Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Company's consolidated financial statements and notes thereto appearing elsewhere in this report.
Forward-Looking Information
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address the Company’s future objectives, plans and goals, as well as the Company’s intent, beliefs and current expectations regarding future operating performance, and can generally be identified by words such as “may”, “will”, “should”, “could”, “believe”, “expect”, “anticipate”, “intend”, “plan”, “foresee”, and other similar words or phrases. Specific events addressed by these forward-looking statements include, but are not limited to:
·
|
new dealership openings;
|
·
|
performance of new dealerships;
|
·
|
same store revenue growth;
|
·
|
the Company’s collection results, including but not limited to collections during income tax refund periods;
|
·
|
investment in development of workforce;
|
·
|
gross margin percentages;
|
·
|
financing the majority of growth from profits;
|
·
|
compliance with tax regulations; and
|
·
|
the Company’s business and growth strategies.
|
These forward-looking statements are based on the Company’s current estimates and assumptions and involve various risks and uncertainties. As a result, you are cautioned that these forward-looking statements are not guarantees of future performance, and that actual results could differ materially from those projected in these forward-looking statements. Factors that may cause actual results to differ materially from the Company’s projections include, but are not limited to:
·
|
the availability of credit facilities to support the Company’s business;
|
·
|
the Company’s ability to underwrite and collect its contracts effectively;
|
·
|
dependence on existing management;
|
·
|
availability of quality vehicles at prices that will be affordable to customers;
|
·
|
changes in financing laws or regulations;
|
·
|
the outcome of pending tax audits; and
|
·
|
general economic conditions in the markets in which the Company operates, including but not limited to fluctuations in gas prices, grocery prices and employment levels.
|
The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the dates on which they are made.
Overview
America’s Car-Mart, Inc., a Texas corporation (the “Company”), is the largest publicly held automotive retailer in the United States focused exclusively on the “Integrated Auto Sales and Finance” segment of the used car market. References to the Company typically include the Company’s consolidated subsidiaries. The Company’s operations are principally conducted through its two operating subsidiaries, America’s Car Mart, Inc., an Arkansas corporation (“Car-Mart of Arkansas”), and Colonial Auto Finance, Inc., an Arkansas corporation (“Colonial”). Collectively, Car-Mart of Arkansas and Colonial are referred to herein as “Car-Mart”. The Company primarily sells older model used vehicles and provides financing for substantially all of its customers. Many of the Company’s customers have limited financial resources and would not qualify for conventional financing as a result of limited credit histories or past credit problems. As of October 31, 2012, the Company operated 117 dealerships located primarily in small cities throughout the South-Central United States.
Car-Mart has been operating since 1981. Car-Mart has grown its revenues between 3% and 21% per year over the last ten fiscal years (average 13%). Growth results from same dealership revenue growth and the addition of new dealerships. Revenue increased 4.2% for the first six months of fiscal 2013 compared to the same period of fiscal 2012 due primarily to a 3.2% increase in retail units sold, a 0.5% increase in average retail sales price and a 13.6% increase in interest income.
The Company’s primary focus is on collections. Each dealership is responsible for its own collections with supervisory involvement of the corporate office. Over the last five full fiscal years, the Company’s credit losses as a percentage of sales have ranged between approximately 20.2% in fiscal 2010 and 22.0% in fiscal 2008 (average of 21.1%). Credit losses in fiscal 2008 were 22% of sales as the Company continued to focus on operational initiatives, including credit and collections efforts. In fiscal 2009, the Company saw the benefit of continuing operational improvements despite negative macro-economic factors and experienced a reduction in credit losses to 21.5% of sales. Improvements in credit losses continued into fiscal 2010 as the provision for credit losses was 20.2% of sales for the year ended April 30, 2010. The Company experienced credit losses of 20.8% of sales for fiscal 2011 and 21.1% of sales for fiscal 2012. In fiscal 2011 the higher credit losses primarily related to credit losses during the second fiscal quarter as the Company did experience some modest operational difficulties. In fiscal 2012 the Company experienced slightly higher credit losses; however, the losses were within the range of credit losses that the Company targets annually. The credit losses as a percentage of sales for the first six months of fiscal 2013 were 23.1% compared to 21.6% of sales for the prior year period. The increase as a percentage of sales was partially the result of the effect of sequentially lower average selling prices as well as anticipated higher losses at newer dealerships as these dealerships represent a higher percentage of the total dealerships as of the end of the second quarter of fiscal 2013 versus the same period last year. Additionally, the Company did see increases in losses as a percentage of sales for some older dealerships due in part to the negative macroeconomic environment and sequentially lower average selling prices.
Historically, credit losses, on a percentage basis, tend to be higher at new and developing dealerships than at mature dealerships. Generally, this is the case because the management at new and developing dealerships tends to be less experienced in making credit decisions and collecting customer accounts and the customer base is less seasoned. Normally the older, more mature dealerships have more repeat customers and on average, repeat customers are a better credit risk than non-repeat customers.
The Company believes that the proper execution of its business practices is the single most important determinant of credit loss experience. The Company does believe that higher energy and fuel costs, general inflation and potentially lower personal income levels affecting customers can have a negative impact on collections. However, negative macro-economic issues do not always lead to higher credit loss results for the Company, because the Company provides basic affordable transportation which in many cases is not a discretionary expenditure for customers. The Company continues to make improvements to its business practices, including better underwriting and better collection procedures in a continuing effort to improve collection results. The Company has installed a proprietary credit scoring system which enables the Company to monitor the quality of contracts on the front end. Corporate office personnel monitor scores and work with dealerships when the distribution of scores fall outside of prescribed thresholds. The Company continues to invest in its corporate infrastructure within the collection area. The Director of Collection Practices and Review provides timely oversight and more accountability on a consistent basis. In addition, the Company now has several Collection Specialists who assist the Director of Collection Practices and Review with monitoring and training efforts.
The Company’s gross margins as a percentage of sales have been fairly consistent from year to year. Over the last five full fiscal years, the Company’s gross margins as a percentage of sales have ranged between approximately 42% and 44%. Gross margin as a percentage of sales for fiscal 2012 was 42.3%. The Company’s gross margins are based upon the cost of the vehicle purchased, with lower-priced vehicles typically having higher gross margin percentages. In recent years, the Company’s gross margins have been negatively affected by the increase in the average retail sales price (a function of a higher purchase price) and higher operating costs, mostly related to increased vehicle repair costs and higher fuel costs. Additionally, the percentage of wholesale sales to retail sales, which relate for the most part to repossessed vehicles sold at or near cost, can have a significant effect on overall gross margin percentages. The negative effect from wholesale sales was higher during the first part of fiscal 2008 due to the increased level of repossession activity coupled with relatively flat retail sales levels. Higher retail sales levels and lower repossessions activity during the latter part of fiscal 2008 and for fiscal 2009 helped to bring gross margin percentages back up. Gross margin percentages in fiscal 2010 benefitted from higher retail sales levels and from a strong wholesale market for repossessed vehicles due to overall used vehicle supply shortages. The gross margin percentage in fiscal 2011 and fiscal 2012 was negatively affected by higher wholesale sales, increased average retail selling price, higher inventory repair costs and lower margins on the payment protection plan and service contract products. For the first six months of fiscal 2013, the gross margin as a percentage of sales was 42.8%, up slightly from 42.6% for the first six months of fiscal 2012. The increase is primarily due to improved margins on the service contract products and slightly lower cost of sales expenses. The Company expects that its gross margin percentage will not change significantly in the near term from the current level (42%-43% range).
Hiring, training and retaining qualified associates are critical to the Company’s success. The rate at which the Company adds new dealerships and is able to implement operating initiatives is limited by the number of trained managers and support personnel the Company has at its disposal. Excessive turnover, particularly at the dealership manager level, could impact the Company’s ability to add new dealerships and to meet operational initiatives. The Company has added resources to recruit, train and develop personnel
especially personnel targeted to fill dealership manager positions. The Company expects to continue to invest in the development of its workforce in fiscal 2013 and beyond.
Consolidated Operations
(Operating Statement Dollars in Thousands)
|
|
|
|
|
|
|
|
% Change
|
|
|
As a % of Sales
|
|
|
|
Three Months Ended
October 31,
|
|
|
2012
|
|
|
Three Months Ended
October 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
98,194
|
|
|
$
|
100,128
|
|
|
|
(1.9
|
) %
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Interest income
|
|
|
12,025
|
|
|
|
10,679
|
|
|
|
12.6
|
|
|
|
12.2
|
|
|
|
10.7
|
|
Total
|
|
|
110,219
|
|
|
|
110,807
|
|
|
|
(0.5
|
)
|
|
|
112.2
|
|
|
|
110.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation shown below
|
|
|
56,204
|
|
|
|
57,807
|
|
|
|
(2.8
|
)
|
|
|
57.2
|
|
|
|
57.7
|
|
Selling, general and administrative
|
|
|
17,351
|
|
|
|
16,721
|
|
|
|
3.8
|
|
|
|
17.7
|
|
|
|
16.7
|
|
Provision for credit losses
|
|
|
23,647
|
|
|
|
22,623
|
|
|
|
4.5
|
|
|
|
24.1
|
|
|
|
22.6
|
|
Interest expense
|
|
|
708
|
|
|
|
575
|
|
|
|
23.1
|
|
|
|
0.7
|
|
|
|
0.6
|
|
Depreciation and amortization
|
|
|
696
|
|
|
|
565
|
|
|
|
23.2
|
|
|
|
0.7
|
|
|
|
0.6
|
|
Total
|
|
|
98,606
|
|
|
|
98,291
|
|
|
|
0.3
|
|
|
|
100.4
|
|
|
|
98.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income
|
|
$
|
11,613
|
|
|
$
|
12,516
|
|
|
|
(7.2
|
) %
|
|
|
11.8
|
%
|
|
|
12.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail units sold
|
|
|
9,814
|
|
|
|
9,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average stores in operation
|
|
|
116
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average units sold per store per month
|
|
|
28.2
|
|
|
|
30.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average retail sales price
|
|
$
|
9,515
|
|
|
$
|
9,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same store revenue change
|
|
|
(4.8
|
)%
|
|
|
13.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period End Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores open
|
|
|
117
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts over 30 days past due
|
|
|
4.3
|
%
|
|
|
3.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended October 31, 2012 vs. Three Months Ended October 31, 2011
Revenues decreased by $588,000, or 0.5%, for the three months ended October 31, 2012 as compared to the same period in the prior fiscal year. The decrease was principally the result of (i) a revenue decrease from dealerships that operated a full three months in both periods ($5.2 million, or 4.8%), partially offset by (ii) revenue growth from dealerships opened during the three months ended October 31, 2011 ($1.5 million), and (iii) revenue from dealerships opened after October 31, 2011 ($3.2 million). The decrease in same store revenue during the quarter ended October 31, 2012 as compared to the quarter ended October 31, 2011 was due primarily to fewer retail units sold and a lower average selling price. The Company believes the amount of credit available to customers in the sub-prime auto industry has increased during recent months and that this additional credit availability had a negative effect on the Company’s sales during the second quarter of fiscal 2013, especially at its older, more established dealerships.
Cost of sales as a percentage of sales decreased 0.5% to 57.2% for the three months ended October 31, 2012 from 57.7% in the same period of the prior fiscal year. The decrease from the prior year period relates primarily to the pricing efficiencies due in part to the lower average retail sales price, improved margins on the service contract product and slightly lower cost of sales expenses. The average retail sales price for the second quarter of fiscal 2013 decreased $42 from the second quarter of fiscal 2012. The Company will continue to focus efforts on holding down purchase costs (and the related selling price) and expects to see gross margin percentages generally in the 42% - 43% range over the near term. Average selling prices and top line sales levels in relation to wholesale volumes, resulting from credit loss experience, can have a significant effect on gross margin percentages.
Selling, general and administrative expenses as a percentage of sales were 17.7% for the three months ended October 31, 2012, an increase of 1.0% from the same period of the prior fiscal year. A portion of the percentage increase results from the overall lower sales levels during the quarter. In dollar terms, overall selling, general and administrative expenses increased $630,000 in the second quarter of fiscal 2013 compared to the same period of the prior fiscal year, consisting primarily of increased payroll costs, incremental costs at new dealerships as well as higher marketing and advertising costs.
Provision for credit losses as a percentage of sales increased to 24.1% for the three months ended October 31, 2012 compared to 22.6% for the three months ended October 31, 2011. The increase as a percentage of sales was partially the result of the effect of sequentially lower average selling prices as well as anticipated higher losses at newer dealerships as these dealerships represent a higher percentage of the total dealerships in second quarter of fiscal 2013 versus the same period last year. Additionally, the Company did see increases in losses as a percentage of sales for some older dealerships due in part to the negative macroeconomic environment and sequentially lower average selling prices. The Company continually pushes for improvements and better execution of its collection practices. However, the continuing negative macro-economic environment continues to put pressure on our customers and the resulting collections of our finance receivables. The Company has made considerable investment in the corporate infrastructure within the collection area which is continuing to have a positive effect on results by providing more oversight and accountability on a consistent basis. The Company believes that the proper execution of its business practices is the single most important determinate of credit loss experience.
Interest expense for the three months ended October 31, 2012 as a percentage of sales increased to 0.7% compared to 0.6% for the three months ended October 31, 2011. The increase resulted from higher average borrowings during the three months ended October 31, 2012 ($90.4 million compared to $72.8 million in the prior year), which were partially offset by lower interest rates on the Company’s variable rate debt.
Consolidated Operations
(Operating Statement Dollars in Thousands)
|
|
|
|
|
|
|
|
% Change
|
|
|
As a % of Sales
|
|
|
|
Six Months Ended
October 31,
|
|
|
|
|
|
Six Months Ended
October 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
196,491
|
|
|
$
|
190,452
|
|
|
|
3.2
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Interest income
|
|
|
23,728
|
|
|
|
20,879
|
|
|
|
13.6
|
|
|
|
12.1
|
|
|
|
11.0
|
|
Total
|
|
|
220,219
|
|
|
|
211,331
|
|
|
|
4.2
|
|
|
|
112.1
|
|
|
|
111.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation shown below
|
|
|
112,389
|
|
|
|
109,369
|
|
|
|
2.8
|
|
|
|
57.2
|
|
|
|
57.4
|
|
Selling, general and administrative
|
|
|
35,207
|
|
|
|
32,918
|
|
|
|
7.0
|
|
|
|
17.9
|
|
|
|
17.3
|
|
Provision for credit losses
|
|
|
45,310
|
|
|
|
41,157
|
|
|
|
10.1
|
|
|
|
23.1
|
|
|
|
21.6
|
|
Interest expense
|
|
|
1,361
|
|
|
|
1,018
|
|
|
|
33.7
|
|
|
|
0.7
|
|
|
|
0.5
|
|
Depreciation and amortization
|
|
|
1,358
|
|
|
|
1,103
|
|
|
|
23.1
|
|
|
|
0.7
|
|
|
|
0.6
|
|
Total
|
|
|
195,625
|
|
|
|
185,565
|
|
|
|
5.4
|
|
|
|
99.6
|
|
|
|
97.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax income
|
|
$
|
24,594
|
|
|
$
|
25,766
|
|
|
|
(4.5
|
) %
|
|
|
12.5
|
%
|
|
|
13.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail units sold
|
|
|
19,567
|
|
|
|
18,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average stores in operation
|
|
|
115
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average units sold per store per month
|
|
|
28.4
|
|
|
|
29.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average retail sales price
|
|
$
|
9,549
|
|
|
$
|
9,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same store revenue change
|
|
|
0.1
|
%
|
|
|
8.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period End Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores open
|
|
|
117
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts over 30 days past due
|
|
|
4.3
|
%
|
|
|
3.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended October 31, 2012 vs. Six Months Ended October 31, 2011
Revenues increased by $8.9 million, or 4.2%, for the six months ended October 31, 2012 as compared to the same period in the prior fiscal year. The increase was principally the result of (i) revenue growth from stores that operated a full six months in both periods ($291,000, or 0.1%), (ii) revenue growth from stores opened during the six months ended October 31, 2011 and stores that opened or closed a satellite location after October 31, 2011 ($3.8 million), and (iii) revenue from stores opened after October 31, 2011 ($4.8 million).
Cost of sales as a percentage of sales decreased 0.2% to 57.2% for the six months ended October 31, 2012 from 57.4% in the same period of the prior fiscal year. The decrease from the prior year period relates primarily to the pricing efficiencies, improved margins on the service contract product and slightly lower cost of sales expenses. The Company will continue to focus efforts on holding down purchase costs (and the related selling price) and expects to see gross margin percentages generally in the 42% - 43% range over the near term. Average selling prices and top line sales levels in relation to wholesale volumes, resulting from credit loss experience, can have a significant effect on gross margin percentages.
Selling, general and administrative expense as a percentage of sales was 17.9% for the six months ended October 31, 2012, an increase of 0.6% from the same period of the prior fiscal year. Selling, general and administrative expenses are, for the most part, more fixed in nature. The overall dollar increase of $2.3 million related primarily to higher payroll costs and to incremental costs related to new locations opened after October 31, 2011. Additionally, many of the Company’s compensation arrangements are tied to financial performance and as such, more payroll costs are incurred during periods of improved financial results.
Provision for credit losses as a percentage of sales increased 1.5% to 23.1% for the six months ended October 31, 2012 from 21.6% in the same period of the prior fiscal year. Continuing negative macro-economic conditions continue to put pressure on our customers and the resulting collections of our finance receivables. However, despite the increase in credit losses during the first six months of fiscal 2012 compared to the prior year period, the credit losses for the current year period were generally in line with historical experience and within an acceptable range. The Company continues to push for improvements and better execution of its collection practices. The Company believes that the proper execution of its business practices is the single most important determinate of credit loss experience and that the credit losses in both the current and prior year periods reflect the improvements in oversight and accountability provided by the Company’s investments in our corporate infrastructure within the collection area.
Interest expense as a percentage of sales increased 0.2% to 0.7% for the six months ended October 31, 2012 from 0.5% for the same period of the prior fiscal year. The increase was attributable to higher average borrowings during the six months ended October 31, 2012 as compared to the same period in the prior fiscal year ($86.2 million compared to $63.3 million) partially offset by lower interest rates on the Company’s variable rate debt.
The following table sets forth the major balance sheet accounts of the Company as of the dates specified (in thousands):
|
|
October 31, 2012
|
|
|
April 30, 2012
|
|
Assets:
|
|
|
|
|
|
|
Finance receivables, net
|
|
$
|
268,811
|
|
|
$
|
251,103
|
|
Inventory
|
|
|
27,463
|
|
|
|
27,242
|
|
Income taxes receivable, net
|
|
|
1,624
|
|
|
|
1,444
|
|
Property and equipment, net
|
|
|
28,149
|
|
|
|
27,547
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
22,070
|
|
|
|
20,701
|
|
Deferred payment protection plan revenue
|
|
|
11,544
|
|
|
|
10,745
|
|
Deferred tax liabilities, net
|
|
|
17,476
|
|
|
|
16,721
|
|
Debt facilities
|
|
|
91,256
|
|
|
|
77,900
|
|
Historically, finance receivables tended to grow slightly faster than revenue growth. This has historically been due, to a large extent, to an increasing weighted average term necessitated by increases in the average retail sales price over recent years. The weighted average term for installment sales contracts at October 31, 2012 increased as compared to October 31, 2011 (28.3 months vs. 27.5 months). Benefits related to software and operational changes made in an effort to shorten relative terms by maximizing up-front equity and scheduling payments to coincide with anticipated income tax refunds have helped maintain the overall term length in the face of the increasing average retail sales prices. However, in response to current competitive and economic conditions, the Company is considering structural changes to its customer contracts which may include further increases to the overall length of contract terms. Revenue growth results from same store revenue growth and the addition of new dealerships. The Company currently anticipates going forward that the growth in finance receivables will be slightly higher than overall revenue growth on an annual basis due to the overall term length increases offset by improvements in underwriting and collection procedures which are expected to result in strong collections.
During the first six months of fiscal 2013, inventory increased 0.8% ($221,000) as compared to inventory at April 30, 2012. The increase resulted from additional inventory for new dealerships and an expected increase in demand for the type of vehicle the Company purchases for resale as well as the Company’s desire to offer a broad mix and sufficient quantities of vehicles to adequately serve its expanding customer base. The Company will continue to manage inventory levels in the future to ensure adequate supply, in volume and mix, and to meet anticipated sales demand.
Income taxes receivable, net, remained relatively constant at October 31, 2012 as compared to April 30, 2012 as the tax payments for the current year have been made and the receivable related to the fiscal year 2012 has not yet been received.
Property and equipment, net, increased $602,000 during the six months ended October 31, 2012 as compared to property and equipment, net, at April 30, 2012 as the Company incurred expenditures related to new dealerships as well as to refurbish and expand existing locations.
Accounts payable and accrued liabilities increased $1.4 million during the first six months of fiscal 2013 as compared to Accounts payable and accrued liabilities at April 30, 2012 due primarily to the amount and timing of cash overdrafts.
Deferred tax liabilities, net, increased $755,000 during the first six months of fiscal 2013 as compared to April 30, 2012 due primarily to the increase in Finance Receivables partially offset by increases in deferred tax assets related to increased share based compensation.
Borrowings on the Company’s revolving credit facilities fluctuate primarily based upon a number of factors including (i) net income, (ii) finance receivables changes, (iii) income taxes, (iv) capital expenditures and (v) common stock repurchases. Historically, income from continuing operations, as well as borrowings on the revolving credit facilities, have funded the Company’s finance receivables growth, capital asset purchases and common stock repurchases. In the first six months of fiscal 2013, the Company had a $13.4 million increase in its debt facilities to help finance receivables growth of $22.0 million, capital expenditures of $2.0 million and common stock repurchases of $14.7 million.
Liquidity and Capital Resources
The following table sets forth certain summarized historical information with respect to the Company’s Statements of Cash Flows (in thousands):
|
|
Six Months Ended
October 31,
|
|
|
|
2012
|
|
|
2011
|
|
Operating activities:
|
|
|
|
|
|
|
Net income
|
|
$
|
15,396
|
|
|
$
|
16,041
|
|
Provision for credit losses
|
|
|
45,310
|
|
|
|
41,157
|
|
Losses on claims for payment protection plan
|
|
|
3,292
|
|
|
|
2,735
|
|
Depreciation and amortization
|
|
|
1,358
|
|
|
|
1,103
|
|
Stock based compensation
|
|
|
1,184
|
|
|
|
1,200
|
|
Finance receivable originations
|
|
|
(182,140
|
)
|
|
|
(175,333
|
)
|
Finance receivable collections
|
|
|
96,730
|
|
|
|
92,989
|
|
Inventory
|
|
|
18,879
|
|
|
|
13,173
|
|
Accounts payable and accrued liabilities
|
|
|
(857
|
)
|
|
|
860
|
|
Deferred payment protection plan revenue
|
|
|
799
|
|
|
|
804
|
|
Income taxes, net
|
|
|
(87
|
)
|
|
|
1,384
|
|
Deferred income taxes
|
|
|
755
|
|
|
|
2,224
|
|
Accrued interest on finance receivables
|
|
|
(270
|
)
|
|
|
(268
|
)
|
Other
|
|
|
94
|
|
|
|
815
|
|
Total
|
|
|
443
|
|
|
|
(1,116
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(1,960
|
)
|
|
|
(2,029
|
)
|
Total
|
|
|
(1,960
|
)
|
|
|
(2,029
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Debt facilities, net
|
|
|
13,356
|
|
|
|
28,898
|
|
Change in cash overdrafts
|
|
|
2,226
|
|
|
|
165
|
|
Purchase of common stock
|
|
|
(14,667
|
)
|
|
|
(26,426
|
)
|
Dividend payments
|
|
|
(20
|
)
|
|
|
(20
|
)
|
Exercise of stock options and warrants, including
tax benefits and issuance of common stock
|
|
|
746
|
|
|
|
635
|
|
Total
|
|
|
1,641
|
|
|
|
3,252
|
|
|
|
|
|
|
|
|
|
|
Increase in Cash
|
|
$
|
124
|
|
|
$
|
107
|
|
The primary drivers of operating profits and cash flows include (i) top line sales, (ii) interest rates on finance receivables, (iii) gross margin percentages on vehicle sales, and (iv) credit losses. The Company generates cash flow from income from operations. Historically, most or all of this cash is used to fund finance receivables growth, capital expenditures and common stock repurchases. To the extent finance receivables growth, capital expenditures and common stock repurchases exceed income from operations generally the Company increases its borrowings under its revolving credit facilities. The majority of the Company’s growth has been self-funded.
Cash flows from operations for the six months ended October 31, 2012 compared to the same period in the prior fiscal year were negatively impacted by (i) an increase in finance receivables, (ii) a smaller increase in income tax payable, net and in deferred income taxes, and (iii) lower net income, partially offset by (iv) higher non-cash charges including credit losses, depreciation, and losses on claims for payment protection plan and (v) higher values for inventory acquired in repossession and payment protection plan claims. Finance receivables, net, increased by $17.7 million from April 30, 2012 to October 31, 2012.
The purchase price the Company pays for a vehicle has a significant effect on liquidity and capital resources. Several external factors can negatively affect the purchase cost of vehicles. Decreases in the overall volume of new car sales, particularly domestic brands, leads to decreased supply in the used car market. Also, the expansion of the customer base due in part to constrictions in consumer credit, as well as general economic conditions, can have an overall effect on the demand for the type of vehicle the Company purchases for resale. Because the Company bases its selling price on the purchase cost for the vehicle, increases in purchase costs result in increased selling prices. As the selling price increases, it becomes more difficult to keep the gross margin percentage and contract term in line with historical results because the Company’s customers have limited incomes and their car payments must remain affordable within their individual budgets. The Company has seen increases in the purchase cost of vehicles and resulting increases in selling prices over the last few years. Management does expect a continuing tight supply of vehicles and a resulting pressure for increases in vehicle purchase costs even though there have been recent sequential decreases in purchase costs. The Company believes that the amount of credit available for the sub-prime auto industry has increased during recent months and management expects the availability of consumer credit within the automotive industry to be somewhat higher over the near term when compared to recent history and that this will contribute to overall increases in demand for most, if not all, of the vehicles the Company purchases for resale. The Company has devoted significant efforts to improve its purchasing processes to ensure adequate supply at appropriate prices. This is expected to result in gross margin percentages generally in the 42% - 43% range in the near term with overall contract terms increasing, somewhat mitigated by software and operational changes which have been made to structure seasonal payments during income tax refund periods. In an effort to ensure an adequate supply of vehicles at appropriate prices, the Company has increased the level of accountability for its purchasing agents including the establishment of sourcing and pricing guidelines. Additionally, the Company is expanding its purchasing territories to larger cities in close proximity to its dealerships and increasing its efforts to purchase vehicles from individuals at the dealership level as well as via the internet. Somewhat as a result of these initiatives, the average retail sales price for the second quarter of fiscal 2013 decreased $69 from the first quarter of fiscal 2013 and decreased $42 from the second quarter of fiscal 2012.
Macro-economic factors can have an effect on credit losses and resulting liquidity. General inflation, particularly within staple items such as groceries and gasoline, as well as overall
unemployment levels can have a significant effect on collection results and ultimately credit losses. The Company has made improvements to its business processes within the last few years to strengthen controls and provide stronger infrastructure to support its collections efforts. The Company anticipates that credit losses on a going-forward basis will be within historical ranges; however, losses for the full fiscal year 2013 could be slightly higher and will be dependent upon successful collections during income tax refund time. Significant negative macro-economic effects could cause actual results to differ from the anticipated range. Management continues to focus on improved execution at the dealership level, specifically as related to working individually with its customers concerning collection issues.
The Company has generally leased the majority of the properties where its dealerships are located. As of October 31, 2012, the Company leased approximately 79% of its dealership properties. The Company expects to continue to lease the majority of the properties where its dealerships are located.
The Company’s revolving credit facilities generally limit distributions by the Company to its shareholders in order to repurchase the Company’s common stock. The distribution limitations under these facilities allow the Company to repurchase the Company’s stock so long as: either (a) the aggregate amount of such repurchases does not exceed $40 million and the sum of borrowing bases combined minus the principal balances of all revolver loans after giving effect to such repurchases is equal to or greater than 25% of the sum of the borrowing bases, or (b) the aggregate amount of such repurchases does not exceed 75% of the consolidated net income of the Company measured on a trailing twelve month basis; provided that immediately before and after giving effect to the stock repurchases, at least 12.5% of the aggregate funds committed under the credit facilities remain available. Thus, the Company is limited in the amount of dividends or other distributions it can make to its shareholders without the consent of the Company’s lenders.
At October 31, 2012, the Company had $400,000 of cash on hand and an additional $53.7 million of availability under its revolving credit facilities (see Note F to the Consolidated Financial Statements). On a short-term basis, the Company’s principal sources of liquidity include income from operations and borrowings under its revolving credit facilities. On a longer-term basis, the Company expects its principal sources of liquidity to consist of income from operations and borrowings under revolving credit facilities and/or fixed interest term loans. The Company’s revolving credit facilities mature in March 2015 and the Company expects that it will be able to renew or refinance its revolving credit facilities on or before the date they mature. Furthermore, while the Company has no specific plans to issue debt or equity securities, the Company believes, if necessary, it could raise additional capital through the issuance of such securities.
The Company expects to use cash to (i) grow its finance receivables portfolio, (ii) purchase property and equipment of approximately $4 million in the next 12 months in connection with refurbishing existing dealerships and adding new dealerships, (iii) repurchase shares of common stock when favorable conditions exist and (iv) reduce debt to the extent excess cash is available. Potential future changes to the structuring of customer contracts could have the effect of reducing the level of capital allocated to our stock repurchase program when compared to levels in recent history.
The Company believes it will have adequate liquidity to continue to grow its revenues and to satisfy its capital needs for the foreseeable future.
Contractual Payment Obligations
There have been no material changes outside of the ordinary course of business in the Company’s contractual payment obligations from those reported at April 30, 2012 in the Company’s Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
The Company has entered into operating leases for approximately 79% of its dealerships and office facilities. Generally these leases are for periods of three to five years and usually contain multiple renewal options. The Company uses leasing arrangements to maintain flexibility in its dealership locations and to preserve capital. The Company expects to continue to lease the majority of its dealerships and office facilities under arrangements substantially consistent with the past.
Other than its operating leases, the Company is not a party to any off-balance sheet arrangement that management believes is reasonably likely to have a current or future effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Related Finance Company Contingency
Car-Mart of Arkansas and Colonial do not meet the affiliation standard for filing consolidated income tax returns, and as such they file separate federal and state income tax returns. Car-Mart of Arkansas routinely sells its finance receivables to Colonial at what the Company believes to be fair market value and is able to take a tax deduction at the time of sale for the difference between the tax basis of the receivables sold and the sales price. These types of transactions, based upon facts and circumstances, have been permissible under the provisions of the Internal Revenue Code (“IRC”) as described in the Treasury Regulations. For financial accounting purposes, these transactions are eliminated in consolidation and a deferred tax liability has been recorded for this timing difference. The sale of finance receivables from Car-Mart of Arkansas to Colonial provides certain legal protection for the Company’s finance receivables and, principally because of certain state apportionment characteristics of Colonial, also has the effect of reducing the Company’s overall effective state income tax rate by approximately 230 basis points. The actual interpretation of the Regulations is in part a facts and circumstances matter. The Company believes it satisfies the material provisions of the Regulations. Failure to satisfy those provisions could result in the loss of a tax deduction at the time the receivables are sold and have the effect of increasing the Company’s overall effective income tax rate as well as the timing of required tax payments.
In fiscal 2010, the Internal Revenue Service (“IRS”) concluded the examinations of the Company’s income tax returns for fiscal years 2008 and 2009. As a result of the examinations, the IRS had questioned whether deferred payment protection plan (“PPP”) revenue associated with the sale of certain receivables are subject to the acceleration of advance payments provision of the IRC and whether the Company may deduct losses on the sale of the PPP receivables in excess of the income recognized on the underlying contracts. The issue was timing in nature and did not affect the overall tax provision, but affected the timing of required tax payments.
Subsequent to the end of the first quarter of fiscal 2013, the Company received a proposed negotiated settlement with the IRS related to the examinations for income tax returns for fiscal years 2008 and 2009. The proposed settlement would result in additional taxable income and a resulting tax payment for the exam period. The question relates to the timing of income recognition and therefore any additional income recognized in 2008 or 2009 would result in a corresponding tax deduction and resulting refund in the following fiscal year. Under the proposed settlement the Company would pay an immaterial amount of interest to the IRS related to the additional tax payment. The settlement is pending final approval within the IRS processes.
The IRS is currently auditing the federal income tax returns for fiscal years 2010 and 2011 for the Company.
The Company’s policy is to recognize accrued interest related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company had no accrued penalties and/or interest as of October 31, 2012.
Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires the Company to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the Company’s estimates. The Company believes the most significant estimate made in the preparation of the accompanying Condensed Consolidated Financial Statements relates to the determination of its allowance for credit losses, which is discussed below. The Company’s accounting policies are discussed in Note B to the accompanying Condensed Consolidated Financial Statements.
The Company maintains an allowance for credit losses on an aggregate basis at an amount it considers sufficient to cover estimated losses in the collection of its finance receivables. At October 31, 2012, the weighted average total contract term was 28.3 months with 20.3 months remaining. The reserve amount in the allowance for credit losses at October 31, 2012, $70.4 million, was 21.5% of the principal balance in finance receivables of $339.2 million, less unearned payment protection plan revenue of $11.5 million. Based on the analysis discussed below and strong and consistent credit results the past several years, management reduced the allowance for credit losses at April 30, 2012 to 21.5% from 22.0% at October 31, 2011. The estimated reserve amount is the Company’s anticipated future net charge-offs for losses incurred through the balance sheet date. The allowance takes into account historical credit loss experience (both timing and severity of losses), with consideration given to recent credit loss trends and changes in contract characteristics (i.e., average amount financed, months outstanding at loss date, term and age of portfolio), delinquency levels, collateral values, economic conditions and underwriting and collection practices. The allowance for credit losses is reviewed at least quarterly by management with any changes reflected in current operations. The calculation of the allowance for credit losses uses the following primary factors:
·
|
The number of units repossessed or charged-off as a percentage of total units financed over specific historical periods of time.
|
|
The average net repossession and charge-off loss per unit during the last eighteen months segregated by the number of months since the contract origination date and adjusted for the expected future average net charge-off loss per unit. About 50% of the charge-offs that will ultimately occur in the portfolio are expected to occur within 10-11 months following the loan origination date. The average age of an account at charge-off date is 10.7 months.
|
|
The timing of repossession and charge-off losses relative to the date of sale (i.e., how long it takes for a repossession or charge-off to occur) for repossessions and charge-offs occurring during the last eighteen months.
|
A point estimate is produced by this analysis which is then supplemented by any positive or negative subjective factors to arrive at an overall reserve amount that management considers to be a reasonable estimate of incurred losses that will be realized via actual charge-offs in the future. Although it is at least reasonably possible that events or circumstances could occur in the future that are not presently foreseen which could cause actual credit losses to be materially different from the recorded allowance for credit losses, the Company believes that it has given appropriate consideration to all relevant factors and has made reasonable assumptions in determining the allowance for credit losses. Periods of economic downturn do not necessarily lead to increased credit losses because the Company provides basic affordable transportation to customers that, for the most part, do not have access to public transportation. The effectiveness of the execution of internal policies and procedures within the collections area has historically had a more significant effect on collection results than macro-economic issues. A 1% change, as a percentage of Finance receivables, in the allowance for credit losses would equate to an approximate pre-tax change of $3.3 million.
Recent Accounting Pronouncements
Occasionally, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies which the Company adopts as of the specified effective date. Unless otherwise discussed, the Company believes the impact of recently issued standards which are not yet effective will not have a material impact on its consolidated financial statements upon adoption.
Goodwill
.
In September 2011, the FASB adopted an update regarding testing goodwill and other intangibles for impairment. The update permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. This update was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company implemented this update for its fiscal year beginning May 1, 2012. This update did not have a material impact on the Company’s financial statements.
Seasonality
The Company’s third fiscal quarter (November through January) was historically the slowest period for vehicle sales. Conversely, the Company’s first and fourth fiscal quarters (May through July and February through April) were historically the busiest times for vehicle sales. Therefore, the Company generally realized a higher proportion of its revenue and operating profit during the first and fourth fiscal quarters. However, beginning in fiscal 2008 tax refund anticipation sales have begun in early November and continued through January (the Company’s third fiscal quarter). The success of the tax refund anticipation sales effort has led to higher sales levels during the third fiscal quarters and the Company expects this trend to continue in future periods, but a shift in the timing of actual tax refund dollars in the Company’s markets could have an effect in future years. If conditions arise that impair vehicle sales during the first, third or fourth fiscal quarters, the adverse effect on the Company’s revenues and operating results for the year could be disproportionately large.