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 May 31, 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 June 23, 2022
Common Stock, par value $0.50	159,165,992

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 Months Ended May 31, 2022 and 2021	3
		Consolidated Statements of Comprehensive Income (Unaudited) –
		Three Months Ended May 31, 2022 and 2021	4
		Consolidated Balance Sheets (Unaudited) –
		May 31, 2022 and February 28, 2022	5
		Consolidated Statements of Cash Flows (Unaudited) –
		Three Months Ended May 31, 2022 and 2021	6
		Consolidated Statements of Shareholders’ Equity (Unaudited) –
		Three Months Ended May 31, 2022 and 2021	7
		Notes to Consolidated Financial Statements (Unaudited)	8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and
		Results of Operations	33
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
	Item 4.	Controls and Procedures	49
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	50
	Item 1A.	Risk Factors	50
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
	Item 6.	Exhibits	51
SIGNATURES			52

Page 2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CARMAX, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(Unaudited)

	Three Months Ended May 31
(In thousands except per share data)	2022		%(1)	2021		%(1)
SALES AND OPERATING REVENUES:
Used vehicle sales	$	7,014,490	75.3	$	6,157,344	80.0
Wholesale vehicle sales	2,116,517		22.7	1,374,357		17.9
Other sales and revenues	180,614		1.9	165,898		2.2
NET SALES AND OPERATING REVENUES	9,311,621		100.0	7,697,599		100.0
COST OF SALES:
Used vehicle cost of sales	6,451,010		69.3	5,560,337		72.2
Wholesale vehicle cost of sales	1,924,850		20.7	1,188,513		15.4
Other cost of sales	60,370		0.6	24,240		0.3
TOTAL COST OF SALES	8,436,230		90.6	6,773,090		88.0
GROSS PROFIT	875,391		9.4	924,509		12.0
CARMAX AUTO FINANCE INCOME	204,473		2.2	241,731		3.1
Selling, general and administrative expenses	656,740		7.1	554,069		7.2
Depreciation and amortization	55,648		0.6	49,890		0.6
Interest expense	28,775		0.3	20,534		0.3
Other expense (income)	2,099		—	(25,577)		(0.3)
Earnings before income taxes	336,602		3.6	567,324		7.4
Income tax provision	84,337		0.9	130,568		1.7
NET EARNINGS	$	252,265	2.7	$	436,756	5.7
WEIGHTED AVERAGE COMMON SHARES:
Basic	160,298			163,151
Diluted	161,798			166,295
NET EARNINGS PER SHARE:
Basic	$	1.57		$	2.68
Diluted	$	1.56		$	2.63

(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 May 31
(In thousands)	2022		2021
NET EARNINGS	$	252,265	$	436,756
Other comprehensive income, net of taxes:
Net change in retirement benefit plan unrecognized actuarial losses	481		659
Net change in cash flow hedge unrecognized gains	51,833		2,278
Other comprehensive income, net of taxes	52,314		2,937
TOTAL COMPREHENSIVE INCOME	$	304,579	$	439,693

See accompanying notes to consolidated financial statements.

Page 4

CARMAX, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

	As of May 31		As of February 28
(In thousands except share data)	2022		2022
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	95,313	$	102,716
Restricted cash from collections on auto loans receivable	531,344		548,099
Accounts receivable, net	610,587		560,984
Inventory	4,691,085		5,124,569
Other current assets	189,638		212,922
TOTAL CURRENT ASSETS	6,117,967		6,549,290
Auto loans receivable, net of allowance for loan losses of $458,214 and $433,030 as of May 31, 2022 and February 28, 2022, respectively	15,672,605		15,289,701
Property and equipment, net of accumulated depreciation of $1,493,660 and $1,437,548 as of May 31, 2022 and February 28, 2022, respectively	3,258,614		3,209,068
Deferred income taxes	91,305		120,931
Operating lease assets	533,355		537,357
Goodwill	141,258		141,258
Other assets	523,590		490,659
TOTAL ASSETS	$	26,338,694	$	26,338,264
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	1,066,922	$	937,717
Accrued expenses and other current liabilities	489,619		533,271
Accrued income taxes	18,365		—
Current portion of operating lease liabilities	44,384		44,197
Current portion of long-term debt	111,517		11,203
Current portion of non-recourse notes payable	520,944		521,069
TOTAL CURRENT LIABILITIES	2,251,751		2,047,457
Long-term debt, excluding current portion	2,569,751		3,255,304
Non-recourse notes payable, excluding current portion	15,218,229		14,919,715
Operating lease liabilities, excluding current portion	519,818		523,269
Other liabilities	378,508		357,080
TOTAL LIABILITIES	20,938,057		21,102,825
Commitments and contingent liabilities
SHAREHOLDERS’ EQUITY:
Common stock, $0.50 par value; 350,000,000 shares authorized; 159,613,860 and 161,053,983 shares issued and outstanding as of May 31, 2022 and February 28, 2022, respectively	79,807		80,527
Capital in excess of par value	1,678,172		1,677,268
Accumulated other comprehensive income (loss)	5,892		(46,422)
Retained earnings	3,636,766		3,524,066
TOTAL SHAREHOLDERS’ EQUITY	5,400,637		5,235,439
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	26,338,694	$	26,338,264

See accompanying notes to consolidated financial statements.

Page 5

CARMAX, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended May 31
(In thousands)	2022		2021
OPERATING ACTIVITIES:
Net earnings	$	252,265	$	436,756
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization	70,473		62,356
Share-based compensation expense	22,443		41,074
Provision for loan losses	57,840		(24,375)
Provision for cancellation reserves	31,719		34,128
Deferred income tax provision	11,561		24,751
Other	5,342		(21,037)
Net (increase) decrease in:
Accounts receivable, net	(49,603)		(174,149)
Inventory	433,484		(91,690)
Other current assets	73,315		(9,873)
Auto loans receivable, net	(440,744)		(644,850)
Other assets	(15,154)		(2,853)
Net increase (decrease) in:
Accounts payable, accrued expenses and other
current liabilities and accrued income taxes	105,445		315,784
Other liabilities	(27,434)		(57,905)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	530,952		(111,883)
INVESTING ACTIVITIES:
Capital expenditures	(94,808)		(59,145)
Proceeds from sale of business	—		617
Purchases of investments	(4,380)		(4,701)
Sales and returns of investments	150		86
NET CASH USED IN INVESTING ACTIVITIES	(99,038)		(63,143)
FINANCING ACTIVITIES:
Proceeds from issuances of long-term debt	1,043,100		388,600
Payments on long-term debt	(1,629,024)		(391,235)
Cash paid for debt issuance costs	(3,940)		(3,910)
Payments on finance lease obligations	(2,925)		(2,789)
Issuances of non-recourse notes payable	3,569,605		3,610,819
Payments on non-recourse notes payable	(3,272,242)		(3,014,131)
Repurchase and retirement of common stock	(162,974)		(133,838)
Equity issuances	3,443		21,589
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES	(454,957)		475,105
(Decrease) increase in cash, cash equivalents, and restricted cash	(23,043)		300,079
Cash, cash equivalents, and restricted cash at beginning of year	803,618		771,947
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD	$	780,575	$	1,072,026
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS:
Cash and cash equivalents	$	95,313	$	377,954
Restricted cash from collections on auto loans receivable	531,344		549,578
Restricted cash included in other assets	153,918		144,494
CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD	$	780,575	$	1,072,026

See accompanying notes to consolidated financial statements.

Page 6

CARMAX, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

(Unaudited)

	Three Months Ended May 31, 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

CARMAX, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

(Unaudited)

	Three Months Ended May 31, 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

See accompanying notes to consolidated financial statements.

Page 7

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. Customers can choose to complete the car-buying experience in-person at one of our stores; or buy the car online and receive delivery through express pickup, available nationwide, or home delivery, available to most customers. We offer customers a range of related products and services, including the appraisal and purchase of vehicles directly from consumers; the financing of retail vehicle purchases through CAF and third-party finance providers; the sale of extended protection plan (“EPP”) products, which include extended service plans (“ESPs”) and guaranteed asset protection (“GAP”); and vehicle repair service.  Vehicles purchased through the appraisal process that do not meet our retail standards are sold to licensed dealers through on-site or virtual wholesale auctions.

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

The accounting policies followed in the presentation of our interim financial results are consistent with those included in the company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2022 (the “2022 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 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 8

Recent Accounting Pronouncements.

Adopted in the Current Period

In August 2020, the Financial Accounting Standards Board (“FASB”) issued an accounting pronouncement (ASU 2020-06) related to the measurement and disclosure requirements for convertible instruments and contracts in an entity's own equity. The pronouncement simplifies and adds disclosure requirements for the accounting and measurement of convertible instruments and the settlement assessment for contracts in an entity's own equity. We adopted this pronouncement for our fiscal year beginning March 1, 2022, and it did not have a material effect on our consolidated financial statements.

In July 2021, the FASB issued an accounting pronouncement (ASU 2021-05) related to accounting for sales-type leases with variable lease payments. This pronouncement is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. We adopted this pronouncement for our fiscal year beginning March 1, 2022, and it did not have a material effect on our consolidated financial statements.

In November 2021, the FASB issued an accounting pronouncement (ASU 2021-10) related to government assistance disclosures. The amendments in this update increase the transparency surrounding government assistance by requiring disclosure of 1) the types of assistance received, 2) an entity’s accounting for the assistance, and 3) the effect of the assistance on the entity’s financial statements. We adopted this pronouncement for our fiscal year beginning March 1, 2022, and it did not 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 9

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 is primarily attributed to expected synergies and the assembled workforce of the acquired business and is not deductible for tax purposes. The fair values assigned to the net identifiable assets and liabilities assumed are based on management’s estimates and assumptions.

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 are 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 are 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 are not presented.

Page 10

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 May 31
(In millions)	2022		2021
Used vehicle sales	$	7,014.5	$	6,157.3
Wholesale vehicle sales	2,116.5		1,374.4
Other sales and revenues:
Extended protection plan revenues	116.5		134.2
Third-party finance income/(fees), net	3.4		(4.6)
Advertising & subscription revenues (1)	34.4		—
Service revenues	21.9		22.2
Other	4.4		14.1
Total other sales and revenues	180.6		165.9
Total net sales and operating revenues	$	9,311.6	$	7,697.6

(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 May 31, 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 May 31
(In millions)	2022		% (1)	2021		% (1)
Interest margin:
Interest and fee income	$	346.7	8.8	$	310.3	8.8
Interest expense	(48.8)		(1.2)	(65.8)		(1.9)
Total interest margin	297.9		7.5	244.5		6.9
Provision for loan losses	(57.8)		(1.5)	24.4		0.7
Total interest margin after provision for loan losses	240.1		6.1	268.9		7.6
Direct expenses:
Payroll and fringe benefit expense	(14.7)		(0.4)	(12.6)		(0.4)
Depreciation and amortization	(3.8)		(0.1)	(0.2)		—
Other direct expenses	(17.1)		(0.4)	(14.4)		(0.4)
Total direct expenses	(35.6)		(0.9)	(27.2)		(0.8)
CarMax Auto Finance income	$	204.5	5.2	$	241.7	6.8
Total average managed receivables	$	15,817.0		$	14,148.7

(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 $15.76 billion as of May 31, 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 May 31		As of February 28
(In millions)	2022		2022
Asset-backed term funding	$	11,613.3	$	11,653.8
Warehouse facilities	3,629.9		3,291.9
Overcollateralization (1)	565.1		489.1
Other managed receivables (2)	243.7		217.5
Total ending managed receivables	16,052.0		15,652.3
Accrued interest and fees	78.1		67.3
Other	0.7		3.1
Less: allowance for loan losses	(458.2)		(433.0)
Auto loans receivable, net	$	15,672.6	$	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.

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Ending Managed Receivables by Major Credit Grade

	As of May 31, 2022
	Fiscal Year of Origination (1)
(In millions)	2023		2022		2021		2020		2019		Prior to 2019		Total		% (2)
Core managed receivables (3):
A	$	1,192.3	$	3,447.1	$	1,584.2	$	1,088.7	$	463.0	$	158.3	$	7,933.6	49.4
B	869.9		2,495.0		1,139.0		743.6		393.8		183.0		5,824.3		36.3
C and other	240.7		823.7		440.2		255.9		131.0		75.5		1,967.0		12.3
Total core managed receivables	2,302.9		6,765.8		3,163.4		2,088.2		987.8		416.8		15,724.9		98.0
Other managed receivables (4):
C and other	81.2		161.6		21.3		30.6		21.1		11.3		327.1		2.0
Total ending managed receivables	$	2,384.1	$	6,927.4	$	3,184.7	$	2,118.8	$	1,008.9	$	428.1	$	16,052.0	100.0

	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 May 31, 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.

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 rate, 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

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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.

Allowance for Loan Losses

	Three Months Ended May 31, 2022
(In millions)	Core		Other		Total		% (1)
Balance as of beginning of period	$	377.5	$	55.5	$	433.0	2.77
Charge-offs	(61.4)		(6.8)		(68.2)
Recoveries	33.1		2.5		35.6
Provision for loan losses	41.2		16.6		57.8
Balance as of end of period	$	390.4	$	67.8	$	458.2	2.85

	Three Months Ended May 31, 2021
(In millions)	Core		Other		Total		% (1)
Balance as of beginning of period	$	379.4	$	31.7	$	411.1	2.97
Charge-offs	(38.7)		(3.1)		(41.8)
Recoveries	32.2		2.4		34.6
Provision for loan losses	(24.8)		0.4		(24.4)
Balance as of end of period	$	348.1	$	31.4	$	379.5	2.62

(1)     Percent of total ending managed receivables.

(2)     Net of costs incurred to recover vehicle.

The allowance for loan losses increased $25.2 million from the prior quarter, primarily reflecting growth in receivables. During the quarter, the previously disclosed expansion of our Tier 2 and Tier 3 originations within CAF's portfolio resulted in a 5 basis point increase in the allowance as a percent of total ending managed receivables from the prior quarter. Loss performance was relatively consistent with the prior quarter. As a result, we determined that the quantitative loss rates should be kept consistent with the end of fiscal 2022. The allowance for loan losses as of May 31, 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 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.

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Past Due Receivables

	As of May 31, 2022
	Core Receivables								Other Receivables		Total
(In millions)	A		B		C & Other		Total		C & Other		$		% (1)
Current	$	7,901.3	$	5,549.2	$	1,692.5	$	15,143.0	$	256.7	$	15,399.7	95.94
Delinquent loans:
31-60 days past due	21.6		175.6		162.8		360.0		40.9		400.9		2.50
61-90 days past due	8.1		79.5		91.4		179.0		23.9		202.9		1.26
Greater than 90 days past due	2.6		20.0		20.3		42.9		5.6		48.5		0.30
Total past due	32.3		275.1		274.5		581.9		70.4		652.3		4.06
Total ending managed receivables	$	7,933.6	$	5,824.3	$	1,967.0	$	15,724.9	$	327.1	$	16,052.0	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