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.

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

CarMax, Inc. (“we,” “our,” “us,” “CarMax” and “the company”), including its wholly owned subsidiaries, is the largest retailer of used vehicles in the United States. We operate in two reportable segments:  CarMax Sales Operations and CarMax Auto Finance (“CAF”).  Our CarMax Sales Operations segment consists of all aspects of our auto merchandising and service operations, excluding financing provided by CAF.  Our CAF segment consists solely of our own finance operation that provides financing to customers buying retail vehicles from CarMax.

 

We seek to deliver an unrivaled customer experience by offering a broad selection of high quality used vehicles and related products and services at low, no-haggle prices using a customer-friendly sales process in an attractive, modern sales facility, as well as through carmax.com and our mobile apps.  We provide customers with a full 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 financingfinance providers; the sale of extended protection plan (“EPP”) products, which include extended service plans (“ESPs”) and guaranteed asset protection (“GAP”); and vehicle repair service.  Vehicles purchased through the appraisal process that do not meet our retail standards are sold to licensed dealers through on-site wholesale auctions.

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.

In connection with our prospective adoption of ASU 2015-03the Financial Accounting Standards Board's (“FASB”) Accounting Standards Update (“ASU”) 2016-09 during the current fiscal year, our provision for income taxes was reduced by $8.7 million and $13.3 million for the three and nine months ended November 30, 2017, respectively. The standard requires the income tax effects of our share-based awards to be recognized in fiscal 2017, we have presented all debt issuance costs, with the exceptionprovision for income taxes when the awards vest or are settled. Previously, these tax effects were recognized within shareholders' equity as capital in excess of thosepar value. Additionally, cash flows related to our revolving credit facility,excess tax benefits from share-based payment arrangements are now classified as a reductionoperating activities, rather than financing activities, in the consolidated statements of the carrying amount of the related debt liability.cash flows. Prior period amounts have been reclassified to conform to the current year's presentation.

undivided percentage ownership interest in the receivables, but not the receivables themselves, to entities formed by third-party investors.  These entities issue asset-backed commercial paper or utilize other funding sources supported by the transferred receivables, and the proceeds are used to finance the securitizedrelated receivables.

We typically use term securitizations to provide long-term funding for most of the auto loan receivables initially securitizedfunded through the warehouse facilities.  In these transactions, a pool of auto loan receivables is sold to a bankruptcy-remote, special purpose entity that, in turn, transfers the receivables to a special purpose securitization trust.  The securitization trust issues asset-backed securities, secured or otherwise supported by the transferred receivables, and the proceeds from the sale of the asset-backed securities are used to finance the securitized receivables.

We are required to evaluate term securitization trusts for consolidation.  In our capacity as servicer, we have the power to direct the activities of the trusts that most significantly impact the economic performance of the trusts.  In addition, we have the obligation to absorb losses (subject to limitations) and the rights to receive any returns of the trusts, which could be significant.  Accordingly, we are the primary beneficiary of the trusts and are required to consolidate them.

We recognize transfers of auto loan receivables into the warehouse facilities and asset-backed term funding transactions, including term securitizations, (“securitization(together, “non-recourse funding vehicles”) as secured borrowings, which result in recording the auto loan receivables and the related non-recourse notes payable on our consolidated balance sheets.

The securitizedThese receivables can only be used as collateral to settle obligations of the securitizationrelated non-recourse funding vehicles.  The securitizationnon-recourse funding vehicles and investors have no recourse to our assets beyond the securitizedrelated receivables, the amounts on deposit in reserve accounts and the restricted cash from collections on auto loan receivables.  We have not provided financial or other support to the securitizationnon-recourse funding vehicles that was not previously contractually required, and there are no additional arrangements, guarantees or other commitments that could require us to provide financial support to the securitizationnon-recourse funding vehicles.

See Notes 4 and 10 for additional information on auto loan receivables and non-recourse notes payable.

We also take into accountconsider recent trends in delinquencies and defaults, recovery rates and the economic environment.environment in assessing the models used in estimating the allowance for loan losses, and may adjust the allowance for loan losses to reflect factors that may not be captured in the models.  In addition, we periodically consider whether the use of additional metrics would result in improved model performance and revise the models when appropriate. The provision for loan losses is the periodic expense of maintaining an adequate allowance.

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.  See Note 4 for additional information on auto loan receivables.

Interest income and expenses related to auto loans are included in CAF income.  Interest income on auto loan receivables is recognized when earned based on contractual loan terms.  All loans continue to accrue interest until repayment or charge-off.  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.

Restricted investments includes money market securities primarily held to satisfy certain insurance program requirements, as well as mutual fundsinvestments held in a rabbi trust established to fund informally our executive deferred compensation plan.  Restricted investments totaled $70.7$75.7 million as of November 30, 2016,2017, and $63.0$70.8 million as of February 29, 2016.

We also sell ESP and GAP products on behalf of unrelated third parties, who are the primary obligors, 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, net ofsale. We also record a reserve for estimated contract cancellations.  Periodically, we may receive additional revenue based upon the level of underwriting profits of the third parties who administer the products.  These additional amounts are recognized as revenue when received.  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.

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.

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.

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

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.

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.

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.

There were no transfers between Levels 1 and 2 for the three and nine months ended November 30, 2016.2017. As of November 30, 20162017 and February 29, 201628, 2017 we had no Level 3 assets.

The current portion of estimated cancellation reserves is recognized as a component of accrued expenses and other current liabilities with the remaining amount recognized in other liabilities. As of November 30, 20162017 and February 29, 2016,28, 2017, the current portion of cancellation reserves was $57.1$57.4 million and $54.4$56.4 million, respectively.

We had $30.4$30.8 million of gross unrecognized tax benefits as of November 30, 2016,2017, and $26.8$30.0 million as of February 29, 2016.28, 2017.  There were no significant changes to the gross unrecognized tax benefits as reported for the year ended February 29, 2016,28, 2017, as all activity was related to positions taken on tax returns previously filed or intended to be filed in the current fiscal year.

We have two frozen noncontributory defined benefit plans: our pension plan (the “pension plan”) and our unfunded, nonqualified plan (the “restoration plan”), which restores retirement benefits for certain associates who are affected by Internal Revenue Code limitations on benefits provided under the pension plan. No additional benefits have accrued under these plans since they were frozen; however, we have a continuing obligation to fund the pension plan and will continue to recognize net periodic pension expense for both plans for benefits earned prior to being frozen. We use a fiscal year end measurement date for both the pension plan and the restoration plan.

Net pension expense includes actuarial loss amortization of $0.4$0.5 million and $0.5$0.4 million for the three months ended November 30, 20162017 and 2015,2016, respectively and $1.2$1.4 million and $1.5$1.2 million for the nine months ended November 30, 2017 and 2016, and 2015, respectively. We made no contributions to the pension plan duringDuring the nine months ended November 30, 2016, and2017, we made a $6.0 million contribution to the pension plan. We do not anticipate making

As of November 30, 2016, $8.792017, $9.61 billion of non-recourse notes payable was outstanding related to asset-backed term securitizations.funding transactions.  These notes payable accrue interest predominantly at fixed rates and have scheduled maturities through April 2023,May 2024, but may mature earlier, depending upon the repayment rate of the underlying auto loan receivables. 

As of November 30, 2016, $1.682017, $1.88 billion of non-recourse notes payable was outstanding related to our warehouse facilities. In fiscalAs of November 30, 2017, we increased the combined limit of our warehouse facilities by $300 million. As of November 30, 2016, the combined warehouse facility limit was $2.80$2.94 billion, and the unused warehouse capacity totaled $1.12$1.06 billion.  Of the combined warehouse facility limit, $1.50 billion will expire in February 2017 and2018, $1.30 billion will expire in August 2017.2018 and $140.0 million will expire in September 2018. 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.

Capitalized Interest.    We capitalize interest in connection with the construction of certain facilities.  For the nine months ended November 30, 20162017 and 2015,2016, we capitalized interest of $8.4$5.8 million and $7.6$8.4 million, respectively.

As of November 30, 2016,2017, our board of directors has authorized the repurchase of up to $4.55 billion of our common stock. At that date, $1.69$1.14 billion was available for repurchase, with no expiration date, under the board's outstanding authorization, which includes an additional $750 million authorized during fiscal 2017. Also during fiscal 2017, the board removed the expiration date of the outstanding repurchase authorizations.  authorization.