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, 2023

OR

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

Commission File Number:  1-31420

CARMAX, INC.

(Exact name of registrant as specified in its charter)

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

(804) 747-0422

(Registrant’s telephone number, including area code)

N/A

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

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

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

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

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

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

Large accelerated 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 22, 2023
Common Stock, par value $0.50	158,209,623

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, 2023 and 2022	3
		Consolidated Statements of Comprehensive Income (Unaudited) –
		Three Months Ended May 31, 2023 and 2022	4
		Consolidated Balance Sheets (Unaudited) –
		May 31, 2023 and February 28, 2023	5
		Consolidated Statements of Cash Flows (Unaudited) –
		Three Months Ended May 31, 2023 and 2022	6
		Consolidated Statements of Shareholders’ Equity (Unaudited) –
		Three Months Ended May 31, 2023 and 2022	7
		Notes to Consolidated Financial Statements (Unaudited)	8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and
		Results of Operations	30
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
	Item 4.	Controls and Procedures	45
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	46
	Item 1A.	Risk Factors	46
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
	Item 5.	Other Information	46
	Item 6.	Exhibits	48
SIGNATURES			49

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)	2023		%(1)	2022		%(1)
SALES AND OPERATING REVENUES:
Used vehicle sales	$	6,001,471	78.1	$	7,014,490	75.3
Wholesale vehicle sales	1,514,363		19.7	2,116,517		22.7
Other sales and revenues	171,229		2.2	180,614		1.9
NET SALES AND OPERATING REVENUES	7,687,063		100.0	9,311,621		100.0
COST OF SALES:
Used vehicle cost of sales	5,486,846		71.4	6,451,010		69.3
Wholesale vehicle cost of sales	1,346,538		17.5	1,924,850		20.7
Other cost of sales	36,289		0.5	60,370		0.6
TOTAL COST OF SALES	6,869,673		89.4	8,436,230		90.6
GROSS PROFIT	817,390		10.6	875,391		9.4
CARMAX AUTO FINANCE INCOME	137,358		1.8	204,473		2.2
Selling, general and administrative expenses	559,837		7.3	656,740		7.1
Depreciation and amortization	58,419		0.8	55,648		0.6
Interest expense	30,466		0.4	28,775		0.3
Other (income) expense	(1,214)		—	2,099		—
Earnings before income taxes	307,240		4.0	336,602		3.6
Income tax provision	78,942		1.0	84,337		0.9
NET EARNINGS	$	228,298	3.0	$	252,265	2.7
WEIGHTED AVERAGE COMMON SHARES:
Basic	158,116			160,298
Diluted	158,561			161,798
NET EARNINGS PER SHARE:
Basic	$	1.44		$	1.57
Diluted	$	1.44		$	1.56

(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)	2023		2022
NET EARNINGS	$	228,298	$	252,265
Other comprehensive (loss) income, net of taxes:
Net change in retirement benefit plan unrecognized actuarial losses	98		481
Net change in cash flow hedge unrecognized gains	(36,637)		51,833
Other comprehensive (loss) income, net of taxes	(36,539)		52,314
TOTAL COMPREHENSIVE INCOME	$	191,759	$	304,579

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)	2023		2023
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	264,247	$	314,758
Restricted cash from collections on auto loans receivable	506,465		470,889
Accounts receivable, net	321,994		298,783
Inventory	4,081,220		3,726,142
Other current assets	189,742		230,795
TOTAL CURRENT ASSETS	5,363,668		5,041,367
Auto loans receivable, net of allowance for loan losses of $535,412 and $507,201 as of May 31, 2023 and February 28, 2023, respectively	16,744,865		16,341,791
Property and equipment, net of accumulated depreciation of $1,672,387 and $1,614,924 as of May 31, 2023 and February 28, 2023, respectively	3,499,384		3,430,914
Deferred income taxes	99,770		80,740
Operating lease assets	541,908		545,677
Goodwill	141,258		141,258
Other assets	571,503		600,989
TOTAL ASSETS	$	26,962,356	$	26,182,736
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	967,420	$	826,592
Accrued expenses and other current liabilities	528,596		478,964
Accrued income taxes	49,191		—
Current portion of operating lease liabilities	55,126		53,287
Current portion of long-term debt	12,305		111,859
Current portion of non-recourse notes payable	501,333		467,609
TOTAL CURRENT LIABILITIES	2,113,971		1,938,311
Long-term debt, excluding current portion	1,906,496		1,909,361
Non-recourse notes payable, excluding current portion	16,252,958		15,865,776
Operating lease liabilities, excluding current portion	519,184		523,828
Other liabilities	346,579		332,383
TOTAL LIABILITIES	21,139,188		20,569,659
Commitments and contingent liabilities
SHAREHOLDERS’ EQUITY:
Common stock, $0.50 par value; 350,000,000 shares authorized; 158,208,623 and 158,079,033 shares issued and outstanding as of May 31, 2023 and February 28, 2023, respectively	79,105		79,040
Capital in excess of par value	1,731,341		1,713,074
Accumulated other comprehensive income	61,330		97,869
Retained earnings	3,951,392		3,723,094
TOTAL SHAREHOLDERS’ EQUITY	5,823,168		5,613,077
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	26,962,356	$	26,182,736

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)	2023		2022
OPERATING ACTIVITIES:
Net earnings	$	228,298	$	252,265
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:
Depreciation and amortization	62,998		70,473
Share-based compensation expense	36,384		22,443
Provision for loan losses	80,890		57,840
Provision for cancellation reserves	24,070		31,719
Deferred income tax (benefit) provision	(7,127)		11,561
Other	2,976		5,342
Net (increase) decrease in:
Accounts receivable, net	(22,439)		(49,603)
Inventory	(355,078)		433,484
Other current assets	30,923		73,315
Auto loans receivable, net	(483,964)		(440,744)
Other assets	634		(15,154)
Net increase (decrease) in:
Accounts payable, accrued expenses and other
current liabilities and accrued income taxes	239,276		105,445
Other liabilities	(23,126)		(27,434)
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES	(185,285)		530,952
INVESTING ACTIVITIES:
Capital expenditures	(136,719)		(94,808)
Proceeds from disposal of property and equipment	1,171		—
Purchases of investments	(1,228)		(4,380)
Sales and returns of investments	17		150
NET CASH USED IN INVESTING ACTIVITIES	(136,759)		(99,038)
FINANCING ACTIVITIES:
Proceeds from issuances of long-term debt	98,600		1,043,100
Payments on long-term debt	(201,377)		(1,629,024)
Cash paid for debt issuance costs	(3,608)		(3,940)
Payments on finance lease obligations	(3,785)		(2,925)
Issuances of non-recourse notes payable	3,125,929		3,569,605
Payments on non-recourse notes payable	(2,706,222)		(3,272,242)
Repurchase and retirement of common stock	(3,931)		(162,974)
Equity issuances	989		3,443
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES	306,595		(454,957)
Decrease in cash, cash equivalents, and restricted cash	(15,449)		(23,043)
Cash, cash equivalents, and restricted cash at beginning of year	951,004		803,618
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD	$	935,555	$	780,575
RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO THE CONSOLIDATED BALANCE SHEETS:
Cash and cash equivalents	$	264,247	$	95,313
Restricted cash from collections on auto loans receivable	506,465		531,344
Restricted cash included in other assets	164,843		153,918
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD	$	935,555	$	780,575

See accompanying notes to consolidated financial statements.

Page 6

CARMAX, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

(Unaudited)

	Three Months Ended May 31, 2023
								Accumulated
	Common			Capital in				Other
	Shares	Common		Excess of		Retained		Comprehensive
(In thousands)	Outstanding	Stock		Par Value		Earnings		Income		Total
Balance as of February 28, 2023	158,079	$	79,040	$	1,713,074	$	3,723,094	$	97,869	$	5,613,077
Net earnings	—	—		—		228,298		—		228,298
Other comprehensive loss	—	—		—		—		(36,539)		(36,539)
Share-based compensation expense	—	—		21,274		—		—		21,274
Exercise of common stock options	18	9		979		—		—		988
Stock incentive plans, net shares issued	112	56		(3,986)		—		—		(3,930)
Balance as of May 31, 2023	158,209	$	79,105	$	1,731,341	$	3,951,392	$	61,330	$	5,823,168

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

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 16 for additional information on our reportable segments.

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

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

The accounting policies followed in the presentation of our interim financial results are consistent with those included in the company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2023 (the “2023 Annual Report”), with the exception of those related to recent accounting pronouncements adopted in the current fiscal year. These interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in our 2023 Annual Report.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities.  Actual results could differ from those estimates.  Certain prior year amounts have been reclassified to conform to the current year’s presentation.  Amounts and percentages may not total due to rounding.

Recent Accounting Pronouncements.

Adopted in the Current Period

In October 2021, the Financial Accounting Standards Board (“FASB”) issued an accounting pronouncement (ASU 2021-08) related to accounting for acquired revenue contracts with customers in a business combination. The amendments in this update address diversity in practice and inconsistency related to recognition of an acquired contract liability and the effect of payment terms on subsequent revenue recognition for the acquirer. This update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We adopted this pronouncement for our fiscal year beginning March 1, 2023, and it did not have a material effect on our consolidated financial statements.

In March 2022, the FASB issued an accounting pronouncement (ASU 2022-01) related to the portfolio layer method of hedge accounting. The amendments in this update clarify the accounting and promote consistency in reporting for hedges where the portfolio layer method is applied. This update is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. We adopted this pronouncement for our fiscal year beginning March 1, 2023, and it did not have a material effect on our consolidated financial statements.

Page 8

In March 2022, the FASB issued an accounting pronouncement (ASU 2022-02) related to troubled debt restructurings (“TDRs”) and vintage disclosures for financing receivables. The amendments in this update eliminate the accounting guidance for TDRs by creditors while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors made to borrowers experiencing financial difficulty. The amendments also require disclosure of current-period gross charge-offs by year of origination for financing receivables. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We adopted this pronouncement for our fiscal year beginning March 1, 2023, and made the necessary updates to our vintage disclosures. Aside from these disclosure changes, the amendments did not have a material effect on our consolidated financial statements.

In September 2022, the 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 adopted this pronouncement for our fiscal year beginning March 1, 2023, and it did not have a material effect on our consolidated financial statements.

2. Revenue

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

Disaggregation of Revenue

	Three Months Ended May 31
(In millions)	2023		2022
Used vehicle sales	$	6,001.5	$	7,014.5
Wholesale vehicle sales	1,514.4		2,116.5
Other sales and revenues:
Extended protection plan revenues	111.2		116.5
Third-party finance income, net	0.3		3.4
Advertising & subscription revenues (1)	31.4		34.4
Service revenues	22.1		21.9
Other	6.2		4.4
Total other sales and revenues	171.2		180.6
Total net sales and operating revenues	$	7,687.1	$	9,311.6

(1)     Excludes intersegment sales and operating revenues that have been eliminated in consolidation. See Note 16 for further details.

Used Vehicle Sales. Revenue from the sale of used vehicles is recognized upon transfer of control of the vehicle to the customer. As part of our customer service strategy, we guarantee the retail vehicles we sell with a 30-day/1,500 mile, money-back guarantee.  We record a reserve for estimated returns based on historical experience and trends. The reserve for estimated returns is presented gross on the consolidated balance sheets, with a return asset recorded in other current assets and a refund liability recorded in accrued expenses and other current liabilities. We also guarantee the used vehicles we sell with a 90-day/4,000-mile limited warranty. These warranties are deemed assurance-type warranties and are accounted for as warranty obligations. See Note 15 for additional information on this warranty and its related obligation.

Wholesale Vehicle Sales. Wholesale vehicles are sold at our auctions, and revenue from the sale of these vehicles is recognized upon transfer of control of the vehicle to the customer. Dealers also pay a fee to us based on the sale price of the

Page 9

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 7 for additional information on cancellation reserves.

We are contractually entitled to receive profit-sharing revenues based on the performance of the ESPs administered by third parties. These revenues are a form of variable consideration included in EPP revenues to the extent that it is probable that it will not result in a significant revenue reversal. An estimate of the amount to which we expect to be entitled is determined upon satisfying the performance obligation of selling the ESP. This estimate is subject to various constraints; primarily, factors that are outside of the company’s influence or control. We have determined that these constraints generally preclude any profit-sharing revenues from being recognized before they are paid. As of May 31, 2023 and February 28, 2023, no current or long-term contract asset was recognized related to cumulative profit-sharing payments to which we expect to be entitled. The estimate of the amount to which we expect to be entitled is reassessed each reporting period and any changes are reflected in other sales and revenues on our consolidated statements of earnings and other assets on our consolidated balance sheets.

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

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

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

Other Revenues. Other revenues include miscellaneous goods and services, which are immaterial to our consolidated financial statements.

3. CarMax Auto Finance

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

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

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CAF income does not include any allocation of indirect costs.  Although CAF benefits from certain indirect overhead expenditures, we have not allocated indirect costs to CAF to avoid making subjective allocation decisions.  Examples of indirect costs not allocated to CAF include retail store expenses and corporate expenses.  In addition, except for auto loans receivable, which are disclosed in Note 4, CAF assets are not separately reported nor do we allocate assets to CAF because such allocation would not be useful to management in making operating decisions.

Components of CAF Income

	Three Months Ended May 31
(In millions)	2023		% (1)	2022		% (1)
Interest margin:
Interest and fee income	$	400.5	9.4	$	346.7	8.8
Interest expense	(142.6)		(3.4)	(48.8)		(1.2)
Total interest margin	257.9		6.1	297.9		7.5
Provision for loan losses	(80.9)		(1.9)	(57.8)		(1.5)
Total interest margin after provision for loan losses	177.0		4.2	240.1		6.1
Direct expenses:
Payroll and fringe benefit expense	(16.6)		(0.4)	(14.7)		(0.4)
Depreciation and amortization	(4.1)		(0.1)	(3.8)		(0.1)
Other direct expenses	(18.9)		(0.4)	(17.1)		(0.4)
Total direct expenses	(39.6)		(0.9)	(35.6)		(0.9)
CarMax Auto Finance income	$	137.4	3.2	$	204.5	5.2
Total average managed receivables	$	17,003.4		$	15,817.0

(1)     Annualized percentage of total average managed receivables.     

4. Auto Loans Receivable

Auto loans receivable include amounts due from customers related to retail vehicle sales financed through CAF and are presented net of an allowance for estimated loan losses.  These auto loans represent a large group of smaller-balance homogeneous loans, which we consider to be part of one class of financing receivable and one portfolio segment for purposes of determining our allowance for loan losses. We generally use warehouse facilities to fund auto loans receivable originated by CAF until we elect to fund them through an asset-backed term funding transaction, such as a term securitization or alternative funding arrangement.  We recognize transfers of auto loans receivable into the warehouse facilities and asset-backed term funding transactions (together, “non-recourse funding vehicles”) as secured borrowings, which result in recording the auto loans receivable and the related non-recourse notes payable on our consolidated balance sheets. The majority of the auto loans receivable serve as collateral for the related non-recourse notes payable of $16.78 billion as of May 31, 2023, and $16.36 billion as of February 28, 2023. See Note 9 for additional information on securitizations and non-recourse notes payable.

Interest income and expenses related to auto loans are included in CAF income.  Interest income on auto loans receivable is recognized when earned based on contractual loan terms.  All loans continue to accrue interest until repayment or charge-off.  When a charge-off occurs, accrued interest is written off by reversing interest income. Direct costs associated with loan originations are not considered material, and thus, are expensed as incurred.  See Note 3 for additional information on CAF income.

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Auto Loans Receivable, Net

	As of May 31		As of February 28
(In millions)	2023		2023
Asset-backed term funding	$	12,036.8	$	12,242.8
Warehouse facilities	4,241.6		3,649.9
Overcollateralization (1)	757.2		739.9
Other managed receivables (2)	155.0		135.3
Total ending managed receivables	17,190.6		16,767.9
Accrued interest and fees	93.1		78.0
Other	(3.4)		3.1
Less: allowance for loan losses	(535.4)		(507.2)
Auto loans receivable, net	$	16,744.9	$	16,341.8

(1)     Represents receivables restricted as excess collateral for the non-recourse funding vehicles.

(2)     Other managed receivables includes receivables not funded through the non-recourse funding vehicles.

Credit Quality.  When customers apply for financing, CAF’s proprietary scoring models utilize the customers’ credit history and certain application information to evaluate and rank their risk.  We obtain credit histories and other credit data that includes information such as number, age, type of and payment history for prior or existing credit accounts.  The application information that is used includes income, collateral value and down payment.  The scoring models yield credit grades that represent the relative likelihood of repayment.  Customers with the highest probability of repayment are A-grade customers. Customers assigned a lower grade are determined to have a lower probability of repayment.  For loans that are approved, the credit grade influences the terms of the agreement, such as the required loan-to-value ratio and interest rate. After origination, credit grades are generally not updated.

CAF uses a combination of the initial credit grades and historical performance to monitor the credit quality of the auto loans receivable on an ongoing basis.  We validate the accuracy of the scoring models periodically.  Loan performance is reviewed on a recurring basis to identify whether the assigned grades adequately reflect the customers’ likelihood of repayment.

Ending Managed Receivables by Major Credit Grade

	As of May 31, 2023
	Fiscal Year of Origination (1)
(In millions)	2024		2023		2022		2021		2020		Prior to 2020		Total		% (2)
Core managed receivables (3):
A	$	1,267.9	$	3,520.0	$	2,297.7	$	972.2	$	556.7	$	173.7	$	8,788.2	51.1
B	800.6		2,275.5		1,662.9		724.9		414.8		197.9		6,076.6		35.4
C and other	150.3		673.4		551.8		280.2		145.6		75.4		1,876.7		10.9
Total core managed receivables	2,218.8		6,468.9		4,512.4		1,977.3		1,117.1		447.0		16,741.5		97.4
Other managed receivables (4):
C and other	53.2		249.1		100.6		13.5		18.4		14.3		449.1		2.6
Total ending managed receivables	$	2,272.0	$	6,718.0	$	4,613.0	$	1,990.8	$	1,135.5	$	461.3	$	17,190.6	100.0
Gross charge-offs	$	0.6	$	50.2	$	37.5	$	10.7	$	6.5	$	4.3	$	109.8

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	As of February 28, 2023
	Fiscal Year of Origination (1)
(In millions)	2023		2022		2021		2020		2019		Prior to 2019		Total		% (2)
Core managed receivables (3):
A	$	3,890.9	$	2,555.3	$	1,112.0	$	677.1	$	218.3	$	36.3	$	8,489.9	50.6
B	2,497.5		1,839.9		816.2		488.9		215.1		56.0		5,913.6		35.3
C and other	732.7		609.5		314.5		169.3		74.1		25.6		1,925.7		11.5
Total core managed receivables	7,121.1		5,004.7		2,242.7		1,335.3		507.5		117.9		16,329.2		97.4
Other managed receivables (4):
C and other	272.0		112.5		15.0		21.1		13.2		4.9		438.7		2.6
Total ending managed receivables	$	7,393.1	$	5,117.2	$	2,257.7	$	1,356.4	$	520.7	$	122.8	$	16,767.9	100.0

(1)     Classified based on credit grade assigned when customers were initially approved for financing.

(2)     Percent of total ending managed receivables.

(3)     Represents CAF's Tier 1 originations.

(4)     Represents CAF's Tier 2 and Tier 3 originations.

Allowance for Loan Losses.  The allowance for loan losses at May 31, 2023 represents the net credit losses expected over the remaining contractual life of our managed receivables. The allowance for loan losses is determined using a net loss timing curve, primarily based on the composition of the portfolio of managed receivables and historical gross loss and recovery trends. Due to the fact that losses for receivables with less than 18 months of performance history can be volatile, our net loss estimate weights both historical losses by credit grade at origination and actual loss data on the receivables to-date, along with forward loss curves, in estimating future performance. Once the receivables have 18 months of performance history, the net loss estimate reflects actual loss experience of those receivables to date, along with forward loss curves, to predict future performance. The forward loss curves are constructed using historical performance data and show the average timing of losses over the course of a receivable’s life. The net loss estimate is calculated by applying the loss rates developed using the methods described above to the amortized cost basis of the managed receivables at inception of the loan.

The output of the net loss timing curve is adjusted to take into account reasonable and supportable forecasts about the future. Specifically, the change in U.S. unemployment rates and the National Automobile Dealers Association used vehicle price index are used to predict changes in gross loss and recovery rates, respectively. An economic adjustment factor, based upon a single macroeconomic scenario, is developed to capture the relationship between changes in these forecasts and changes in gross loss and recovery rates. This factor is applied to the output of the net loss timing curve for the reasonable and supportable forecast period of two years. After the end of this two-year period, we revert to historical experience on a straight-line basis over a period of 12 months. We periodically consider whether the use of alternative metrics would result in improved model performance and revise the models when appropriate. We also consider whether qualitative adjustments are necessary for factors that are not reflected in the quantitative methods but impact the measurement of estimated credit losses. Such adjustments include the uncertainty of the impacts of recent economic trends on customer behavior. The change in the allowance for loan losses is recognized through an adjustment to the provision for loan losses.

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Allowance for Loan Losses

	Three Months Ended May 31, 2023
(In millions)	Core		Other		Total		% (1)
Balance as of beginning of period	$	401.5	$	105.7	$	507.2	3.02
Charge-offs	(93.1)		(16.7)		(109.8)
Recoveries (2)	50.5		6.6		57.1
Provision for loan losses	68.6		12.3		80.9
Balance as of end of period	$	427.5	$	107.9	$	535.4	3.11

	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 (2)	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

(1)     Percent of total ending managed receivables.

(2)     Net of costs incurred to recover vehicle.

During the first three months of fiscal 2024, the allowance for loan losses increased $28.2 million. The increase in the allowance (both in dollars and as a percent of total ending managed receivables) was primarily driven by unfavorable loss performance as well as the uncertain macroeconomic environment. The increase in net charge-offs primarily reflects customer hardship in the current economic environment. The allowance for loan losses as of May 31, 2023 reflects our best estimate of expected future losses based on recent trends in delinquencies, loss performance, recovery rates and the economic environment.

Past Due Receivables. An account is considered delinquent when the related customer fails to make a substantial portion of a scheduled payment on or before the due date. In general, accounts are charged-off on the last business day of the month during which the earliest of the following occurs: the receivable is 120 days or more delinquent as of the last business day of the month, the related vehicle is repossessed and liquidated, or the receivable is otherwise deemed uncollectible. For purposes of determining impairment, auto loans are evaluated collectively, as they represent a large group of smaller-balance homogeneous loans, and therefore, are not individually evaluated for impairment.

Past Due Receivables

	As of May 31, 2023
	Core Receivables								Other Receivables		Total
(In millions)	A		B		C & Other		Total		C & Other		$		% (1)
Current	$	8,745.3	$	5,691.1	$	1,545.9	$	15,982.3	$	322.4	$	16,304.7	94.85
Delinquent loans:
31-60 days past due	27.4		229.4		183.1		439.9		63.5		503.4		2.93
61-90 days past due	11.7		126.1		121.1		258.9		51.5		310.4		1.81
Greater than 90 days past due	3.8		30.0		26.6		60.4		11.7		72.1		0.41
Total past due	42.9		385.5		330.8		759.2		126.7		885.9		5.15
Total ending managed receivables	$	8,788.2	$	6,076.6	$	1,876.7	$	16,741.5	$	449.1	$	17,190.6	100.00

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	As of February 28, 2023
	Core Receivables								Other Receivables		Total
(In millions)	A		B		C & Other		Total		C & Other		$		% (1)
Current	$	8,450.3	$	5,540.2	$	1,612.3	$	15,602.8	$	327.6	$	15,930.4	95.00
Delinquent loans:
31-60 days past due	25.1		225.7		175.4		426.2		60.6		486.8		2.90
61-90 days past due	10.6		120.0		114.5		245.1		42.1		287.2		1.71
Greater than 90 days past due	3.9		27.7		23.5		55.1		8.4		63.5		0.39
Total past due	39.6		373.4		313.4		726.4		111.1		837.5		5.00
Total ending managed receivables	$	8,489.9	$	5,913.6	$	1,925.7	$	16,329.2	$	438.7	$	16,767.9	100.00

(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 generally designate these derivative instruments as cash flow hedges for accounting purposes.  In certain cases, we may choose not to designate a derivative instrument as a cash flow hedge for accounting purposes due to uncertainty around the probability that future hedged transactions will occur. Our derivative instruments are used to manage (i) differences in the amount of our known or expected cash receipts and our known or expected cash payments principally related to the funding of our auto loans receivable, and (ii) exposure to variable interest rates associated with our term loans.

For the derivatives associated with our non-recourse funding vehicles that are designated as cash flow hedges, the changes in fair value are initially recorded in accumulated other comprehensive income (“AOCI”).  For the majority of these derivatives, the amounts are subsequently reclassified into CAF income in the period that the hedged forecasted transaction affects earnings, which occurs as interest expense is recognized on those future issuances of debt. During the next 12 months, we estimate that an additional $42.9 million will be reclassified from AOCI as an increase to CAF income. Changes in fair value related to derivatives that have not been designated as cash flow hedges for accounting purposes are recognized in the income statement in the period in which the change occurs. For the three months ended May 31, 2023, we recognized expense of $9.3 million in CAF income representing these changes in fair value.

As of May 31, 2023 and February 28, 2023, we had interest rate swaps outstanding with a combined notional amount of $4.56 billion and $4.49 billion, respectively, that were designated as cash flow hedges of interest rate risk. As of May 31, 2023 and February 28, 2023, we had interest rate swaps with a combined notional amount of $1.22 billion and $1.14 billion, respectively, outstanding that were not designated as cash flow hedges for accounting purposes.

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

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.

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Level 2     Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets in active markets, quoted prices from identical or similar assets in inactive markets, observable inputs, such as interest rates and yield curves, and assumptions about risk.

Level 3     Inputs that are significant to the measurement that are not observable in the market and include management’s judgments about the assumptions market participants would use in pricing the asset or liability (including assumptions about risk).

Our fair value processes include controls that are designed to ensure that fair values are appropriate.  Such controls include model validation, review of key model inputs, analysis of period-over-period fluctuations and reviews by senior management.

Valuation Methodologies

Money Market Securities.  Money market securities are cash equivalents, which are included in cash and cash equivalents, restricted cash from collections on auto loans receivable and other assets.  They consist of highly liquid investments with original maturities of three months or less and are classified as Level 1.

Mutual Fund Investments.  Mutual fund investments consist of publicly traded mutual funds that primarily include diversified equity investments in large-, mid- and small-cap domestic and international companies or investment grade debt securities.  The investments, which are included in other assets, are held in a rabbi trust established to fund informally our executive deferred compensation plan and are classified as Level 1.

Derivative Instruments.  The fair values of our derivative instruments are included in either other current assets, other assets, accounts payable or other liabilities.  Our derivatives are not exchange-traded and are over-the-counter customized derivative instruments.  All of our derivative exposures are with highly rated bank counterparties.

We measure derivative fair values assuming that the unit of account is an individual derivative instrument and that derivatives are sold or transferred on a stand-alone basis.  We estimate the fair value of our derivatives using quotes determined by the derivative counterparties and third-party valuation services.  Quotes from third-party valuation services and quotes received from bank counterparties project future cash flows and discount the future amounts to a present value using market-based expectations for interest rates and the contractual terms of the derivative instruments.  The models do not require significant judgment and model inputs can typically be observed in a liquid market; however, because the models include inputs other than quoted prices in active markets, all derivatives are classified as Level 2.

Our derivative fair value measurements consider assumptions about counterparty and our own nonperformance risk.  We monitor counterparty and our own nonperformance risk and, in the event that we determine that a party is unlikely to perform under terms of the contract, we would adjust the derivative fair value to reflect the nonperformance risk.

Items Measured at Fair Value on a Recurring Basis

	As of May 31, 2023
(In thousands)	Level 1			Level 2			Total
Assets:
Money market securities	$	866,338		$	—		$	866,338
Mutual fund investments	24,458			—			24,458
Derivative instruments designated as hedges	—			63,427			63,427
Derivative instruments not designated as hedges	—			24,595			24,595
Total assets at fair value	$	890,796		$	88,022		$	978,818
Percent of total assets at fair value	91.0		%	9.0		%	100.0		%
Percent of total assets	3.3		%	0.3		%	3.6		%
Liabilities:
Derivative instruments designated as hedges	$	—		$	(3,008)		$	(3,008)
Total liabilities at fair value	$	—		$	(3,008)		$	(3,008)
Percent of total liabilities	—		%	—		%	—		%

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	As of February 28, 2023
(In thousands)	Level 1			Level 2			Total
Assets:
Money market securities	$	865,943		$	—		$	865,943
Mutual fund investments	22,671			—			22,671
Derivative instruments designated as hedges	—			97,328			97,328
Derivative instruments not designated as hedges	—			33,870			33,870
Total assets at fair value	$	888,614		$	131,198		$	1,019,812
Percent of total assets at fair value	87.1		%	12.9		%	100.0		%
Percent of total assets	3.4		%	0.5		%	3.9		%
Liabilities:
Total liabilities at fair value	$	—		$	—		$	—
Percent of total liabilities	—		%	—		%	—		%

Fair Value of Financial Instruments

The carrying value of our cash and cash equivalents, accounts receivable, other restricted cash deposits and accounts payable approximates fair value due to the short-term nature and/or variable rates associated with these financial instruments. Auto loans receivable are presented net of an allowance for estimated loan losses, which we believe approximates fair value. We believe that the carrying value of our revolving credit facility and term loans approximates fair value due to the variable rates associated with these obligations. The fair value of our senior unsecured notes, which are not carried at fair value on our consolidated balance sheets, was determined using Level 2 inputs based on quoted market prices. The carrying value and fair value of the senior unsecured notes as of May 31, 2023 and February 28, 2023, respectively, are as follows:

(In thousands)	As of May 31, 2023		As of February 28, 2023
Carrying value	$	400,000	$	500,000
Fair value	$	378,977	$	473,749

7. Cancellation Reserves

We recognize revenue for EPP products, on a net basis, at the time of sale. We also record a reserve, or refund liability, for estimated contract cancellations.  Cancellations of these services may result from early termination by the customer, or default or prepayment on the finance contract.  The reserve for cancellations is evaluated for each product and is based on forecasted forward cancellation curves utilizing historical experience, recent trends and credit mix of the customer base. 

Cancellation Reserves

	Three Months Ended May 31
(In millions)	2023		2022
Balance as of beginning of period	$	139.2	$	144.7
Cancellations	(24.6)		(27.7)
Provision for future cancellations	24.1		31.7
Balance as of end of period	$	138.7	$	148.7

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 May 31, 2023 and February 28, 2023, the current portion of cancellation reserves was $75.2 million and $76.1 million, respectively.

8. Income Taxes

We had $28.7 million of gross unrecognized tax benefits as of May 31, 2023, and $27.1 million as of February 28, 2023.  There were no significant changes to the gross unrecognized tax benefits as reported for the fiscal year ended February 28, 2023.

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9. Debt

(In thousands)		As of May 31		As of February 28
Debt Description (1)	Maturity Date	2023		2023
Revolving credit facility (2)	June 2024	$	—	$	—
Term loan (2)	June 2024	300,000		300,000
Term loan (2)	October 2026	699,528		699,493
3.86% Senior notes	April 2023	—		100,000
4.17% Senior notes	April 2026	200,000		200,000
4.27% Senior notes	April 2028	200,000		200,000
Financing obligations	Various dates through February 2059	519,994		522,526
Non-recourse notes payable	Various dates through November 2029	16,779,798		16,360,092
Total debt		18,699,320		18,382,111
Less: current portion		(513,638)		(579,468)
Less: unamortized debt issuance costs		(26,228)		(27,506)
Long-term debt, net		$	18,159,454	$	17,775,137

 (1)    Interest is payable monthly, with the exception of our senior notes, which are payable semi-annually.

 (2)    Borrowings accrue interest at variable rates based on the Eurodollar rate (LIBOR), or the successor benchmark rate, the federal funds rate, or the prime rate, depending on the type of borrowing.

Revolving Credit Facility. Borrowings under our $2.00 billion unsecured revolving credit facility (the “credit facility”) are available for working capital and general corporate purposes.  We pay a commitment fee on the unused portions of the available funds. Borrowings under the credit facility are either due “on demand” or at maturity depending on the type of borrowing.  Borrowings with “on demand” repayment terms are presented as short-term debt, while amounts due at maturity are presented as long-term debt.  As of May 31, 2023, the unused capacity of $2.00 billion was fully available to us. In June 2023, the credit facility was amended to extend the maturity date to June 2028 with no other material changes to the terms of the agreement.

Term Loans. Borrowings under our $300 million and $700 million term loans are available for working capital and general corporate purposes. The interest rate on our term loans was 5.93% as of May 31, 2023, and the loans were classified as long-term debt as no repayments are scheduled to be made within the next 12 months.

Senior Notes. The 3.86% senior notes matured during the first quarter of fiscal 2024. Borrowings under our unsecured senior notes totaling $400 million are available for working capital and general corporate purposes. As of May 31, 2023, all notes were classified as long-term debt as no repayments are scheduled to be made within the next 12 months.

Financing Obligations.  Financing obligations relate to stores subject to sale-leaseback transactions that do not qualify for sale accounting.  The financing obligations were structured at varying interest rates and generally have initial lease terms ranging from 15 to 20 years with payments made monthly.  We have not entered into any new sale-leaseback transactions since fiscal 2009. In the event the agreements are modified or extended beyond their original term, the related obligation is adjusted based on the present value of the revised future payments, with a corresponding change to the assets subject to these transactions. Upon modification, the amortization of the obligation is reset, resulting in more of the payments being applied to interest expense in the initial years following the modification.

Non-Recourse Notes Payable.  The non-recourse notes payable relate to auto loans receivable funded through non-recourse funding vehicles.  The timing of principal payments on the non-recourse notes payable is based on the timing of principal collections and defaults on the related auto loans receivable. The current portion of non-recourse notes payable represents principal payments that are due to be distributed in the following period.

Notes payable related to our asset-backed term funding transactions accrue interest predominantly at fixed rates and have scheduled maturities through November 2029, but may mature earlier, depending upon the repayment rate of the underlying auto loans receivable. 

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Information on our funding vehicles of non-recourse notes payable as of May 31, 2023 are as follows:

(In billions)	Capacity
Warehouse facilities:
August 2023 expiration	2.30
December 2023 expiration	0.50
February 2024 expiration	2.80
Combined warehouse facility limit	$	5.60
Unused capacity	$	1.36
Non-recourse notes payable outstanding:
Warehouse facilities	$	4.24
Asset-backed term funding transactions	12.54
Non-recourse notes payable	$	16.78

We generally enter into warehouse facility agreements for one-year terms and typically renew the agreements annually. The return requirements of warehouse facility investors could fluctuate significantly depending on market conditions.  At renewal, the cost, structure and capacity of the facilities could change.  These changes could have a significant impact on our funding costs.

See Note 4 for additional information on the related auto loans receivable.

Capitalized Interest.  We capitalize interest in connection with the construction of certain facilities.  For the three months ended May 31, 2023 and 2022, we capitalized interest of $1.4 million and $0.8 million, respectively.

Financial Covenants.  The credit facility, term loans and senior note agreements contain representations and warranties, conditions and covenants.  We must also meet financial covenants in conjunction with certain financing obligations.  The agreements governing our non-recourse funding vehicles contain representations and warranties, as well as financial covenants and performance triggers related to events of default.  As of May 31, 2023, we were in compliance with these financial covenants and our non-recourse funding vehicles were in compliance with these performance triggers.

10. Stock and Stock-Based Incentive Plans

(A)Share Repurchase Program

As of May 31, 2023, a total of $4.0 billion of board authorizations for repurchases of our common stock was outstanding, with no expiration date, of which $2.45 billion remained available for repurchase. Share repurchases were paused during the third quarter of fiscal 2023.

Common Stock Repurchases

	Three Months Ended
	May 31
	2023		2022
Number of shares repurchased (in thousands)	—		1,644.4
Average cost per share	$	—	$	95.83
Available for repurchase, as of end of period (in millions)	$	2,451.3	$	2,616.9

(B)Stock Incentive Plans

We maintain long-term incentive plans for management, certain employees and the nonemployee members of our board. The plans allow for the granting of equity-based compensation awards, including nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock awards, stock- and cash-settled restricted stock units, stock grants or a combination of awards. To date, we have not awarded any incentive stock options.

The majority of associates who receive share-based compensation awards primarily receive cash-settled restricted stock units. Senior management and other key associates receive awards of nonqualified stock options, stock-settled restricted stock units

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and/or restricted stock awards. Nonemployee directors are eligible to receive awards of nonqualified stock options, stock grants, stock-settled restricted stock units and/or restricted stock awards. Excluding stock grants and stock-settled deferred stock units, all share-based compensation awards, including any associated dividend rights, are subject to forfeiture.

Nonqualified Stock Options. Nonqualified stock options are awards that allow the recipient to purchase shares of our common stock at a fixed price. Stock options are granted at an exercise price equal to the fair market value of our common stock on the grant date. The stock options generally vest annually in equal amounts over four years. These options expire seven years after the date of the grant.

Cash-Settled Restricted Stock Units. Also referred to as restricted stock units, or RSUs, these are awards that entitle the holder to a cash payment equal to the fair market value of a share of our common stock for each unit granted. For grants prior to fiscal 2021, conversion generally occurs at the end of a three-year vesting period. For RSUs granted during or after fiscal 2021, conversion generally occurs annually in equal amounts over three years. However, the cash payment per RSU will not be greater than 200% or less than 75% of the fair market value of a share of our common stock on the grant date. The initial grant date fair values are based on the closing prices of our common stock on the grant dates. RSUs are liability-classified awards and do not have voting rights.

Stock-Settled Market Stock Units. Also referred to as market stock units, or MSUs, these are restricted stock unit awards with market conditions granted to eligible key associates that are converted into between zero and two shares of common stock for each unit granted. Conversion generally occurs at the end of a three-year vesting period. The conversion ratio is calculated by dividing the average closing price of our stock during the final 40 trading days of the three-year vesting period by our stock price on the grant date, with the resulting quotient capped at two. This quotient is then multiplied by the number of MSUs granted to yield the number of shares awarded. The grant date fair values are determined using a Monte-Carlo simulation and are based on the expected market price of our common stock on the vesting date and the expected number of converted common shares. MSUs do not have voting rights.

Other Share-Based Incentives

Stock-Settled Performance Stock Units. Also referred to as performance stock units, or PSUs, these are restricted stock unit awards with performance conditions granted to eligible key associates that are converted into between zero and two shares of common stock for each unit granted. Conversion generally occurs at the end of a three-year vesting period. The conversion ratio is based on the company reaching certain performance target levels set by the board at the beginning of each one-year period, with the resulting quotients subject to meeting a minimum threshold and capped at 200%. These quotients are then multiplied by the number of PSUs granted to yield the number of shares awarded.

For the first-year of the fiscal 2022 awards, these targets were based on annual pretax diluted earnings per share excluding any unrealized gains or losses on equity investments in private companies; the board certified a performance adjustment factor of 200%. For the second-year and third-year periods of the fiscal 2022 awards, the first-year and second-year periods of the fiscal 2023 awards and the first-year period of the fiscal 2024 awards, the performance targets are based on annual pretax diluted earnings per share excluding any unrealized gains or losses on equity investments in private companies and market share. For the second-year period of the fiscal 2022 awards and the first-year period of the fiscal 2023 awards, the board certified performance adjustment factors of 4% each. For the third-year period of the fiscal 2023 awards and the second- and third-year periods of the fiscal 2024 awards, the remaining awarded 65,077 PSUs do not qualify as grants under ASC 718 as mutual understanding of the target performance levels are either not fully set or have not been set.

PSUs do not have voting rights. The grant date fair values are based on the closing prices of our common stock on the grant dates. As of May 31, 2023, 97,584 granted units were outstanding at a weighted average grant date fair value per share of $87.61.

Stock-Settled Deferred Stock Units. Also referred to as deferred stock units, or DSUs, these are restricted stock unit awards granted to non-employee members of our board of directors that are converted into one share of common stock for each unit granted. Conversion occurs at the end of the one-year vesting period unless the director has exercised the option to defer conversion until separation of service to the company. The grant date fair values are based on the volume-weighted average prices or closing prices of our common stock on the grant dates. DSUs have no voting rights. As of May 31, 2023, 78,893 units were outstanding at a weighted average grant date fair value of $91.65.

Restricted Stock Awards. Restricted stock awards, or RSAs, are awards of our common stock that are subject to specified restrictions that generally lapse after a one- to three-year period from the date of the grant. The grant date fair values are based on the closing prices of our common stock on the grant dates. Participants holding restricted stock are entitled to vote on

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matters submitted to holders of our common stock for a vote. As of May 31, 2023, there were 7,847 shares outstanding at a grant date value of $124.21.

(C)Share-Based Compensation

Composition of Share-Based Compensation Expense

	Three Months Ended
	May 31
(In thousands)	2023		2022
Cost of sales	$	1,390	$	240
CarMax Auto Finance income	449		708
Selling, general and administrative expenses	35,304		22,236
Share-based compensation expense, before income taxes	$	37,143	$	23,184

Composition of Share-Based Compensation Expense – By Grant Type

	Three Months Ended
	May 31
(In thousands)	2023		2022
Nonqualified stock options	$	14,077	$	11,212
Cash-settled restricted stock units (RSUs)	15,111		849
Stock-settled market stock units (MSUs)	6,224		5,347
Other share-based incentives:
Stock-settled performance stock units (PSUs)	741		4,691
Restricted stock (RSAs)	231		344
Employee stock purchase plan	759		741
Total other share-based incentives	$	1,731	$	5,776
Share-based compensation expense, before income taxes	$	37,143	$	23,184

Unrecognized Share-Based Compensation Expense – By Grant Type

	As of May 31, 2023
			Weighted Average
	Unrecognized		Remaining
	Compensation		Recognition Life
(Costs in millions)	Costs		(Years)
Nonqualified stock options	$	79.1	2.1
Stock-settled market stock units	26.2		2.2
Other share-based incentives:
Stock-settled performance stock units	4.2		1.8
Restricted stock	0.1		0.1
Total other share-based incentives	4.3		1.7
Total	$	109.6	2.1

We recognize compensation expense for stock options, MSUs, PSUs, DSUs and RSAs on a straight-line basis (net of estimated forfeitures) over the requisite service period, which is generally the vesting period of the award.  The PSU expense is adjusted for any change in management’s assessment of the performance target level that is probable of being achieved. The variable expense associated with RSUs is recognized over their vesting period (net of estimated forfeitures) and is calculated based on the closing price of our common stock on the last trading day of each reporting period. 

The total costs for matching contributions for our employee stock purchase plan are included in share-based compensation expense.  There were no capitalized share-based compensation costs as of or for the three months ended May 31, 2023 or 2022.

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Stock Option Activity