaudited) –
 
 
 
Three and Nine Months Ended November 30, 2018 and 2017
 
 
 
 
 
 
Consolidated Balance Sheets (Unaudited) –
 
 
 
November 30, 2018 and February 28, 2018
 
 
 
 
 
 
Consolidated Statements of Cash Flows (Unaudited) –
 
 
 
Nine Months Ended November 30, 2018 and 2017
 
 
 
 
 
 
Notes to Consolidated Financial Statements (Unaudited)
 
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and
 
 
 
Results of Operations
 21
 
 
 
 
 
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)
2018
%(1)
 
2017
%(1)
 
2018
%(1)
 
2017
%(1)
SALES AND OPERATING REVENUES:
 
 
 
 
 
 
 
 
 
 
 
Used vehicle sales
$
3,547,925

82.6
 
$
3,425,540

83.4

 
$
11,544,340

83.3
 
$
10,963,113

84.1

Wholesale vehicle sales
603,584

14.1
 
552,754

13.5

 
1,849,225

13.3
 
1,653,911

12.7

Other sales and revenues
144,362

3.4
 
128,723

3.1

 
460,933

3.3
 
418,967

3.2

NET SALES AND OPERATING REVENUES
4,295,871

100.0
 
4,107,017

100.0

 
13,854,498

100.0
 
13,035,991

100.0

COST OF SALES:
 
 
 
 
 
 
 
 
 
 
 
Used vehicle cost of sales
3,177,953

74.0
 
3,061,193

74.5

 
10,305,945

74.4
 
9,761,690

74.9

Wholesale vehicle cost of sales
498,840

11.6
 
459,153

11.2

 
1,518,698

11.0
 
1,355,361

10.4

Other cost of sales
49,841

1.2
 
47,483

1.2

 
148,642

1.1
 
126,809

1.0

TOTAL COST OF SALES
3,726,634

86.7
 
3,567,829

86.9

 
11,973,285

86.4
 
11,243,860

86.3

GROSS PROFIT 
569,237

13.3
 
539,188

13.1

 
1,881,213

13.6
 
1,792,131

13.7

CARMAX AUTO FINANCE INCOME 
109,725

2.6
 
102,810

2.5

 
334,985

2.4
 
320,109

2.5

Selling, general and administrative expenses
409,520

9.5
 
399,672

9.7

 
1,301,308

9.4
 
1,208,237

9.3

Interest expense
18,814

0.4
 
17,405

0.4

 
54,816

0.4
 
51,079

0.4

Other expense (income)
2,820

0.1
 
(279
)

 
3,097

 
(561
)

Earnings before income taxes
247,808

5.8
 
225,200

5.5

 
856,977

6.2
 
853,485

6.5

Income tax provision
57,497

1.3
 
76,360

1.9

 
207,120

1.5
 
311,519

2.4

NET EARNINGS 
$
190,311

4.4
 
$
148,840

3.6

 
$
649,857

4.7
 
$
541,966

4.2

WEIGHTED AVERAGE COMMON SHARES:
 
 
 
 
 
 
 
 
 
 
 
Basic
173,816

 
 
181,888



 
176,088

 
 
183,324

 
Diluted
175,321

 
 
184,033



 
177,656

 
 
185,201

 
NET EARNINGS PER SHARE:
 
 
 
 
 
 
 
 
 
 
 
Basic
$
1.09

 
 
$
0.82



 
$
3.69

 
 
$
2.96

 
Diluted
$
1.09

 
 
$
0.81



 
$
3.66

 
 
$
2.93

 
 
 
(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)
2018
 
2017
 
2018
 
2017
NET EARNINGS
$
190,311

 
$
148,840

 
$
649,857

 
$
541,966

Other comprehensive income, net of taxes
 
 
 
 

 

Net change in retirement benefit plan unrecognized actuarial losses
370

 
277

 
1,109

 
826

Net change in cash flow hedge unrecognized gains
(72
)
 
8,046

 
(934
)
 
4,425

Other comprehensive income, net of taxes
298

 
8,323

 
175

 
5,251

TOTAL COMPREHENSIVE INCOME
$
190,609

 
$
157,163

 
$
650,032

 
$
547,217

 
  
 



































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)
2018
 
2018
ASSETS
 

 
 

CURRENT ASSETS:
 

 
 

Cash and cash equivalents
$
35,049

 
$
44,525

Restricted cash from collections on auto loan receivables
426,613

 
399,442

Accounts receivable, net
111,156

 
133,321

Inventory
2,424,700

 
2,390,694

Other current assets
59,901

 
93,462

TOTAL CURRENT ASSETS 
3,057,419

 
3,061,444

Auto loan receivables, net
12,299,270

 
11,535,704

Property and equipment, net of accumulated depreciation of $1,263,168 and $1,164,249 as of November 30, 2018 and February 28, 2018, respectively
2,800,051

 
2,667,061

Deferred income taxes
57,893

 
63,256

Other assets
182,179

 
158,807

TOTAL ASSETS 
$
18,396,812

 
$
17,486,272

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 

 
 
CURRENT LIABILITIES:
 

 
 
Accounts payable
$
558,324

 
$
529,733

Accrued expenses and other current liabilities
280,104

 
278,771

Accrued income taxes
1,634

 

Short-term debt
436

 
127

Current portion of finance and capital lease obligations
11,092

 
9,994

Current portion of non-recourse notes payable
373,283

 
355,433

TOTAL CURRENT LIABILITIES 
1,224,873

 
1,174,058

Long-term debt, excluding current portion
992,091

 
995,479

Finance and capital lease obligations, excluding current portion
504,776

 
490,369

Non-recourse notes payable, excluding current portion
11,997,315

 
11,266,964

Other liabilities
242,644

 
242,553

TOTAL LIABILITIES 
14,961,699

 
14,169,423

 
 
 
 
Commitments and contingent liabilities


 


SHAREHOLDERS’ EQUITY:
 
 
 
Common stock, $0.50 par value; 350,000,000 shares authorized; 171,785,396 and 179,747,894 shares issued and outstanding as of November 30, 2018 and February 28, 2018, respectively
85,893

 
89,874

Capital in excess of par value
1,255,966

 
1,234,047

Accumulated other comprehensive loss
(54,137
)
 
(54,312
)
Retained earnings
2,147,391

 
2,047,240

TOTAL SHAREHOLDERS’ EQUITY 
3,435,113

 
3,316,849

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 
$
18,396,812

 
$
17,486,272






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)
2018
 
2017
OPERATING ACTIVITIES:
 
 
 
Net earnings
$
649,857

 
$
541,966

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
135,609

 
133,175

Share-based compensation expense
61,403

 
52,363

Provision for loan losses
111,703

 
98,982

Provision for cancellation reserves
54,952

 
50,850

Deferred income tax provision
909

 
14,384

Other
4,104

 
1,223

Net decrease (increase) in:
 
 
 
Accounts receivable, net
22,165

 
56,547

Inventory
(34,006
)
 
(179,988
)
Other current assets
40,952

 
(5,422
)
Auto loan receivables, net
(875,269
)
 
(879,731
)
Other assets
(6,734
)
 
(348
)
Net increase (decrease) in:
 
 
 
Accounts payable, accrued expenses and other
 
 
 
  current liabilities and accrued income taxes
22,236

 
(9,373
)
Other liabilities
(73,251
)
 
(67,750
)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
114,630

 
(193,122
)
INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(243,311
)
 
(227,559
)
Proceeds from disposal of property and equipment
680

 
96

Purchases of investments
(5,470
)
 
(6,612
)
Sales of investments
1,104

 
466

NET CASH USED IN INVESTING ACTIVITIES
(246,997
)
 
(233,609
)
FINANCING ACTIVITIES:
 
 
 
Increase in short-term debt, net
309

 
531

Proceeds from issuances of long-term debt
2,758,000

 
2,996,700

Payments on long-term debt
(2,761,700
)
 
(2,906,700
)
Cash paid for debt issuance costs
(12,329
)
 
(11,524
)
Payments on finance and capital lease obligations
(7,247
)
 
(6,704
)
Issuances of non-recourse notes payable
8,183,502

 
7,720,963

Payments on non-recourse notes payable
(7,435,128
)
 
(6,976,360
)
Repurchase and retirement of common stock
(633,170
)
 
(454,960
)
Equity issuances
54,580

 
66,549

NET CASH PROVIDED BY FINANCING ACTIVITIES
146,817

 
428,495

Increase in cash, cash equivalents and restricted cash
14,450

 
1,764

Cash, cash equivalents and restricted cash at beginning of year
554,898

 
523,865

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD
$
569,348

 
$
525,629

 
 
 
 
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS:
Cash and cash equivalents
$
35,049

 
$
26,287

Restricted cash from collections on auto loan receivables
426,613

 
388,945

Restricted cash included in other assets
107,686

 
110,397

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD
$
569,348

 
$
525,629


See accompanying notes to consolidated financial statements.

Page 6



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 largest retailer of used vehicles in the United States. 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.
 
We deliver an unrivaled customer experience by offering a broad selection of high quality used vehicles and related products and services at low, no-haggle prices using a customer-friendly sales process in an attractive, modern sales facility, as well as through carmax.com and our mobile apps.  We provide customers with 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 wholesale auctions.

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

The accounting policies followed in the presentation of our interim financial results are consistent with those included in the company's Annual Report on Form 10-K for the fiscal year ended February 28, 2018 (the “2018 Annual Report”), with the exception of those related to recent accounting pronouncements adopted in the current fiscal year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in our 2018 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.

On March 1, 2018, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-09 related to revenue recognition using the modified retrospective transition method for all contracts. Results for reporting periods beginning after March 1, 2018, are presented under ASU 2014-09, while comparative period amounts have not been restated and continue to be presented under the previous accounting standard. See Note 2 for further details.

In connection with our adoption of FASB ASU 2016-18 during the current fiscal year, restricted cash is now included with cash and cash equivalents in the reconciliation of beginning of year and end of period total amounts in the consolidated statements of cash flows. Prior period amounts have been reclassified to conform to the current period's presentation, resulting in a decrease in cash used in investing activities of $13.9 million for the nine months ended November 30, 2017.

Recent Accounting Pronouncements.
Effective in Future Periods.
In February 2016, the FASB issued an accounting pronouncement (FASB ASU 2016-02) related to the accounting for leases. This pronouncement, along with subsequent ASUs issued to clarify certain provisions of ASU 2016-02, requires lessees to record most leases on their balance sheet while also disclosing key information about those lease arrangements. Under the new guidance, lease classification as either a finance lease or an operating lease will affect the pattern and classification of expense recognition in the income statement. The classification criteria to distinguish between finance and operating leases are generally consistent with the classification criteria to distinguish between capital and operating leases under existing lease accounting guidance. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018. We plan to adopt the new standard for our fiscal year beginning March 1, 2019, using the modified retrospective transition approach;

Page 7



specifically, using the optional transition method provided by the accounting pronouncement (FASB ASU 2018-11), which allows for transition through a cumulative-effect adjustment at the beginning of the period of adoption.
 
We expect to record a $400 million to $430 million increase in both assets and liabilities on our opening consolidated balance sheets as a result of recognizing new right-of-use assets and lease liabilities as of March 1, 2019. This estimate is based on our lease portfolio as of February 28, 2018, and it does not include the potential impacts of remeasurement due to changes in our assessment of the lease term subsequent to our adoption of the standard, which could be material. The ultimate impact of adopting this pronouncement will depend on our lease portfolio and other factors as of the transition date. We do not expect this standard to have a material impact on our sale-leaseback transactions currently accounted for as direct financings, and we believe most of our leases will maintain their current lease classification under the new standard. As a result, we do not expect the new standard to have a material effect on our expense recognition pattern or, in turn, our consolidated statements of operations. We are in the process of implementing new business processes, systems and internal controls in preparation of adopting the new standard.

In June 2016, the FASB issued an accounting pronouncement (FASB ASU 2016-13) related to the measurement of credit losses on financial instruments. This pronouncement, along with a subsequent ASU issued to clarify certain provisions of ASU 2016-13, changes the impairment model for most financial assets and will require the use of an “expected loss” model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected to be collected on the financial asset. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. We plan to adopt this pronouncement for our fiscal year beginning March 1, 2020. We are currently evaluating the effect on our consolidated financial statements, as well as the impacts on our business processes, systems and internal controls, and expect that the standard will have a material impact on our calculation of the allowance for loan losses.

In August 2018, the FASB issued an accounting pronouncement (FASB ASU 2018-15) related to a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is considered a service contract. This pronouncement aligns the requirements for capitalizing implementation costs in such arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. We plan to early adopt this pronouncement for our fiscal year beginning March 1, 2019 using the prospective approach. We are currently in the process of evaluating the effects of this pronouncement on our consolidated financial statements.

In October 2018, the FASB issued an accounting pronouncement (FASB ASU 2018-16) to permit the use of the Overnight Index Swap (“OIS”) Rate based on the Secured Overnight Financing Rate (“SOFR”) as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815. For entities that have not already adopted ASU 2017-12 (Derivatives and Hedging), the amendments in this pronouncement are required to be adopted concurrently with the amendments in ASU 2017-12. We plan to adopt ASU 2018-16 for our fiscal year beginning March 1, 2019, concurrently with the adoption of ASU 2017-12, and we do not expect it to have a material effect on our consolidated financial statements.

In October 2018, the FASB issued an accounting pronouncement (FASB ASU 2018-17) related to related party guidance for variable interest entities. The amendments in this pronouncement are effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. We plan to adopt this pronouncement for our fiscal year beginning March 1, 2020, 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.

On March 1, 2018, we adopted FASB ASU 2014-09 related to revenue recognition using the modified retrospective transition method for all contracts. In connection with the adoption of this standard, we recorded a net after-tax cumulative-effect adjustment to increase beginning retained earnings by $12.9 million to recognize profit-sharing revenues on ESP contracts sold on or before February 28, 2018, with corresponding adjustments to other assets and deferred income taxes. The adoption also resulted in $8.4 million recorded in other sales and revenues on our consolidated statement of earnings for the nine months ended November 30,

Page 8



2018, relating to additional profit-sharing revenues to which we expect to be entitled. During the three months ended November 30, 2018, no additional profit-sharing revenues were recorded. Lastly, the adoption resulted in a $15.7 million increase to other current assets and accrued expenses and other current liabilities as of November 30, 2018 related to estimated vehicle sales returns, which were previously shown on a net basis.

Disaggregation of Revenue

 
Three Months Ended November 30
 
Nine Months Ended November 30
(In millions)
2018
 
2017
 
2018
 
2017
Used vehicle sales
$
3,547.9

 
$
3,425.5

 
$
11,544.3

 
$
10,963.1

Wholesale vehicle sales
603.6

 
552.8

 
1,849.2

 
1,653.9

Other sales and revenues:
 
 
 
 
 
 
 
Extended protection plan revenues
85.6

 
77.1

 
284.2

 
254.5

Third-party finance fees, net
(8.4
)
 
(12.8
)
 
(32.5
)
 
(35.8
)
Service revenues
32.4

 
32.3

 
105.1

 
100.5

Other
34.8

 
32.1

 
104.1

 
99.8

Total other sales and revenues
144.4

 
128.7

 
460.9

 
419.0

Total net sales and operating revenues
$
4,295.9

 
$
4,107.0

 
$
13,854.5

 
$
13,036.0


Used Vehicle Sales. We sell used vehicles at our retail stores, and revenue from the sale of these 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 7-day, money-back guarantee.  We record a reserve for estimated returns based on historical experience and trends. The reserve for estimated returns is presented gross on the consolidated balance sheets, with a return asset recorded in other current assets and a refund liability recorded in accrued expenses and other current liabilities. We also guarantee the used vehicles we sell with at least a 30-day limited warranty. These warranties are deemed assurance-type warranties and accounted for as warranty obligations. See Note 14 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 for estimated contract cancellations.   The reserve for cancellations is evaluated for each product and is based on forecasted forward cancellation curves utilizing historical experience, recent trends and credit mix of the customer base.  Our risk related to contract cancellations is limited to the revenue that we receive.  Cancellations fluctuate depending on the volume of EPP sales, customer financing default or prepayment rates, and shifts in customer behavior, including those related to changes in the coverage or term of the product.  The current portion of estimated cancellation reserves is recognized as a component of accrued expenses and other current liabilities with the remaining amount recognized in other liabilities.  See Note 7 for additional information on cancellation reserves.

We are contractually entitled to receive profit-sharing revenues based on the performance of the ESPs administered by third parties. These revenues are a form of variable consideration included in the ESP transaction price 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, 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 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. Profit-sharing payments by the ESP provider begin when the underlying ESPs reach a specified level of claims history. As of November 30, 2018, we have recognized a long-term contract asset of

Page 9



$25.7 million related to cumulative profit-sharing payments to which we expect to be entitled, which is included in other assets on our consolidated balance sheets.

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

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 at our two new car franchise locations and sales of accessories. Revenue in this category is recognized upon transfer of control to the customer.

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 loan receivables, 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 to fund loans originated by CAF.  CAF income primarily reflects the interest and fee income generated by the auto loan receivables 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 loan receivables, 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.

Components of CAF Income


Three Months Ended November 30
 
Nine Months Ended November 30
(In millions)
2018
 
(1)
 
2017
 
(1)
 
2018
 
(1)
 
2017
 
(1)
Interest margin:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest and fee income
$
247.8

 
8.0

 
$
217.1

 
7.6

 
$
722.3

 
8.0

 
$
637.4

 
7.7

Interest expense
(75.3
)
 
(2.4
)
 
(55.4
)
 
(2.0
)
 
(208.2
)
 
(2.3
)
 
(156.6
)
 
(1.9
)
Total interest margin
172.5

 
5.6

 
161.7

 
5.7

 
514.1

 
5.7

 
480.8

 
5.8

Provision for loan losses
(40.8
)
 
(1.3
)
 
(37.5
)
 
(1.3
)
 
(111.7
)
 
(1.2
)
 
(99.0
)
 
(1.2
)
Total interest margin after provision for loan losses
131.7

 
4.3

 
124.2

 
4.4

 
402.4

 
4.5

 
381.8

 
4.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total other expense
(0.1
)
 

 

 

 
(0.4
)
 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Direct expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Payroll and fringe benefit expense
(9.4
)
 
(0.3
)
 
(8.9
)
 
(0.3
)
 
(28.6
)
 
(0.3
)
 
(26.2
)
 
(0.3
)
Other direct expenses
(12.5
)
 
(0.4
)
 
(12.5
)
 
(0.4
)
 
(38.4
)
 
(0.4
)
 
(35.5
)
 
(0.4
)
Total direct expenses
(21.9
)
 
(0.7
)
 
(21.4
)
 
(0.8
)
 
(67.0
)
 
(0.7
)
 
(61.7
)
 
(0.7
)
CarMax Auto Finance income
$
109.7

 
3.6

 
$
102.8

 
3.6

 
$
335.0

 
3.7

 
$
320.1

 
3.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total average managed receivables
$
12,321.0

 


 
$
11,365.6

 


 
$
12,054.6

 
 
 
$
11,102.4

 
 

(1)  
Annualized percentage of total average managed receivables.     
 

Page 10



4.    Auto Loan Receivables
 
Auto loan receivables include amounts due from customers related to retail vehicle sales financed through CAF and are presented net of an allowance for estimated loan losses.  We generally use warehouse facilities to fund auto loan receivables 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 loan receivables into the warehouse facilities and asset-backed term funding transactions (together, “non-recourse funding vehicles”) as secured borrowings, which result in recording the auto loan receivables and the related non-recourse notes payable on our consolidated balance sheets. The majority of the auto loan receivables serve as collateral for the related non-recourse notes payable of $12.39 billion as of November 30, 2018 and $11.64 billion as of February 28, 2018. See Note 9 for additional information on non-recourse notes payable.

Auto Loan Receivables, Net
 
As of November 30
 
As of February 28
(In millions)
2018
 
2018
Asset-backed term funding
$
10,026.7

 
$
9,455.2

Warehouse facilities
1,993.0

 
1,834.0

Overcollateralization (1)
277.5

 
269.4

Other managed receivables (2)
80.0

 
60.3

Total ending managed receivables
12,377.2

 
11,618.9

Accrued interest and fees
52.2

 
43.2

Other
8.2

 
2.2

Less allowance for loan losses
(138.3
)
 
(128.6
)
Auto loan receivables, net
$
12,299.3

 
$
11,535.7


(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 rely on 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 assigned a grade of “A” are determined to have the highest probability of repayment, and 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.

CAF uses a combination of the initial credit grades and historical performance to monitor the credit quality of the auto loan receivables 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
 
As of February 28
(In millions)
2018 (1)
 
% (2)
 
2018 (1)
 
% (2)
A
$
6,142.6

 
49.6
 
$
5,725.1

 
49.3
B
4,432.0

 
35.8
 
4,133.8

 
35.6
C and other
1,802.6

 
14.6
 
1,760.0

 
15.1
Total ending managed receivables
$
12,377.2

 
100.0
 
$
11,618.9

 
100.0

(1)  
Classified based on credit grade assigned when customers were initially approved for financing.
(2)  
Percent of total ending managed receivables.


Page 11



Allowance for Loan Losses
 
Three Months Ended November 30
 
Nine Months Ended November 30
(In millions)
2018
 
% (1)
 
2017
 
% (1)
 
2018
 
% (1)
 
2017
 
% (1)
Balance as of beginning of period
$
138.1

 
1.13
 
$
129.5

 
1.15
 
$
128.6

 
1.11
 
$
123.6

 
1.16
Charge-offs
(74.3
)
 
 
 
(68.8
)
 

 
(198.1
)
 
 
 
(183.3
)
 
 
Recoveries
33.7

 
 
 
29.5

 

 
96.1

 
 
 
88.4

 
 
Provision for loan losses
40.8

 
 
 
37.5

 

 
111.7

 
 
 
99.0

 
 
Balance as of end of period
$
138.3

 
1.12
 
$
127.7

 
1.11
 
$
138.3

 
1.12
 
$
127.7

 
1.11

(1)  
Percent of total ending managed receivables.
 
The allowance for loan losses represents an estimate of the amount of net losses inherent in our portfolio of managed receivables as of the applicable reporting date and anticipated to occur during the following 12 months.  The allowance is primarily based on the composition of the portfolio of managed receivables, historical loss trends and forecasted forward loss curves.  We also take into account recent trends in delinquencies and defaults, recovery rates and the economic environment.  The provision for loan losses is the periodic expense of maintaining an adequate allowance.

Past Due Receivables
 
As of November 30
 
As of February 28
(In millions)
2018
 
% (1)
 
2018
 
% (1)
Total ending managed receivables
$
12,377.2

 
100.0
 
$
11,618.9

 
100.0
Delinquent loans:
 
 
 
 
 
 
 
31-60 days past due
$
298.1

 
2.4
 
$
246.6

 
2.1
61-90 days past due
134.7

 
1.1
 
116.9

 
1.0
Greater than 90 days past due
34.1

 
0.3
 
29.7

 
0.3
Total past due
$
466.9

 
3.8
 
$
393.2

 
3.4

(1)  
Percent of total ending managed receivables. 

5.    Derivative Instruments and Hedging Activities
 
We use derivatives to manage certain risks arising from both our business operations and economic conditions, particularly with regard to issuances of debt.  Primary exposures include 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 designate these derivative instruments as cash flow hedges for accounting purposes.  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 loan receivables, and (ii) exposure to variable interest rates associated with our term loan.
 
For the derivatives associated with our non-recourse funding vehicles, the effective portion of changes in the fair value is initially recorded in accumulated other comprehensive loss (“AOCL”).  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 $7.2 million will be reclassified in AOCL as an increase to CAF income.
 
As of November 30, 2018 and February 28, 2018, we had interest rate swaps outstanding with a combined notional amount of $2.30 billion and $2.16 billion, respectively, that were designated as cash flow hedges of interest rate risk.

See Note 6 for discussion of fair values of financial instruments and Note 12 for the effect on comprehensive income.


Page 12



6.    Fair Value Measurements
 
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market or, if none exists, the most advantageous market, for the specific asset or liability at the measurement date (referred to as the “exit price”).  The fair value should be based on assumptions that market participants would use, including a consideration of nonperformance risk.
 
We assess the inputs used to measure fair value using the three-tier hierarchy.  The hierarchy indicates the extent to which inputs used in measuring fair value are observable in the market.
 
Level 1
Inputs include unadjusted quoted prices in active markets for identical assets or liabilities that we can access at the measurement date.
 
Level 2
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets in active markets, quoted prices from identical or similar assets in inactive markets and observable inputs such as interest rates and yield curves.
 
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 loan receivables 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 or accounts payable.  As described in Note 5, as part of our risk management strategy, we utilize derivative instruments to manage 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 loan receivables as well as to manage exposure to variable interest rates on our term loan.  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.


Page 13



Items Measured at Fair Value on a Recurring Basis
 
As of November 30, 2018
(In thousands)
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Money market securities
$
345,807

 
$

 
$
345,807

Mutual fund investments
19,116

 

 
19,116

Derivative instruments

 
3,624

 
3,624

Total assets at fair value
$
364,923

 
$
3,624

 
$
368,547

 
 
 
 
 
 
Percent of total assets at fair value
99.0
%
 
1.0
 %
 
100.0
 %
Percent of total assets
2.0
%
 
 %
 
2.0
 %
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Derivative instruments
$

 
$
(1,917
)
 
$
(1,917
)
Total liabilities at fair value
$

 
$
(1,917
)
 
$
(1,917
)
 
 
 
 
 
 
Percent of total liabilities
%
 
 %
 
 %
 
As of February 28, 2018
(In thousands)
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Money market securities
$
276,894

 
$

 
$
276,894

Mutual fund investments
19,429

 

 
19,429

Derivative instruments

 
12,127

 
12,127

Total assets at fair value
$
296,323

 
$
12,127

 
$
308,450

 
 
 
 
 
 
Percent of total assets at fair value
96.1
%
 
3.9
%
 
100.0
%
Percent of total assets
1.7
%
 
0.1
%
 
1.8
%
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Derivative instruments
$

 
$
(99
)
 
$
(99
)
Total liabilities at fair value
$

 
$
(99
)
 
$
(99
)
 
 
 
 
 
 
Percent of total liabilities
%
 
%
 
%

There were no transfers between Levels 1 and 2 for the three and nine months ended November 30, 2018. As of November 30, 2018 and February 28, 2018, we had no Level 3 assets.

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 loan receivables are presented net of an allowance for estimated loan losses. We believe that the carrying value of our revolving credit facility and term loan 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, 2018 and February 28, 2018, respectively, are as follows:
(In thousands)
As of November 30, 2018
 
As of February 28, 2018
Carrying value
$
500,000

 
$
500,000

Fair value
$
478,836

 
$
492,163



Page 14



7.    Cancellation Reserves
 
We recognize revenue for EPP products, on a net basis, at the time of sale. We also record a reserve 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)
2018
 
2017
 
2018
 
2017
Balance as of beginning of period
$
110.6

 
$
109.8

 
$
105.2

 
$
108.2

Cancellations
(17.2
)
 
(16.9
)
 
(50.5
)
 
(49.8
)
Provision for future cancellations
16.3

 
16.3

 
55.0

 
50.8

Balance as of end of period
$
109.7

 
$
109.2

 
$
109.7

 
$
109.2

 
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, 2018 and February 28, 2018, the current portion of cancellation reserves was $58.2 million and $56.0 million, respectively.

8.    Income Taxes
 
The Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was enacted on December 22, 2017, and, among other changes, reduced the federal statutory tax rate from 35.0% to 21.0%. In accordance with U.S. GAAP for income taxes, as well as SEC Staff Accounting Bulletin No. 118 (“SAB 118”), the company made a reasonable estimate of the impacts of the 2017 Tax Act and recorded this estimate in its results for the year ended February 28, 2018. SAB 118 allows for a measurement period of up to one year, from the date of enactment, to complete the company’s accounting for the impacts of the 2017 Tax Act. As of November 30, 2018, our analysis under SAB 118 is complete and resulted in no material adjustments to the provisional amounts recorded as of February 28, 2018.

We had $31.9 million of gross unrecognized tax benefits as of November 30, 2018, and $28.7 million as of February 28, 2018.  There were no significant changes to the gross unrecognized tax benefits as reported for the year ended February 28, 2018.

9.    Debt

 
As of November 30
 
As of February 28
(In thousands)
2018
 
2018
Revolving credit facility
$
194,236

 
$
197,627

Term loan
300,000

 
300,000

3.86% Senior notes due 2023
100,000

 
100,000

4.17% Senior notes due 2026
200,000

 
200,000

4.27% Senior notes due 2028
200,000

 
200,000

Finance and capital lease obligations
515,868

 
500,363

Non-recourse notes payable
12,392,989

 
11,644,615

Total debt
13,903,093

 
13,142,605

Less: current portion
(384,811
)
 
(365,554
)
Less: unamortized debt issuance costs
(24,100
)
 
(24,239
)
Long-term debt, net
$
13,494,182

 
$
12,752,812


Revolving Credit Facility.    We have a $1.20 billion unsecured revolving credit facility (the “credit facility”) with various financial institutions that expires in August 2020. Borrowings under the credit facility are available for working capital and general corporate purposes.  Borrowings accrue interest at variable rates based on LIBOR, the federal funds rate, or the prime rate, depending on the type of borrowing, and 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 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 no repayments are

Page 15



expected to be made within the next 12 months.  As of November 30, 2018, the unused capacity of $1.01 billion was fully available to us.
 
Term Loan.    We have a $300 million unsecured term loan that expires in August 2020.  The term loan accrues interest at variable rates based on the LIBOR rate, the federal funds rate, or the prime rate, and interest is payable monthly.  As of November 30, 2018, $300 million remained outstanding and is classified as long-term debt, as no repayments are scheduled to be made within the next 12 months.  Borrowings under the term loan are available for working capital and general corporate purposes.  

Senior Notes. We have senior unsecured notes with outstanding principal totaling $500 million as of November 30, 2018, which are due in 2023, 2026 and 2028. These notes are classified as long-term debt as no repayments are scheduled to be made within the next 12 months. Borrowings under these notes are available for working capital and general corporate purposes. Interest on the notes is payable semi-annually.
 
Finance and Capital Lease Obligations.  Finance and capital lease obligations relate primarily to stores subject to sale-leaseback transactions that did not qualify for sale accounting, and therefore, are accounted for as direct financings.  The leases were structured at varying interest rates and generally have initial lease terms ranging from 15 to 20 years with payments made monthly.  Payments on the leases are recognized as interest expense and a reduction of the obligations.  We have not entered into any new sale-leaseback transactions since fiscal 2009. In the event the leases are modified or extended beyond their original lease term, the related obligation is increased based on the present value of the revised future lease payments, with a corresponding increase to the assets subject to these transactions. Upon modification, the amortization of the obligation is reset, resulting in more of the lease payments being applied to interest expense in the initial years following the modification. See Note 13 for additional information on finance and capital lease obligations.
 
Non-Recourse Notes Payable.  The non-recourse notes payable relate to auto loan receivables 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 loan receivables. The current portion of non-recourse notes payable represents principal payments that are due to be distributed in the following period.
 
As of November 30, 2018, $10.40 billion of non-recourse notes payable was outstanding related to asset-backed term funding transactions.  These notes payable accrue interest predominantly at fixed rates and have scheduled maturities through April 2025, but may mature earlier, depending upon the repayment rate of the underlying auto loan receivables. 
 
As of November 30, 2018, $1.99 billion of non-recourse notes payable was outstanding related to our warehouse facilities. As of November 30, 2018, the combined limit of our warehouse facilities was $3.25 billion, and the unused warehouse capacity totaled $1.26 billion.  Of the combined limit, $1.70 billion will expire in February 2019, $1.40 billion will expire in August 2019 and $150 million will expire in September 2019. 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 4 for additional information on the related auto loan receivables.
 
Capitalized Interest.    We capitalize interest in connection with the construction of certain facilities.  For the nine months ended November 30, 2018 and 2017, we capitalized interest of $4.8 million and $5.8 million, respectively.
 
Financial Covenants.  The credit facility, term loan and senior note agreements contain representations and warranties, conditions and covenants.  We must also meet financial covenants in conjunction with certain of the sale-leaseback transactions.  The agreements governing our non-recourse funding vehicles contain representations and warranties, financial covenants and performance triggers.  As of November 30, 2018, we were in compliance with all financial covenants and our non-recourse funding vehicles were in compliance with the related performance triggers.
 

Page 16



10.    Stock and Stock-Based Incentive Plans
 
(A) Share Repurchase Program
On October 23, 2018, the board authorized the repurchase of up to an additional $2 billion of our common stock. As of November 30, 2018, a total of $2.75 billion of board authorizations for repurchases of our common stock was outstanding, with no expiration date, of which $2.38 billion remained available for repurchase.

Common Stock Repurchases
 
Three Months Ended
 
Nine Months Ended
 
November 30
 
November 30
 
2018
 
2017
 
2018
 
2017
Number of shares repurchased (in thousands)
3,657.8

 
1,488.4

 
9,257.1

 
6,976.2

Average cost per share
$
69.52

 
$
72.02

 
$
68.36

 
$
63.90

Available for repurchase, as of end of period (in millions)
$
2,384.0

 
$
1,144.6

 
$
2,384.0

 
$
1,144.6


(B) Share-Based Compensation

Composition of Share-Based Compensation Expense
 
Three Months Ended
 
Nine Months Ended
 
November 30
 
November 30
(In thousands)
2018
 
2017
 
2018
 
2017
Cost of sales
$
(343
)
 
$
963

 
$
2,551

 
$
2,266

CarMax Auto Finance income
596

 
895

 
3,030

 
2,563

Selling, general and administrative expenses
7,275

 
14,255

 
57,027

 
48,664

Share-based compensation expense, before income taxes
$
7,528

 
$
16,113

 
$
62,608

 
$
53,493


Composition of Share-Based Compensation Expense – By Grant Type
 
Three Months Ended
 
Nine Months Ended
 
November 30
 
November 30
(In thousands)
2018
 
2017
 
2018
 
2017
Nonqualified stock options
$
6,230

 
$
5,125

 
$
23,838

 
$
21,411

Cash-settled restricted stock units (RSUs)
(2,485
)
 
8,450

 
25,409

 
21,353

Stock-settled market stock units (MSUs)
2,681

 
2,135

 
9,960

 
8,299

Other share-based incentives:
 
 
 
 
 
 
 
Stock-settled performance stock units (PSUs)
317

 
59

 
1,043

 
549

Restricted stock (RSAs)

 
9

 
433

 
751

Stock-settled deferred stock units (DSUs)
426

 

 
720

 

Employee stock purchase plan
359

 
335

 
1,205

 
1,130

Total other share-based incentives
$
1,102

 
$
403

 
$
3,401

 
$
2,430

Share-based compensation expense, before income taxes
$
7,528

 
$
16,113

 
$
62,608

 
$
53,493



Page 17



(C) Stock Incentive Plan Information

Share/Unit Activity
 
Nine Months Ended November 30, 2018
 
Equity Classified
Liability Classified
(Shares/units in thousands)
Options
MSUs
Other
RSUs
Outstanding as of February 28, 2018
7,762

419

271

1,460

Granted
1,745

206

23

630

Exercised or vested and converted
(1,225
)
(95
)
(93
)
(341
)
Cancelled
(312
)
(16
)
(39
)
(116
)
Outstanding as of November 30, 2018
7,970

514

162

1,633

 
 
 
 
 
Weighted average grant date fair value per share/unit:
 
 
 
 
 
 
 
 
 
Granted
$
18.75

$
82.09

$
73.22

$
63.07

Ending outstanding
$
16.53

$
74.31

$
57.45

$
58.01

 
 
 
 
 
 
 
 
 
 
 
As of November 30, 2018
 
Unrecognized compensation (in millions)
$
43.8

$
16.1

$
2.3

 
 
11.    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)
2018
 
2017
 
2018
 
2017
Net earnings
$
190,311

 
$
148,840

 
$
649,857

 
$
541,966

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
173,816

 
181,888

 
176,088

 
183,324

Dilutive potential common shares:
 
 
 
 
 
 
 
Stock options
1,109

 
1,659

 
1,165

 
1,444

Stock-settled stock units and awards
396

 
486

 
403

 
433

Weighted average common shares and dilutive potential common shares
175,321

 
184,033

 
177,656

 
185,201

 
 
 
 
 
 
 
 
Basic net earnings per share
$
1.09

 
$
0.82

 
$
3.69

 
$
2.96

Diluted net earnings per share
$
1.09

 
$
0.81

 
$
3.66

 
$
2.93

 
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, 2018 and 2017, options to purchase 2,808,555 shares and 2,712,724 shares of common stock, respectively, were not included. For the nine months ended November 30, 2018 and 2017, options to purchase 3,904,738 shares and 2,900,093 shares of common stock, respectively, were not included.


Page 18



12.    Accumulated Other Comprehensive Loss
 
Changes in Accumulated Other Comprehensive Loss By Component
 
 
 
 
 
Total
 
Net
 
 
 
Accumulated
 
Unrecognized
 
Net
 
Other
 
Actuarial
 
Unrecognized
 
Comprehensive
(In thousands, net of income taxes)
Losses
 
Hedge Gains
 
Loss
Balance as of February 28, 2018
$
(68,497
)
 
$
14,185

 
$
(54,312
)
Other comprehensive income before reclassifications

 
2,788

 
2,788

Amounts reclassified from accumulated other comprehensive loss
1,109

 
(3,722
)
 
(2,613
)
Other comprehensive income (loss)
1,109

 
(934
)
 
175

Balance as of November 30, 2018
$
(67,388
)
 
$
13,251

 
$
(54,137
)
 
Changes In and Reclassifications Out of Accumulated Other Comprehensive Loss
 
Three Months Ended November 30
 
Nine Months Ended November 30
(In thousands)
2018
 
2017
 
2018
 
2017
Retirement Benefit Plans:
 
 
 
 
 
 
 
Actuarial loss amortization reclassifications recognized in net pension expense:
 
 
 
 
 
 
 
Cost of sales
$
206

 
$
189

 
$
611

 
$
561

CarMax Auto Finance income
13

 
12

 
38

 
34

Selling, general and administrative expenses
268

 
253

 
812

 
766

Total amortization reclassifications recognized in net pension expense
487

 
454

 
1,461

 
1,361

Tax expense
(117
)
 
(177
)
 
(352
)
 
(535
)
Amortization reclassifications recognized in net pension expense, net of tax
370

 
277

 
1,109

 
826

Net change in retirement benefit plan unrecognized actuarial losses, net of tax
370

 
277

 
1,109

 
826

 
 
 
 
 
 
 
 
Cash Flow Hedges (Note 5):
 
 
 
 
 
 
 
Effective portion of changes in fair value
1,986

 
12,361

 
3,786

 
4,423

Tax expense
(523
)
 
(4,865
)
 
(998
)
 
(1,740
)
Effective portion of changes in fair value, net of tax
1,463

 
7,496

 
2,788

 
2,683

Reclassifications to CarMax Auto Finance income
(2,084
)
 
906

 
(5,054
)
 
2,871

Tax benefit (expense)
549

 
(356
)
 
1,332

 
(1,129
)
Reclassification of hedge (gains) losses, net of tax
(1,535
)
 
550

 
(3,722
)
 
1,742

Net change in cash flow hedge unrecognized gains, net of tax
(72
)
 
8,046

 
(934
)
 
4,425

Total other comprehensive income, net of tax
$
298

 
$
8,323

 
$
175

 
$
5,251

 
Changes in the funded status of our retirement plans and the effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognized in accumulated other comprehensive loss.  The cumulative balances are net of deferred taxes of $16.5 million as of November 30, 2018 and $16.6 million as of February 28, 2018.
  

Page 19



13.    Supplemental Cash Flow Information

Supplemental disclosures of cash flow information:

 
Nine Months Ended November 30
(In thousands)
2018
 
2017
Non-cash investing and financing activities:
 

 
 

Decrease in accrued capital expenditures
$
(1,847
)
 
$
(3,096
)
Increase in finance and capital lease obligations
$
21,854

 
$
10,245


14.    Contingent Liabilities
 
LitigationCarMax entities are defendants in five proceedings asserting wage and hour claims with respect to CarMax sales consultants and non-exempt employees in California. The asserted claims include failure to pay minimum wage, provide meal periods and rest breaks, pay statutory/contractual wages, reimburse for work-related expenses and provide accurate itemized wage statements; unfair competition; and Private Attorney General Act claims. On September 4, 2015, Craig Weiss et al., v. CarMax Auto Superstores California, LLC, and CarMax Auto Superstores West Coast, Inc., a putative class action, was filed in the Superior Court of California, County of Placer. The Weiss lawsuit seeks civil penalties, fines, cost of suit, and the recovery of attorneys’ fees. On June 29, 2016, Ryan Gomez et al. v. CarMax Auto Superstores California, LLC, and CarMax Auto Superstores West Coast, Inc., a putative class action, was filed in the Superior Court of the State of California, Los Angeles. The Gomez lawsuit seeks declaratory relief, unspecified damages, restitution, statutory penalties, interest, cost and attorneys’ fees. On September 7, 2016, James Rowland v. CarMax Auto Superstores California, LLC, and CarMax Auto Superstores West Coast, Inc., a putative class action, was filed in the U.S. District Court, Eastern District of California, Sacramento Division. The Rowland lawsuit seeks unspecified damages, restitution, statutory penalties, interest, cost and attorneys’ fees.  On October 31, 2017, Joshua Sabanovich v. CarMax Superstores California, LLC et. al., a putative class action, was filed in the Superior Court of California, County of Stanislaus. The Sabanovich lawsuit seeks unspecified damages, restitution, statutory penalties, interest, cost and attorneys’ fees. On November 21, 2018, Derek Mcelhannon et al v. CarMax Auto Superstores California, LLC and CarMax Auto Superstores West Coast, Inc., a putative class action, was filed in Superior Court of California, County of Alameda. The Mcelhannon lawsuit seeks unspecified damages, restitution, statutory and/or civil penalties, interest, cost and attorneys’ fees.  We are unable to make a reasonable estimate of the amount or range of loss that could result from an unfavorable outcome in these matters.

On April 25, 2017 and October 11, 2018, the company met with representatives from multiple California municipality district attorney offices as part of an informal inquiry by those offices into the handling, storage and disposal of certain types of hazardous waste at our store locations in those municipalities. We are unable to make a reasonable estimate of the amount or range of loss that could result from an unfavorable outcome in these matters.

We are involved in various other legal proceedings in the normal course of business.  Based upon our evaluation of information currently available, we believe that the ultimate resolution of any such proceedings will not have a material adverse effect, either individually or in the aggregate, on our financial condition, results of operations or cash flows.
 
Other Matters.  In accordance with the terms of real estate lease agreements, we generally agree to indemnify the lessor from certain liabilities arising as a result of the use of the leased premises, including environmental liabilities and repairs to leased property upon termination of the lease.  Additionally, in accordance with the terms of agreements entered into for the sale of properties, we generally agree to indemnify the buyer from certain liabilities and costs arising subsequent to the date of the sale, including environmental liabilities and liabilities resulting from the breach of representations or warranties made in accordance with the agreements.  We do not have any known material environmental commitments, contingencies or other indemnification issues arising from these arrangements.
As part of our customer service strategy, we guarantee the used vehicles we retail with at least a 30-day limited warranty.  A vehicle in need of repair within this period will be repaired free of charge.  As a result, each vehicle sold has an implied liability associated with it.  Accordingly, based on historical trends, we record a provision for estimated future repairs during the guarantee period for each vehicle sold.  The liability for this guarantee was $6.4 million as of November 30, 2018, and $6.1 million as of February 28, 2018, and is included in accrued expenses and other current liabilities.
 


Page 20



ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements, the accompanying notes and the MD&A included in our Annual Report on Form 10-K for the fiscal year ended February 28, 2018 (“fiscal 2018”), as well as our consolidated financial statements and the accompanying notes included in Item 1 of this Form 10-Q.  Note references are to the notes to consolidated financial statements included in Item 1.  All references to net earnings per share are to diluted net earnings per share.  Certain prior year amounts have been reclassified to conform to the current year’s presentation.  Amounts and percentages may not total due to rounding.

OVERVIEW
 
CarMax 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.
 
CarMax Sales Operations
Our sales operations segment consists of retail sales of used vehicles and related products and services, such as wholesale vehicle sales; the sale of extended protection plan (“EPP”) products, which include extended service plans (“ESPs”) and guaranteed asset protection (“GAP”); and vehicle repair service. We offer low, no-haggle prices; a broad selection of CarMax Quality Certified used vehicles; value-added EPP products; and superior customer service. Our website and related mobile apps are tools for communicating the CarMax consumer offer in detail; sophisticated search engines for finding the right vehicle; and sales channels for customers who prefer to conduct part of the shopping and sales process online. 
 
Our customers finance the majority of the retail vehicles purchased from us, and availability of on-the-spot financing is a critical component of the sales process.  We provide financing to qualified retail customers through CAF and our arrangements with industry-leading third-party finance providers.  All of the finance offers, whether by CAF or our third-party providers, are backed by a 3-day payoff option. 
 
As of November 30, 2018, we operated 198 used car stores in 97 U.S. television markets.  As of that date, we also conducted wholesale auctions at 75 used car stores and we operated 2 new car franchises. 
 
CarMax Auto Finance
In addition to third-party finance providers, we provide vehicle financing through CAF, which offers financing solely to customers buying retail vehicles from CarMax.  CAF allows us to manage our reliance on third-party finance providers and to leverage knowledge of our business to provide qualifying customers a competitive financing option.  As a result, we believe CAF enables us to capture additional profits, cash flows and sales.  CAF income primarily reflects the interest and fee income generated by the auto loan receivables less the interest expense associated with the debt issued to fund these receivables, a provision for estimated loan losses and direct expenses.  CAF income does not include any allocation of indirect costs.  After the effect of 3-day payoffs and vehicle returns, CAF financed 43.6% of our retail used vehicle unit sales in the first nine months of fiscal 2019.  As of November 30, 2018, CAF serviced approximately 953,000 customer accounts in its $12.38 billion portfolio of managed receivables. 
 
Management regularly analyzes CAF’s operating results by assessing the competitiveness of our consumer offer, profitability, the performance of the auto loan receivables, including trends in credit losses and delinquencies, and CAF direct expenses.
 
Revenues and Profitability -- Three and Nine Months Ended November 30, 2018
During the third quarter of fiscal 2019, net sales and operating revenues increased 4.6% and net earnings increased 27.9%. The increase in net earnings was due to the combination of a 10% increase in earnings before income taxes and a decrease in the effective income tax rate to 23.2% in the third quarter of fiscal 2019 from 33.9% in the third quarter of fiscal 2018, reflecting the effect of the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”). The 34.6% increase in net earnings per share reflected the increase in net earnings and the effect of our ongoing share repurchase program.
 
Our primary source of revenue and net earnings is the retail sale of used vehicles.  During the third quarter of fiscal 2019, we sold 173,476 used vehicles, representing 82.6% of our net sales and operating revenues and 65.0% of our gross profit.  Compared with

Page 21



the prior year period, used vehicle revenues grew 3.6% and used vehicle gross profits improved 1.5%. Total used unit sales increased 2.3%, while comparable store used unit sales decreased 1.2%.

Wholesale sales are also a significant contributor to our revenues and net earnings.  During the third quarter of fiscal 2019, we sold 110,403 wholesale vehicles, representing 14.1% of our net sales and operating revenues and 18.4% of our gross profit.  Compared with the prior year period, wholesale vehicle revenues grew 9.2% and wholesale vehicle gross profits increased 11.9%, primarily due to a 10.0% increase in unit sales.
 
During the third quarter of fiscal 2019, other sales and revenues, which include revenues earned on the sale of EPP products, net third-party finance fees and service department and new vehicle sales, represented 3.4% of our net sales and operating revenues and 16.6% of our gross profit. Compared with the prior year period, other sales and revenues increased 12.1% and other gross profit rose 16.4%, primarily reflecting improvements in EPP revenues and net third-party finance fees.
 
Income from our CAF segment totaled $109.7 million in the third quarter of fiscal 2019, up 6.7% compared with the prior year period.  The increase in CAF income reflected the net effects of an increase in average managed receivables and a slightly lower total interest margin percentage.

Selling, general and administrative (“SG&A”) expenses increased 2.5% to $409.5 million, primarily reflecting an increase in spending to advance our technology platforms and support strategic initiatives as well as the 11% increase in our store base since the beginning of the third quarter of fiscal 2018, partially offset by a decrease in share-based compensation expense.

The effective income tax rate declined to 23.2% in the third quarter of fiscal 2019 from 33.9% in the third quarter of fiscal 2018, primarily due to the reduction in the federal statutory tax rate following the enactment of the 2017 Tax Act.
 
During the first nine months of fiscal 2019, net sales and operating revenues increased 6.3%, net earnings increased 19.9% and net earnings per share increased 24.9%.

Liquidity
Our primary ongoing sources of liquidity include funds provided by operations, proceeds from non-recourse funding vehicles, and borrowings under our revolving credit facility or through other financing sources.  During the first nine months of fiscal 2019, net cash provided by operations totaled $114.6 million. This amount, combined with $748.4 million of net issuances of non-recourse notes payable, resulted in $863.0 million of adjusted net cash provided by operating activities (a non-GAAP measure). This liquidity was primarily used to fund the 9.3 million common shares repurchased under our share repurchase program and our store growth.

When considering cash provided by operating activities, management does not include increases in auto loan receivables that have been funded with non-recourse notes payable, which are separately reflected as cash provided by financing activities.  For a reconciliation of adjusted net cash provided by operating activities to net cash provided by operating activities, the most directly comparable GAAP financial measure, see “Reconciliation of Adjusted Net Cash from Operating Activities” included in “FINANCIAL CONDITION – Liquidity and Capital Resources.”
 
Future Outlook
Our long-term strategy is to complete the rollout of our retail concept, including our new omni-channel experience, and to increase our share of used vehicle unit sales in each of the markets in which we operate. Our new omni-channel experience empowers customers to buy a car on their own terms, either completely from home, in-store, or through a seamlessly integrated combination of online and in-store experiences. We believe that, over the long term, used vehicle unit sales are the primary driver for earnings growth. We also believe that increased used vehicle unit sales will drive increased sales of wholesale vehicles and ancillary products and, over time, increased CAF income.
As of November 30, 2018, we had used car stores located in 97 U.S. television markets, which covered approximately 74% of the U.S. population.  Completing our rollout requires a disciplined approach to opening stores in new markets and expanding our presence in existing markets. The format and operating models utilized in stores are continuously evaluated and may change or evolve over time based upon market and consumer expectations. During the first nine months of fiscal 2019, we opened 10 stores, and during the remainder of the fiscal year, we plan to open 5 stores.  In fiscal 2020, we plan to open between 13 and 16 stores.   For a detailed list of stores we plan to open in the 12 months following November 30, 2018, see the table included in “PLANNED FUTURE ACTIVITIES.”


Page 22



In calendar 2017, we estimate we sold approximately 4.6% of the age 0- to 10-year old vehicles sold in the television markets in which we operate. In addition to opening new stores, our strategy to increase our share of each of these markets includes continuing to focus on:

Delivering a new customer-driven, omni-channel buying and selling experience that is a unique and powerful integration of our in-store and online capabilities.
Hiring and developing an engaged and skilled workforce.
Improving efficiency in our stores and our logistics operations to drive out waste.
Leveraging data and advanced analytics to continuously improve our processes and systems.

We are investing in various strategic initiatives to increase innovation, specifically with regards to customer facing and customer-enabling technologies. We continue to make improvements to our website and test new customer experiences, such as finance pre-approval, home delivery, online appraisal and express pick-up. Our use of data is a core component of these initiatives and continues to be a strategic asset for us as we leverage data to enhance the customer experience and increase operational efficiencies. Ultimately, our goal is to create an omni-channel experience that enables customers to seamlessly move across the online and in-store experience with ease. In December 2018, we launched our new omni-channel car buying experience in the Atlanta market, which will help us learn how to best operationalize all our offerings and scale them across the entire organization. We anticipate having the new omni-channel experience available to the majority of our customers by February 2020.
  
While there are incremental costs and inefficiencies in the near term related to strategic initiatives, we have also identified potential cost savings through process changes and other improvements that can help offset these expenses over time. While in any individual period conditions may vary, over the long term, we would expect to begin leveraging our SG&A expenses when comparable store used unit sales growth is in the mid-single digit range. In the near term, while we continue to invest in these strategic initiatives, we believe the SG&A leverage point is likely at the higher end of this range.
 
While we execute our long-term strategy, there are trends and factors that could impact our strategic approach or our results in the short and medium term. A significant portion of our used vehicle inventory is sourced from local, regional and online wholesale auto auctions. Wholesale vehicle prices are influenced by a variety of factors, including the supply of vehicles available at auction relative to dealer demand. Industry sources predict that there will be a continued influx in off-lease vehicles in coming years, which has and could continue to increase the volume of late-model vehicles available at auction relative to dealer demand. While conditions in any one quarter may vary, this could impact wholesale auction prices, our vehicle acquisition costs and CAF recovery rates.

The federal statutory tax rate associated with the 2017 Tax Act, which was enacted in our fourth quarter of fiscal 2018, is expected to continue to benefit our financial results and cash flows. We are using a portion of those benefits to invest in our associates and business, including our digital and technology capabilities. After these investments, we believe the majority of the benefit from the lower tax rate will impact our net earnings.

For additional information about risks and uncertainties facing our company, see “Risk Factors,” included in Part I. Item 1A of the Annual Report on Form 10-K for the fiscal year ended February 28, 2018.

CRITICAL ACCOUNTING POLICIES

For information on critical accounting policies, see “Critical Accounting Policies” in MD&A included in Item 7 of the Annual Report on Form 10-K for the fiscal year ended February 28, 2018


Page 23



RESULTS OF OPERATIONS – CARMAX SALES OPERATIONS
 
NET SALES AND OPERATING REVENUES
 
Three Months Ended November 30
 
Nine Months Ended November 30
(In millions)
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Used vehicle sales
$
3,547.9

 
$
3,425.5

 
3.6
%
 
$
11,544.3

 
$
10,963.1

 
5.3
%
Wholesale vehicle sales
603.6

 
552.8

 
9.2
%
 
1,849.2

 
1,653.9

 
11.8
%
Other sales and revenues:
 

 
 

 
 

 
 

 
 

 
 

Extended protection plan revenues
85.6

 
77.1

 
11.1
%
 
284.2

 
254.5

 
11.7
%
Third-party finance fees, net
(8.4
)
 
(12.8
)
 
34.7
%
 
(32.5
)
 
(35.8
)
 
9.2
%
Other
67.2

 
64.4

 
4.1
%
 
209.2

 
200.3

 
4.5
%
Total other sales and revenues
144.4

 
128.7

 
12.1
%
 
460.9

 
419.0

 
10.0
%
Total net sales and operating revenues
$
4,295.9

 
$
4,107.0

 
4.6
%
 
$
13,854.5

 
$
13,036.0

 
6.3
%
 
UNIT SALES
 
Three Months Ended November 30
 
Nine Months Ended November 30
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Used vehicles
173,476

 
169,648

 
2.3
%
 
568,754

 
550,940

 
3.2
%
Wholesale vehicles
110,403

 
100,332

 
10.0
%
 
344,604

 
309,283

 
11.4
%
 
AVERAGE SELLING PRICES
 
Three Months Ended November 30
 
Nine Months Ended November 30
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Used vehicles
$
20,273

 
$
20,008

 
1.3
 %
 
$
20,109

 
$
19,705

 
2.1
%
Wholesale vehicles
$
5,214

 
$
5,268

 
(1.0
)%
 
$
5,120

 
$
5,110

 
0.2
%

COMPARABLE STORE USED VEHICLE SALES CHANGES
 
Three Months Ended November 30 (1)
 
Nine Months Ended November 30 (1)
 
2018
 
2017
 
2018
 
2017
Used vehicle units
(1.2
)%
 
2.7
%
 
(0.5
)%
 
5.5
%
Used vehicle revenues
0.1
 %
 
5.3
%
 
1.5
 %
 
5.8
%

(1) 
Stores are added to the comparable store base beginning in their fourteenth full month of operation. We do not remove renovated stores from our comparable store base. Comparable store calculations include results for a set of stores that were included in our comparable store base in both the current and corresponding prior year periods.

VEHICLE SALES CHANGES
 
Three Months Ended November 30
 
Nine Months Ended November 30
 
2018
 
2017
 
2018
 
2017
Used vehicle units
2.3
%
 
8.2
%
 
3.2
%
 
11.2
%
Used vehicle revenues
3.6
%
 
10.8
%
 
5.3
%
 
11.6