UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended November 30, 2022

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number:  1-31420

CARMAX, INC.

(Exact name of registrant as specified in its charter)

Virginia		54-1821055
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification No.)
12800 Tuckahoe Creek Parkway		23238
Richmond,	Virginia
(Address of Principal Executive Offices)		(Zip Code)

(804) 747-0422

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	KMX	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ☒    No  ☐ 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐     No  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding as of January 4, 2023
Common Stock, par value $0.50	158,023,499

Page 1

CARMAX, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

			Page No.
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements:
		Consolidated Statements of Earnings (Unaudited) –
		Three and Nine Months Ended November 30, 2022 and 2021	3
		Consolidated Statements of Comprehensive Income (Unaudited) –
		Three and Nine Months Ended November 30, 2022 and 2021	4
		Consolidated Balance Sheets (Unaudited) –
		November 30, 2022 and February 28, 2022	5
		Consolidated Statements of Cash Flows (Unaudited) –
		Nine Months Ended November 30, 2022 and 2021	6
		Consolidated Statements of Shareholders’ Equity (Unaudited) –
		Three and Nine Months Ended November 30, 2022 and 2021	7
		Notes to Consolidated Financial Statements (Unaudited)	9
	Item 2.	Management’s Discussion and Analysis of Financial Condition and
		Results of Operations	31
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
	Item 4.	Controls and Procedures	48
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	49
	Item 1A.	Risk Factors	49
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
	Item 6.	Exhibits	50
SIGNATURES			51

Page 2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CARMAX, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(Unaudited)

	Three Months Ended November 30						Nine Months Ended November 30
(In thousands except per share data)	2022		%(1)	2021		%(1)	2022		%(1)	2021		%(1)
SALES AND OPERATING REVENUES:
Used vehicle sales	$	5,204,584	80.0	$	6,435,590	75.5	$	18,503,159	77.2	$	18,697,300	77.2
Wholesale vehicle sales	1,152,207		17.7	1,922,283		22.5	4,959,050		20.7	4,998,212		20.6
Other sales and revenues	149,165		2.3	169,886		2.0	500,171		2.1	518,205		2.1
NET SALES AND OPERATING REVENUES	6,505,956		100.0	8,527,759		100.0	23,962,380		100.0	24,213,717		100.0
COST OF SALES:
Used vehicle cost of sales	4,801,790		73.8	5,927,237		69.5	17,041,898		71.1	17,085,416		70.6
Wholesale vehicle cost of sales	1,037,534		15.9	1,710,103		20.1	4,512,053		18.8	4,411,175		18.2
Other cost of sales	89,944		1.4	53,859		0.6	219,205		0.9	140,573		0.6
TOTAL COST OF SALES	5,929,268		91.1	7,691,199		90.2	21,773,156		90.9	21,637,164		89.4
GROSS PROFIT	576,688		8.9	836,560		9.8	2,189,224		9.1	2,576,553		10.6
CARMAX AUTO FINANCE INCOME	152,196		2.3	165,968		1.9	539,538		2.3	607,732		2.5
Selling, general and administrative expenses	591,727		9.1	575,930		6.8	1,914,508		8.0	1,704,285		7.0
Depreciation and amortization	57,377		0.9	54,428		0.6	170,717		0.7	157,107		0.6
Interest expense	30,150		0.5	24,303		0.3	91,670		0.4	67,247		0.3
Other income	(363)		—	(8,094)		(0.1)	(2,303)		—	(35,453)		(0.1)
Earnings before income taxes	49,993		0.8	355,961		4.2	554,170		2.3	1,291,099		5.3
Income tax provision	12,413		0.2	86,523		1.0	138,420		0.6	299,638		1.2
NET EARNINGS	$	37,580	0.6	$	269,438	3.2	$	415,750	1.7	$	991,461	4.1
WEIGHTED AVERAGE COMMON SHARES:
Basic	158,003			162,006			159,044			162,710
Diluted	158,536			164,873			160,195			165,606
NET EARNINGS PER SHARE:
Basic	$	0.24		$	1.66		$	2.61		$	6.09
Diluted	$	0.24		$	1.63		$	2.60		$	5.99

(1)    Percents are calculated as a percentage of net sales and operating revenues and may not total due to rounding. 

See accompanying notes to consolidated financial statements.

Page 3

CARMAX, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended November 30				Nine Months Ended November 30
(In thousands)	2022		2021		2022		2021
NET EARNINGS	$	37,580	$	269,438	$	415,750	$	991,461
Other comprehensive income, net of taxes:
Net change in retirement benefit plan unrecognized actuarial losses	482		659		1,444		1,976
Net change in cash flow hedge unrecognized gains	24,939		11,383		102,398		16,414
Other comprehensive income, net of taxes	25,421		12,042		103,842		18,390
TOTAL COMPREHENSIVE INCOME	$	63,001	$	281,480	$	519,592	$	1,009,851

See accompanying notes to consolidated financial statements.

Page 4

CARMAX, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

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

See accompanying notes to consolidated financial statements.

Page 5

CARMAX, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended November 30
(In thousands)	2022		2021
OPERATING ACTIVITIES:
Net earnings	$	415,750	$	991,461
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization	202,655		200,819
Share-based compensation expense	64,974		108,962
Provision for loan losses	218,967		87,342
Provision for cancellation reserves	79,924		91,607
Deferred income tax (benefit) provision	(2,178)		19,564
Other	8,879		(26,808)
Net decrease (increase) in:
Accounts receivable, net	314,190		(290,346)
Inventory	1,709,632		(1,502,323)
Other current assets	149,777		(13,615)
Auto loans receivable, net	(1,170,098)		(1,764,693)
Other assets	(43,502)		(18,309)
Net (decrease) increase in:
Accounts payable, accrued expenses and other
current liabilities and accrued income taxes	(195,154)		170,474
Other liabilities	(91,739)		(136,780)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	1,662,077		(2,082,645)
INVESTING ACTIVITIES:
Capital expenditures	(319,486)		(226,903)
Proceeds from disposal of property and equipment	3,806		260
Proceeds from sale of business	—		12,284
Purchases of investments	(6,460)		(13,676)
Sales and returns of investments	3,486		36,915
Business acquisition, net of cash acquired	—		(241,563)
NET CASH USED IN INVESTING ACTIVITIES	(318,654)		(432,683)
FINANCING ACTIVITIES:
Proceeds from issuances of long-term debt	2,863,500		5,804,200
Payments on long-term debt	(4,116,775)		(4,524,973)
Cash paid for debt issuance costs	(13,987)		(14,473)
Payments on finance lease obligations	(10,056)		(8,822)
Issuances of non-recourse notes payable	11,351,696		11,217,298
Payments on non-recourse notes payable	(10,581,076)		(9,565,649)
Repurchase and retirement of common stock	(333,814)		(475,950)
Equity issuances	13,504		76,310
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES	(827,008)		2,507,941
Increase (decrease) in cash, cash equivalents, and restricted cash	516,415		(7,387)
Cash, cash equivalents, and restricted cash at beginning of year	803,618		771,947
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD	$	1,320,033	$	764,560
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS:
Cash and cash equivalents	$	688,618	$	62,598
Restricted cash from collections on auto loans receivable	466,525		552,487
Restricted cash included in other assets	164,890		149,475
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD	$	1,320,033	$	764,560

See accompanying notes to consolidated financial statements.

Page 6

CARMAX, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

(Unaudited)

	Nine Months Ended November 30, 2022
								Accumulated
	Common			Capital in				Other
	Shares	Common		Excess of		Retained		Comprehensive
(In thousands)	Outstanding	Stock		Par Value		Earnings		Income (Loss)		Total
Balance as of February 28, 2022	161,054	$	80,527	$	1,677,268	$	3,524,066	$	(46,422)	$	5,235,439
Net earnings	—	—		—		252,265		—		252,265
Other comprehensive income	—	—		—		—		52,314		52,314
Share-based compensation expense	—	—		21,594		—		—		21,594
Repurchases of common stock	(1,644)	(822)		(17,207)		(139,565)		—		(157,594)
Exercise of common stock options	49	24		3,418		—		—		3,442
Stock incentive plans, net shares issued	155	78		(6,901)		—		—		(6,823)
Balance as of May 31, 2022	159,614	$	79,807	$	1,678,172	$	3,636,766	$	5,892	$	5,400,637
Net earnings	—	—		—		125,905		—		125,905
Other comprehensive income	—	—		—		—		26,107		26,107
Share-based compensation expense	—	—		15,062		—		—		15,062
Repurchases of common stock	(1,730)	(865)		(18,279)		(143,873)		—		(163,017)
Exercise of common stock options	155	78		9,762		—		—		9,840
Stock incentive plans, net shares issued	5	2		(309)		—		—		(307)
Balance as of August 31, 2022	158,044	$	79,022	$	1,684,408	$	3,618,798	$	31,999	$	5,414,227
Net earnings	—	—		—		37,580		—		37,580
Other comprehensive income	—	—		—		—		25,421		25,421
Share-based compensation expense	—	—		12,797		—		—		12,797
Repurchases of common stock	(30)	(15)		(320)		(2,297)		—		(2,632)
Exercise of common stock options	4	2		218		—		—		220
Stock incentive plans, net shares issued	1	1		(41)		—		—		(40)
Balance as of November 30, 2022	158,019	$	79,010	$	1,697,062	$	3,654,081	$	57,420	$	5,487,573

See accompanying notes to consolidated financial statements.

Page 7

CARMAX, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

(Unaudited)

	Nine Months Ended November 30, 2021
								Accumulated
	Common			Capital in				Other
	Shares	Common		Excess of		Retained		Comprehensive
(In thousands)	Outstanding	Stock		Par Value		Earnings		Loss		Total
Balance as of February 28, 2021	163,172	$	81,586	$	1,513,821	$	2,887,897	$	(118,691)	$	4,364,613
Net earnings	—	—		—		436,756		—		436,756
Other comprehensive income	—	—		—		—		2,937		2,937
Share-based compensation expense	—	—		20,102		—		—		20,102
Repurchases of common stock	(998)	(499)		(9,348)		(114,695)		—		(124,542)
Exercise of common stock options	375	187		21,403		—		—		21,590
Stock incentive plans, net shares issued	254	127		(18,102)		—		—		(17,975)
Balance as of May 31, 2021	162,803	$	81,401	$	1,527,876	$	3,209,958	$	(115,754)	$	4,703,481
Net earnings	—	—		—		285,267		—		285,267
Other comprehensive income	—	—		—		—		3,411		3,411
Share-based compensation expense	—	—		14,116		—		—		14,116
Shares issued for acquisition	776	388		90,183		—		—		90,571
Repurchases of common stock	(1,754)	(877)		(17,164)		(202,004)		—		(220,045)
Exercise of common stock options	621	311		38,185		—		—		38,496
Stock incentive plans, net shares issued	24	12		(130)		—		—		(118)
Balance as of August 31, 2021	162,470	$	81,235	$	1,653,066	$	3,293,221	$	(112,343)	$	4,915,179
Net earnings	—	—		—		269,438		—		269,438
Other comprehensive income	—	—		—		—		12,042		12,042
Share-based compensation expense	—	—		12,347		—		—		12,347
Repurchases of common stock	(851)	(425)		(8,695)		(106,226)		—		(115,346)
Exercise of common stock options	253	126		16,097		—		—		16,223
Stock incentive plans, net shares issued	—	—		(87)		—		—		(87)
Balance as of November 30, 2021	161,872	$	80,936	$	1,672,728	$	3,456,433	$	(100,301)	$	5,109,796

See accompanying notes to consolidated financial statements.

Page 8

CARMAX, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

1.Background

Business. CarMax, Inc. (“we,” “our,” “us,” “CarMax” and “the company”), including its wholly owned subsidiaries, is the nation’s largest retailer of used vehicles.  We operate in two reportable segments:  CarMax Sales Operations and CarMax Auto Finance (“CAF”).  Our CarMax Sales Operations segment consists of all aspects of our auto merchandising and service operations, excluding financing provided by CAF.  Our CAF segment consists solely of our own finance operation that provides financing to customers buying retail vehicles from CarMax. On June 1, 2021, we completed the acquisition of Edmunds Holding Company (“Edmunds”), which does not meet the quantitative thresholds to be considered a reportable segment. See Note 17 for additional information on our reportable segments and Note 2 for additional information regarding our acquisition of Edmunds.

We deliver an unrivaled customer experience by offering a broad selection of quality used vehicles and related products and services at competitive, no-haggle prices using a customer-friendly sales process.  Our omni-channel platform, which gives us the largest addressable market in the used car industry, empowers our retail customers to buy a car on their terms – online, in-store or an integrated combination of both. We offer customers a range of related products and services, including the appraisal and purchase of vehicles directly from consumers; the financing of retail vehicle purchases through CAF and third-party finance providers; the sale of extended protection plan (“EPP”) products, which include extended service plans (“ESPs”) and guaranteed asset protection (“GAP”); and vehicle repair service.  Vehicles purchased through the appraisal process that do not meet our retail standards are sold to licensed dealers through on-site or virtual wholesale auctions.

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

The accounting policies followed in the presentation of our interim financial results are consistent with those included in the company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2022 (the “2022 Annual Report”), with the exception of those related to recent accounting pronouncements adopted in the current fiscal year. These interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in our 2022 Annual Report.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities.  Actual results could differ from those estimates.  In particular, the novel coronavirus (“COVID-19”) pandemic and the resulting adverse impacts to global economic conditions, as well as our operations, may impact future estimates including, but not limited to, our allowance for loan losses, inventory valuations, fair value measurements, downward adjustments to investments in equity securities, asset impairment charges, the effectiveness of the company’s hedging instruments, deferred tax valuation allowances, cancellation reserves, actuarial losses on our retirement benefit plans and discount rate assumptions. Certain prior year amounts have been reclassified to conform to the current year’s presentation.  Amounts and percentages may not total due to rounding.

Page 9

Recent Accounting Pronouncements.

Effective in Future Periods

In September 2022, the Financial Accounting Standards Board (“FASB”) issued an accounting pronouncement (ASU 2022-04) related to disclosure requirements for buyers in supplier finance programs. The amendments in the update require that buyers disclose qualitative and quantitative information about their supplier finance programs. Interim and annual requirements include disclosure of outstanding amounts under the obligations as of the end of the reporting period, and annual requirements include a rollforward of those obligations for the annual reporting period, as well as a description of payment and other key terms of the programs. This update is effective for annual periods beginning after December 15, 2022, and interim periods within those fiscal years, except for the requirement to disclose rollforward information, which is effective for fiscal years beginning after December 15, 2023. We plan to adopt this pronouncement for our fiscal year beginning March 1, 2023, and we do not expect it to have a material effect on our consolidated financial statements.

2. Acquisition of Edmunds

On June 1, 2021, we completed the acquisition of Edmunds Holding Company, one of the most well established and trusted online guides for automotive information and a recognized leader in digital car shopping innovations. With this acquisition, CarMax has enhanced its digital capabilities and further strengthened its role and reach across the used auto ecosystem while adding exceptional technology and creative talent. Edmunds continues to operate independently and remains focused on delivering confidence to consumers and excellent value to its dealer and Original Equipment Manufacturer (“OEM”) clients. Additionally, this acquisition allows both businesses to accelerate their respective capabilities to deliver an enhanced digital experience to their customers by leveraging Edmunds’ compelling content and technology, CarMax’s unparalleled national scale and infrastructure, and the combined talent of both businesses.

The acquisition was accounted for in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, and, accordingly, Edmunds’ results of operations have been consolidated in our financial statements since the date of acquisition. We recorded a preliminary allocation of the purchase price to assets acquired and liabilities assumed based on their estimated fair values as of June 1, 2021. The transaction costs associated with the acquisition were approximately $8.0 million and were expensed as incurred within selling, general and administrative expenses.

The following table summarizes the total purchase consideration:

(In thousands)
Total cash consideration for outstanding shares	$	251,047
Fair value of common stock (1)	90,571
Fair value of preexisting relationship	60,200
Total	$	401,818

(1)     Represents the issuance of 776,097 shares of CarMax common stock to Edmunds equity holders, the fair value of which was based on the market value of CarMax common stock as of market close on the acquisition date (June 1, 2021).

In January 2020, we acquired a minority stake in Edmunds for $50 million. The noncontrolling equity investment in Edmunds was remeasured at a fair value of $60.2 million prior to the acquisition of the remaining ownership stake on June 1, 2021, which resulted in the recognition of a gain of $8.7 million. The gain was included in other income in the consolidated statements of earnings for the second quarter of fiscal 2022.

Page 10

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

(In thousands)	Fair Value
Cash	$	9,484
Accounts receivable, net	33,719
Other current assets	2,397
Property and equipment, net	20,741
Goodwill (1)	141,258
Intangible assets	218,000
Operating lease assets	97,250
Other assets	191
Total assets acquired	523,040
Accounts payable	5,063
Accrued expenses and other current liabilities	11,277
Current portion of operating lease liabilities	12,795
Deferred income taxes (1)	3,823
Operating lease liabilities, excluding current portion	88,264
Total liabilities assumed	121,222
Net assets acquired	$	401,818

(1)     During the third quarter of fiscal 2022, we obtained new information about facts and circumstances that existed as of the acquisition date, which resulted in a change in the fair value of assets and liabilities recognized. The adjustments were primarily related to research and development tax credits, which resulted in a decrease in goodwill and a decrease in deferred income taxes of $8.4 million.

The excess of purchase consideration over the fair value of net identifiable assets acquired and liabilities assumed was recorded as goodwill, which was primarily attributed to expected synergies and the assembled workforce of the acquired business and was not deductible for tax purposes. The fair values assigned to the net identifiable assets and liabilities assumed were based on management’s estimates and assumptions.

Identifiable intangible assets were recognized at their estimated acquisition date fair values. The fair value of identifiable intangible assets was determined by using certain estimates and assumptions that were not observable in the market. The fair values of the trade name asset and the internally developed software asset were determined using the relief-from-royalty method, and the fair value of the customer relationships asset was determined using the excess earnings method. These income-based approaches included significant assumptions such as the amount and timing of projected cash flows, growth rates, customer attrition rates, discount rates, and the assessment of the asset’s life cycle. The estimated fair value and estimated remaining useful lives of identifiable intangible assets as of the acquisition date were as follows:

(In thousands)	Useful Life (Years)	Fair Value
Trade name	Indefinite	$	31,900
Internally developed software	7	52,900
Customer relationships	17	133,200
Identifiable intangible assets		$	218,000

The operating results of Edmunds have been included in our consolidated financial statements since the date of the acquisition. Net sales and operating revenues and net earnings attributable to Edmunds were not material for the reporting periods presented. Our pro forma results as if the acquisition had taken place on the first day of fiscal 2021 would not be materially different from the amounts reflected in the accompanying consolidated financial statements, and therefore were not presented.

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3. Revenue

We recognize revenue when control of the good or service has been transferred to the customer, generally either at the time of sale or upon delivery to a customer.  Our contracts have a fixed contract price and revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. We collect sales taxes and other taxes from customers on behalf of governmental authorities at the time of sale.  These taxes are accounted for on a net basis and are not included in net sales and operating revenues or cost of sales. We generally expense sales commissions when incurred because the amortization period would have been less than one year. These costs are recorded within selling, general and administrative expenses. We do not have any significant payment terms as payment is received at or shortly after the point of sale.

Disaggregation of Revenue

	Three Months Ended November 30				Nine Months Ended November 30
(In millions)	2022		2021		2022		2021
Used vehicle sales	$	5,204.6	$	6,435.6	$	18,503.2	$	18,697.3
Wholesale vehicle sales	1,152.2		1,922.3		4,959.1		4,998.2
Other sales and revenues:
Extended protection plan revenues	91.8		106.6		318.1		353.8
Third-party finance income/(fees), net	1.0		1.6		7.1		(0.3)
Advertising & subscription revenues (1)	33.3		33.3		101.9		67.9
Service revenues	19.6		19.7		60.8		62.9
Other	3.5		8.7		12.3		33.9
Total other sales and revenues	149.2		169.9		500.2		518.2
Total net sales and operating revenues	$	6,506.0	$	8,527.8	$	23,962.4	$	24,213.7

(1)     Excludes intersegment sales and operating revenues that have been eliminated in consolidation. See Note 17 for further details.

Used Vehicle Sales. Revenue from the sale of used vehicles is recognized upon transfer of control of the vehicle to the customer. As part of our customer service strategy, we guarantee the retail vehicles we sell with a 30-day/1,500 mile, money-back guarantee.  We record a reserve for estimated returns based on historical experience and trends. The reserve for estimated returns is presented gross on the consolidated balance sheets, with a return asset recorded in other current assets and a refund liability recorded in accrued expenses and other current liabilities. We also guarantee the used vehicles we sell with a 90-day/4,000-mile limited warranty. These warranties are deemed assurance-type warranties and are accounted for as warranty obligations. See Note 16 for additional information on this warranty and its related obligation.

Wholesale Vehicle Sales. Wholesale vehicles are sold at our auctions, and revenue from the sale of these vehicles is recognized upon transfer of control of the vehicle to the customer. Dealers also pay a fee to us based on the sale price of the vehicles they purchase. This fee is recognized as revenue at the time of sale. While we provide condition disclosures on each wholesale vehicle sold, the vehicles are subject to a limited right of return. We record a reserve for estimated returns based on historical experience and trends. The reserve for estimated returns is presented gross on the consolidated balance sheets, with a return asset recorded in other current assets and a refund liability recorded in accrued expenses and other current liabilities.

EPP Revenues. We also sell ESP and GAP products on behalf of unrelated third parties, who are primarily responsible for fulfilling the contract, to customers who purchase a retail vehicle.  The ESPs we currently offer on all used vehicles provide coverage up to 60 months (subject to mileage limitations), while GAP covers the customer for the term of their finance contract. We recognize revenue, on a net basis, at the time of sale. We also record a reserve, or refund liability, for estimated contract cancellations. The reserve for cancellations is evaluated for each product and is based on forecasted forward cancellation curves utilizing historical experience, recent trends and credit mix of the customer base.  Our risk related to contract cancellations is limited to the revenue that we receive.  Cancellations fluctuate depending on the volume of EPP sales, customer financing default or prepayment rates, and shifts in customer behavior, including those related to changes in the coverage or term of the product.  The current portion of estimated cancellation reserves is recognized as a component of accrued expenses and other current liabilities with the remaining amount recognized in other liabilities.  See Note 8 for additional information on cancellation reserves.

We are contractually entitled to receive profit-sharing revenues based on the performance of the ESPs administered by third parties. These revenues are a form of variable consideration included in EPP revenues to the extent that it is probable that it

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will not result in a significant revenue reversal. An estimate of the amount to which we expect to be entitled, subject to various constraints, is recognized upon satisfying the performance obligation of selling the ESP. These constraints include factors that are outside of the company’s influence or control and the length of time until settlement. We apply the expected value method, utilizing historical claims and cancellation data from CarMax customers, as well as external data and other qualitative assumptions. This estimate is reassessed each reporting period with changes reflected in other sales and revenues on our consolidated statements of earnings and other assets on our consolidated balance sheets. As of November 30, 2022 and February 28, 2022, no current or long-term contract asset was recognized related to cumulative profit-sharing payments to which we expect to be entitled.

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

Advertising and Subscription Revenues. Advertising and subscription revenues consist of revenues earned by our Edmunds business. Advertising revenues are derived from advertising contracts with automotive manufacturers based on fixed fees per impression and fees for certain activities completed by customers on the manufacturers' websites. These fees are recognized in the period the impressions are delivered or certain activities occurred. Subscription revenues are derived from packages sold to automotive dealers that include car leads, inventory listings and enhanced placement in Edmunds' dealer locator and are recognized over the period that the services are made available to the dealers. Subscription revenues also include a digital marketing subscription service, which allows dealers to gain exposure on third party partner websites. Revenues for this service are recognized on a net basis.

Service Revenues. Service revenue consists of labor and parts income related to vehicle repair service, including repairs of vehicles covered under an ESP we sell or warranty program. Service revenue is recognized at the time the work is completed.

Other Revenues. Other revenues consist primarily of new vehicle sales and sales of accessories. Revenue in this category is recognized upon transfer of control to the customer.

4. CarMax Auto Finance

CAF provides financing to qualified retail customers purchasing vehicles from CarMax.  CAF provides us the opportunity to capture additional profits, cash flows and sales while managing our reliance on third-party finance sources.  Management regularly analyzes CAF’s operating results by assessing profitability, the performance of the auto loans receivable, including trends in credit losses and delinquencies, and CAF direct expenses.  This information is used to assess CAF’s performance and make operating decisions, including resource allocation.

We typically use securitizations or other funding arrangements to fund loans originated by CAF.  CAF income primarily reflects the interest and fee income generated by the auto loans receivable less the interest expense associated with the debt issued to fund these receivables, a provision for estimated loan losses and direct CAF expenses.

CAF income does not include any allocation of indirect costs.  Although CAF benefits from certain indirect overhead expenditures, we have not allocated indirect costs to CAF to avoid making subjective allocation decisions.  Examples of indirect costs not allocated to CAF include retail store expenses and corporate expenses.  In addition, except for auto loans receivable, which are disclosed in Note 5, CAF assets are not separately reported nor do we allocate assets to CAF because such allocation would not be useful to management in making operating decisions.

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Components of CAF Income

	Three Months Ended November 30						Nine Months Ended November 30
(In millions)	2022		% (1)	2021		% (1)	2022		% (1)	2021		% (1)
Interest margin:
Interest and fee income	$	365.4	8.8	$	330.0	8.6	$	1,069.3	8.8	$	964.4	8.7
Interest expense	(88.8)		(2.1)	(53.6)		(1.4)	(200.1)		(1.6)	(180.0)		(1.6)
Total interest margin	276.6