Item 7. 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 in Item 8 of this Annual Report on Form 10-K.
Overview
America’s Car-Mart, Inc., a Texas corporation (the “Company”), is one of the largest publicly held automotive retailers in the United States focused exclusively on the “Integrated Auto Sales and Finance” segment of the used car market. References to the Company 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 April 30, 2022, the Company operated 154 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 approximately 4% and 32% per year over the last ten years (average 11%). Growth results from same dealership revenue growth and the addition of new dealerships. Revenue increased 32.0% for the fiscal year ended April 30, 2022 compared to fiscal 2021 primarily due to a 22.2% increase in average retail sales price, a 6.7% increase in units sold and a 37.4% increase in interest income. The Company added three new dealerships in fiscal 2022.
The Company earns revenue from the sale of used vehicles, and in most cases a related service contract and an accident protection plan product, as well as interest income and late fees from the related financing. The Company’s cost structure is more fixed in nature and is sensitive to volume changes. Revenues can be affected by our level of competition, which is influenced to a large extent by the availability of funding to the sub-prime automobile industry, together with the availability and resulting purchase cost of the types of vehicles the Company purchases for resale. Revenues can also be affected by the macro-economic environment. Down payments, contract term lengths and proprietary credit scoring are critical to helping customers succeed and are monitored closely by corporate management at the point of sale. After the sale, collections, delinquencies and charge-offs are crucial elements of the Company’s evaluation of its financial condition and results of operations and are monitored and reviewed on a continuous basis. Management believes that developing and maintaining a relationship with its customers and earning their repeat business is critical to the success and growth of the Company and can serve to offset the effects of increased competition and negative macro-economic factors.
The Company focuses on the benefits of excellent customer service and its “local” face-to-face offering in an effort to help customers succeed, while continuing to enhance the Company’s digital services and offerings to meet growing demands for an online sales experience. The Company, over recent years, has focused on providing a good mix of vehicles in various price ranges to increase affordability for customers.
The purchase price the Company pays for its vehicles can also have a significant effect on revenues, liquidity and capital resources. Because the Company bases its selling price on the purchase cost of 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. Decreases in the overall volume of new car sales, particularly domestic brands, lead to decreased supply and generally increased prices in the used car market. Also, expansions or constrictions in consumer credit, as well as general economic conditions, can have an overall effect on the demand and the resulting purchase cost of the types of vehicles the Company purchases for resale.
The COVID-19 pandemic and the resulting economic effects have had an impact on the availability and prices of the vehicles the Company purchases. Over the past two years, the reduction in new car production, fewer off-lease vehicles and fewer repossessions in the overall market have negatively impacted the availability of product and resulted in higher purchase costs. The Company constantly reviews and adjusts purchasing avenues in order to obtain an appropriate flow of vehicles. While the Company anticipates that the availability of used vehicles will remain constricted and keep purchase costs elevated in the near future, any decline in overall market pressures affecting the availability and costs of used vehicles could result in lower inventory purchase costs and present an opportunity for the Company to purchase slightly newer, lower mileage vehicle for its customers.
The Company consistently focuses on collections. Each dealership is responsible for its own collections with supervisory involvement of the corporate office. Over the last five fiscal years, the Company’s credit losses as a percentage of sales have ranged from approximately 20.3% in fiscal 2021 to 28.7% in fiscal 2018 (average of 24.4%). Credit losses as a percentage of sales have steadily improved on an annual basis in each of the past five fiscal years from a historical high in fiscal 2018, as improvements in collection processes and higher recovery rates on repossessions have progressively offset continuing competitive pressures. The Company’s credit loss results were temporarily negatively impacted during the fourth quarter of fiscal 2020 by the impacts of COVID-19, including the Company’s suspension of certain collection activities for a period of time and the Company’s decision to increase the allowance for credit losses as a result of the pandemic from 24.5% to 26.5%, resulting in a $9.1 million pretax charge to the provision for credit losses. However, credit loss results improved substantially in fiscal 2021 due to a lower frequency of losses and lower severity of loss amounts relative to the principal balance as the CARES Act enhanced unemployment and stimulus funds, combined with the Company’s commitment to working with customers, aided customers’ ability to make their vehicle payments. The improvement in credit losses as a percentage of sales for fiscal 2021 was further accelerated by the Company’s decision during the fourth quarter of fiscal 2021 to reduce the allowance for credit losses back to 24.5% of finance receivables, net of deferred revenue, which resulted in a $15.1 million pretax decrease in the provision for credit losses. The fiscal year 2022 credit losses began to normalize to pre-pandemic levels but were still below historical levels despite the increase in the average retail sales price. Based on the Company’s current analysis of loan losses, the allowance for credit losses remains at 24.5% at April 30, 2022.
Historically, credit losses, on a percentage basis, tend to be higher at new and developing dealerships than at mature dealerships. Generally, this is 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 more mature dealerships have more repeat customers and, on average, repeat customers are a better credit risk than non-repeat customers. Credit losses and charge-offs can also be impacted by market and economic factors, including a competitive used vehicle financing environment and macro-economic conditions such as inflation in the price of gasoline, groceries and other staple items and overall unemployment levels, as well as the personal income levels of the Company’s customers. Negative macro-economic issues, however, 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.
In an effort to offset credit losses and to operate more efficiently, the Company continues to look for improvements to its business practices, including better underwriting and better collection procedures. The Company has a proprietary credit scoring system which enables the Company to monitor the quality of contracts. Corporate office personnel monitor proprietary credit scores and work with dealerships when the distribution of scores falls outside of prescribed thresholds. The Company also uses credit reporting and the use of global positioning system (“GPS”) units on vehicles. Additionally, the Company has placed significant focus on the collection area as the Company’s training department continues to spend significant time and effort on collections improvements. The Company’s vice president of collections oversees the collections department and provides timely oversight and additional accountability on a consistent basis. The Company believes that the proper execution of its business practices is the single most important determinant of its long-term credit loss experience.
Historically, the Company’s gross margin as a percentage of sales has been fairly consistent from year to year at approximately 40% or 41% over each of the previous five fiscal years. The Company’s gross margin is based upon the cost of the vehicle purchased, with lower-priced vehicles typically having higher gross margin percentages but lower gross profit dollars, and is also affected by the percentage of wholesale sales to retail sales, which relates for the most part to repossessed vehicles sold at or near cost. The gross margin percentage decreased in fiscal 2022 to 37.4% from 40.7% in the prior fiscal year, while gross margin dollars per retail unit sold increased by $760, primarily as a result of the Company selling on average a higher priced vehicle in fiscal 2022. The Company expects that increasing vehicle purchase costs and sales prices will continue to put pressure on its gross margin percentage over the near term as the demand for the vehicles the Company purchases will remain high. The Company successfully manages the business based upon gross margin dollars as demonstrated with the increase during the last three fiscal years in the gross margin dollars per retail unit sold.
Hiring, training and retaining qualified associates is 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 landscape for hiring remains very competitive as the business activity and workforce participation continue to adjust post-pandemic. The Company has continued to add 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.
Consolidated Operations
(Operating Statement Dollars in Thousands)
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% Change |
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2022 |
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2021 |
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Years Ended April 30, |
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vs. |
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vs. |
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As a % of Sales |
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2022 |
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2021 |
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2020 |
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2021 |
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2020 |
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2022 |
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2021 |
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2020 |
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Operating Statement: |
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Revenues: |
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Sales |
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$ |
1,060,512 |
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|
$ |
808,065 |
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|
$ |
652,992 |
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|
|
31.2 |
% |
|
|
23.7 |
% |
|
|
100.0 |
% |
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|
100.0 |
% |
|
|
100.0 |
% |
Interest and other income |
|
|
151,853 |
|
|
|
110,545 |
|
|
|
91,619 |
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|
|
37.4 |
|
|
|
20.7 |
|
|
|
14.3 |
|
|
|
13.7 |
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|
|
14.0 |
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Total |
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1,212,365 |
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|
918,610 |
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|
|
744,611 |
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|
|
32.0 |
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|
|
23.4 |
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|
|
114.3 |
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|
113.7 |
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|
114.0 |
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Costs and expenses: |
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Cost of sales, excluding depreciation shown below |
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|
663,631 |
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|
479,153 |
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|
|
388,475 |
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38.5 |
% |
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23.3 |
% |
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|
62.6 |
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|
|
59.3 |
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|
59.5 |
|
Selling, general and administrative |
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156,130 |
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|
130,855 |
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|
117,762 |
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19.3 |
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11.1 |
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14.7 |
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16.2 |
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18.0 |
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Provision for credit losses |
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257,101 |
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|
163,662 |
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|
|
162,246 |
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|
|
57.1 |
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|
|
0.9 |
|
|
|
24.2 |
|
|
|
20.3 |
|
|
|
24.8 |
|
Interest expense |
|
|
10,919 |
|
|
|
6,820 |
|
|
|
8,052 |
|
|
|
60.1 |
|
|
|
(15.3 |
) |
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|
1.0 |
|
|
|
0.8 |
|
|
|
1.2 |
|
Depreciation and amortization |
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|
4,033 |
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|
|
3,719 |
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|
|
3,839 |
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|
8.4 |
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|
(3.1 |
) |
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0.4 |
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0.5 |
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0.6 |
|
Gain on disposal of property and equipment |
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|
149 |
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|
(40 |
) |
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|
(114 |
) |
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- |
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- |
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- |
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- |
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- |
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Total |
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|
1,091,963 |
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|
|
784,169 |
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|
|
680,260 |
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|
|
39.3 |
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|
|
15.3 |
|
|
|
103.0 |
|
|
|
97.0 |
|
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|
104.1 |
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Income before income taxes |
|
$ |
120,402 |
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|
$ |
134,441 |
|
|
$ |
64,351 |
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|
|
|
|
|
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|
11.4 |
% |
|
|
16.6 |
% |
|
|
9.9 |
% |
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Operating Data (Unaudited): |
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Retail units sold |
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|
60,595 |
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|
56,806 |
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|
|
52,914 |
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|
6.7 |
% |
|
|
7.4 |
% |
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|
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|
|
|
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|
Average dealerships in operation |
|
|
152 |
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|
|
150 |
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|
|
146 |
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|
|
1.3 |
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|
|
2.7 |
|
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|
Average units sold per dealership per month |
|
|
33.2 |
|
|
|
31.6 |
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|
|
30.2 |
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|
5.1 |
|
|
|
4.6 |
|
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|
Average retail sales price |
|
$ |
16,649 |
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|
$ |
13,621 |
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|
$ |
11,793 |
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|
|
22.2 |
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|
15.5 |
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|
Gross profit per retail unit sold |
|
$ |
6,550 |
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|
$ |
5,790 |
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|
$ |
4,999 |
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|
|
13.1 |
|
|
|
15.8 |
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Same store revenue growth |
|
|
30.5 |
% |
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|
18.7 |
% |
|
|
9.3 |
% |
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|
Receivables average yield |
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|
15.8 |
% |
|
|
15.9 |
% |
|
|
15.7 |
% |
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|
2022 Compared to 2021
Total revenues increased $293.8 million, or 32.0%, in fiscal 2022, as compared to revenue growth of 23.4% in fiscal 2021, principally as a result of (i) revenue growth from dealerships that operated a full twelve months in both fiscal years ($276.7 million), and (ii) revenue from stores opened or acquired during or after the year ended April 30, 2021 ($17.1 million), partially offset by (iii) decreased revenue from dealerships closed during or after the year ended April 30, 2021 ($86,000). The increase in revenue for fiscal 2022 is attributable to (i) a 22.2% increase in average retail sales price, (ii) a 6.7% increase in retail units sold and (iii) a 37.4% increase in interest and other income, due to the $265.1 million increase in average finance receivables.
Cost of sales, as a percentage of sales, increased to 62.6% compared to 59.3% in fiscal 2021, resulting in a decrease in the gross margin percentage to 37.4% of sales in fiscal 2022 from 40.7% of sales in fiscal 2021. On a dollar basis, our gross margin per retail unit sold increased by $760 in fiscal 2022 compared to fiscal 2021. The average retail sales price for fiscal 2022 was $16,649, a $3,028 increase over the prior fiscal year, reflecting the high demand for used cars, especially in the market we serve. As purchase costs increase, the margin between the purchase cost and the sales price of the vehicles we sell generally narrows on a percentage basis because the Company must offer affordable prices to our customers. Demand for the vehicles we purchase for resale has remained high and the supply has continued to be restricted due to lower repossessions and lower levels of new car production. While the long-term impact of COVID-19 and the ongoing microchip supply shortages on new car production and sales and the availability of used vehicles in our market is undetermined at this time, the Company has seen disruptions in the supply of vehicles since the beginning of the pandemic and expects the supply to be tighter in the near-term relative to demand, resulting in the continuation of elevated purchase costs.
Selling, general and administrative expenses, as a percentage of sales decreased to 14.7% in fiscal 2022 from 16.2% for fiscal 2021. Selling, general and administrative expenses are, for the most part, more fixed in nature. However, we have recently made increasing investments in several areas including recruiting, training and retention, inventory procurement and management, customer experience and digital efforts. In dollar terms, selling, general and administrative expenses increased $25.3 million from fiscal 2021. The increase is primarily focused on continued investments in our associates in the wages and benefit areas and building our customer experience team and investing in procurement. We continue to focus on controlling costs, while at the same time ensuring a solid infrastructure to ensure a high level of support for our customers.
Provision for credit losses as a percentage of sales increased to 24.2% for fiscal 2022 compared to 20.3% for fiscal 2021. Net charge-offs as a percentage of average finance receivables increased to 20.2% for fiscal 2022 compared to 19.3% for the prior year. The stimulus payments during fiscal 2021 had positive impacts on collections and net charge-off metrics. From a long-term historical perspective, the current fiscal year net charge-offs were much improved and below historical levels despite the increase in the average retail sales price. The frequency of losses increased compared to the prior year as credit losses began to normalize to pre-pandemic levels. The Company uses several operational initiatives (including credit reporting and the use of GPS units on vehicles) to improve collections and continually pushes 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 determinant of credit loss experience and will continue to focus on improvements in oversight and accountability provided by the Company’s investments in our corporate infrastructure within the collections area.
Interest expense for fiscal 2022 as a percentage of sales increased slightly to 1.0% in fiscal 2022 from 0.8% in fiscal 2021. The increase in interest expense is primarily due to the higher average borrowings in fiscal 2022 ($331.6 million in fiscal 2022 compared to $215.0 million for fiscal 2021).
2021 Compared to 2020
Total revenues increased $174.0 million, or 23.4%, in fiscal 2021, as compared to revenue growth of 11.3% in fiscal 2020, principally as a result of (i) revenue growth from dealerships that operated a full twelve months in both fiscal years ($137.6 million), and (ii) revenue from stores opened or acquired during or after the year ended April 30, 2020 ($36.7 million), partially offset by (iii) decreased revenue from dealerships closed during or after the year ended April 30, 2020 ($333,000). The increase in revenue for fiscal 2021 is attributable to (i) a 15.5% increase in average retail sales price, (ii) a 7.4% increase in retail units sold and (iii) a 20.7% increase in interest and other income.
Cost of sales, as a percentage of sales, decreased slightly to 59.3% compared to 59.5% in fiscal 2020, resulting in a slight improvement in the gross margin percentage to 40.7% of sales in fiscal 2021 from 40.5% of sales in fiscal 2020. On a dollar basis, our gross margin per retail unit sold increased by $791 in fiscal 2021 compared to fiscal 2020. The average retail sales price for fiscal 2021 was $13,621, a $1,828 increase over the prior fiscal year, reflecting the high demand for used cars, especially in the market we serve. As purchase costs increase, the margin between the purchase cost and the sales price of the vehicles we sell generally narrows on a percentage basis because the Company must offer affordable prices to our customers. However, during fiscal 2021, the pressure on the cost of sales and gross margin percentages from the increase in average purchase costs was more than offset by improved wholesale margins, strong demand and low supply of lower priced units, and reduced repair expenses to prepare purchased vehicles for resale. Demand for the vehicles we purchase for resale remained high during fiscal 2021 and the supply continued to be restricted due to lower repossessions, lower levels of new car production and sales and additional demand due to stimulus money.
Selling, general and administrative expenses, as a percentage of sales decreased to 16.2% in fiscal 2021 from 18.0% for fiscal 2020. Selling, general and administrative expenses remained, for the most part, more fixed in nature. In dollar terms, overall selling, general and administrative expenses increased $13.1 million from fiscal 2020. The increase was primarily focused on investments in our associates, especially building our customer experience team and investing in procurement, combined with increased commissions due to higher net income.
Provision for credit losses as a percentage of sales decreased to 20.3% for fiscal 2021 compared to 24.8% for fiscal 2020. Net charge-offs as a percentage of average finance receivables decreased to 19.3% for fiscal 2021 compared to 23.1% for the prior year. The decrease in net charge-offs for fiscal 2021 primarily resulted from a lower frequency of losses combined with a lower severity of losses, primarily due to improvements in collections as a result of the stimulus money and enhanced unemployment, as well as higher recovery rates on repossessions. As a result of the improved credit losses, improved delinquencies at yearend, as well as our outlook for projected losses, the Company decreased the allowance for credit losses during the fourth quarter of fiscal 2021 from 26.5% to 24.5%, a $15.1 million pretax decrease to the provision for credit losses. The Company believes the somewhat improved macro-economic environment prior to the pandemic mitigated the competitive pressures and positively impacted credit loss results for fiscal 2021.
Interest expense for fiscal 2021 as a percentage of sales decreased slightly to 0.8% in fiscal 2021 from 1.2% in fiscal 2020. Although the Company had higher average borrowings in fiscal 2021 ($215.0 million in fiscal 2021 compared to $179.9 million for fiscal 2020), the lower interest rates offset the interest on the higher debt balances.
Financial Condition
The following table sets forth the major balance sheet accounts of the Company at April 30, 2022, 2021 and 2020 (in thousands):
|
|
April 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
Assets: |
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|
|
|
|
|
|
|
|
|
|
|
Finance receivables, net |
|
$ |
854,290 |
|
|
$ |
625,119 |
|
|
$ |
466,141 |
|
Inventory |
|
|
115,302 |
|
|
|
82,263 |
|
|
|
36,414 |
|
Income taxes receivable, net |
|
|
274 |
|
|
|
- |
|
|
|
- |
|
Property and equipment, net |
|
|
51,438 |
|
|
|
34,719 |
|
|
|
30,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
52,685 |
|
|
|
49,486 |
|
|
|
32,846 |
|
Deferred revenue |
|
|
92,491 |
|
|
|
56,810 |
|
|
|
36,121 |
|
Income taxes payable, net |
|
|
- |
|
|
|
150 |
|
|
|
3,841 |
|
Deferred income tax liabilities, net |
|
|
28,233 |
|
|
|
20,007 |
|
|
|
12,979 |
|
Non-recourse notes payable |
|
|
395,986 |
|
|
|
- |
|
|
|
- |
|
Revolving line of credit |
|
|
44,670 |
|
|
|
225,924 |
|
|
|
215,568 |
|
The following table shows receivables growth compared to revenue growth during each of the past three fiscal years. For fiscal year 2022, growth in finance receivables, net of deferred revenue, of 34.1% exceeded revenue growth of 32.0%. The Company currently anticipates going forward that the growth in finance receivables will generally be slightly higher than overall revenue growth on an annual basis due to overall term length increases in our installment sales contracts in recent years, partially offset by improvements in underwriting and collection procedures in an effort to reduce credit losses. The average term for installment sales contracts at April 30, 2022 was 42.9 months, compared to 37.3 months for April 30, 2021.
|
|
Years Ended April 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth in finance receivables, net of deferred revenue |
|
|
34.1 |
% |
|
|
28.7 |
% |
|
|
14.4 |
% |
Revenue growth |
|
|
32.0 |
% |
|
|
23.4 |
% |
|
|
11.3 |
% |
At fiscal year-end 2022, inventory increased 40.2% ($33.0 million), compared to fiscal year-end 2021, primarily due to increasing our investment in inventory quantities to accommodate the higher sales volumes and provide customers a quality mix of vehicles, combined with the higher cost of the vehicles we purchase. The Company strives to improve the quality of the inventory and maintain adequate turns while maintaining inventory levels to ensure adequate supply of vehicles, in volume and mix, and to meet sales demand.
Property and equipment, net, increased by approximately $16.7 million as of April 30, 2022 as compared to fiscal 2021. We incurred approximately $20.9 million in expenditures during fiscal year 2022, primarily related to technology investments, designed to attract additional sales opportunities, and remodeling or relocating existing locations. The net increase to property and equipment, net, was partially offset by depreciation expense of $4.0 million and disposals of approximately $200,000 in furniture and equipment.
Accounts payable and accrued liabilities increased by approximately $3.2 million at April 30, 2022 as compared to April 30, 2021 primarily due to higher accounts payable related to increased inventory and sales activity, and higher deferred sales tax related to the increase in sales.
Deferred revenue increased $35.7 million at April 30, 2022 over April 30, 2021, primarily resulting from the increase in sales of the accident protection plan and service contract products, as well as the increased terms on the service contracts.
Deferred income tax liabilities, net, increased approximately $8.2 million at April 30, 2022 as compared to April 30, 2021, due primarily to the increase in finance receivables, net.
On April 27, 2022, the Company completed an asset-backed securitization offering through which an indirect subsidiary of the Company issued four classes of non-recourse notes payable in an aggregate principal amount of $400.0 million, with a weighted average fixed coupon rate of 5.14% per annum and scheduled maturities through April 20, 2029. The notes are collateralized by auto loans directly originated by us. Net proceeds from the offering (after deducting the underwriting discount payable to the initial purchasers and other fees) were approximately $396.0 million, a portion of which were used to pay outstanding debt under our revolving line of credit and to make the initial deposit into a reserve account for the notes and the remainder of which are being used for other general purposes. See Note F for further details on these non-recourse notes payable.
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, (v) common stock repurchases and (vi) other sources of financing, such as our recent issuance of asset-backed non-recourse notes. 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 fiscal 2022, the Company had a $175.0 million net increase in total debt, net of cash, used to contribute to the funding of finance receivables growth of $292.0 million, an inventory increase of $33.0 million, net capital expenditures of $20.9 million and common stock repurchases of $34.7 million. These investments reflect our commitment to providing the necessary inventory and facilities to support a growing customer base.
Liquidity and Capital Resources
The following table sets forth certain historical information with respect to the Company’s Statements of Cash Flows (in thousands):
|
|
Years Ended April 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
93,307 |
|
|
$ |
104,139 |
|
|
$ |
51,343 |
|
Provision for credit losses |
|
|
257,101 |
|
|
|
163,662 |
|
|
|
162,246 |
|
Losses on claims for accident protection plan |
|
|
21,871 |
|
|
|
18,954 |
|
|
|
17,966 |
|
Depreciation and amortization |
|
|
4,033 |
|
|
|
3,719 |
|
|
|
3,839 |
|
Amortization of debt issuance costs |
|
|
775 |
|
|
|
391 |
|
|
|
273 |
|
Stock based compensation |
|
|
5,496 |
|
|
|
5,962 |
|
|
|
4,732 |
|
Deferred income taxes |
|
|
8,226 |
|
|
|
7,028 |
|
|
|
(1,280 |
) |
Finance receivable originations |
|
|
(1,009,859 |
) |
|
|
(762,716 |
) |
|
|
(604,497 |
) |
Finance receivable collections |
|
|
417,796 |
|
|
|
370,254 |
|
|
|
322,180 |
|
Accrued interest on finance receivables |
|
|
(1,559 |
) |
|
|
(269 |
) |
|
|
(750 |
) |
Inventory |
|
|
50,881 |
|
|
|
5,019 |
|
|
|
53,827 |
|
Accounts payable and accrued liabilities |
|
|
5,166 |
|
|
|
14,766 |
|
|
|
1,009 |
|
Deferred accident protection plan revenue |
|
|
11,232 |
|
|
|
8,224 |
|
|
|
3,113 |
|
Deferred service contract revenue |
|
|
24,449 |
|
|
|
12,465 |
|
|
|
1,049 |
|
Income taxes, net |
|
|
(424 |
) |
|
|
(3,691 |
) |
|
|
5,788 |
|
Other |
|
|
(2,775 |
) |
|
|
(1,719 |
) |
|
|
79 |
|
Total |
|
|
(114,284 |
) |
|
|
(53,812 |
) |
|
|
20,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of investments |
|
|
(1,343 |
) |
|
|
- |
|
|
|
(4,648 |
) |
Purchase of property and equipment |
|
|
(20,921 |
) |
|
|
(8,952 |
) |
|
|
(5,422 |
) |
Proceeds from sale of property and equipment |
|
|
20 |
|
|
|
694 |
|
|
|
184 |
|
Total |
|
|
(22,244 |
) |
|
|
(8,258 |
) |
|
|
(9,886 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Debt facilities, net |
|
|
(186,037 |
) |
|
|
9,965 |
|
|
|
62,377 |
|
Non-recourse debt, net |
|
|
399,994 |
|
|
|
- |
|
|
|
- |
|
Change in cash overdrafts |
|
|
(1,802 |
) |
|
|
1,802 |
|
|
|
(1,274 |
) |
Purchase of common stock |
|
|
(34,698 |
) |
|
|
(10,616 |
) |
|
|
(16,009 |
) |
Dividend payments |
|
|
(40 |
) |
|
|
(40 |
) |
|
|
(40 |
) |
Exercise of stock options, including tax benefits and issuance of common stock |
|
|
(1,195 |
) |
|
|
4,292 |
|
|
|
1,723 |
|
Total |
|
|
176,222 |
|
|
|
5,403 |
|
|
|
46,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash, cash equivalents, and restricted cash |
|
$ |
39,694 |
|
|
$ |
(56,667 |
) |
|
$ |
57,808 |
|
The primary drivers of operating profits and cash flows include (i) top line sales (ii) interest income on finance receivables, (iii) gross margin percentages on vehicle sales, and (iv) credit losses, a significant portion of which relates to the collection of principal on finance receivables. Historically, most of the cash generated from operations has been used to fund finance receivables growth, capital expenditures and common stock repurchases. To the extent finance receivables growth, common stock repurchases and capital expenditures exceed income from operations we historically increased our borrowings under our revolving credit facilities and most recently also utilized the securitization market. During April 2022, we completed our first asset-backed securitization transaction that diversified our funding sources. The majority of the Company’s growth has been self-funded.
Cash flows from operations in fiscal 2022 compared to fiscal 2021 decreased primarily as a result of (i) an increase in finance receivable originations and (ii) an increase in inventory, partially offset by increases in (iii) finance receivable collections and (iv) deferred revenue. Finance receivables, net, increased by $229.2 million during fiscal 2022.
Cash flows from operations in fiscal 2021 compared to fiscal 2020 decreased primarily as a result of (i) an increase in finance receivable originations, (ii) an increase in inventory and (iii) a decrease in income taxes payable, partially offset by (iv) an increase in finance receivable collections, (v) an increase in accounts payable and accrued liabilities and (vi) an increase in deferred revenue. Finance receivables, net, increased by $159.0 million during fiscal 2021.
The purchase price the Company pays for a vehicle has a significant effect on liquidity and capital resources. 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 generally 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. Several external factors can negatively affect the purchase cost of vehicles. Decreases in the overall volume of new car sales, particularly domestic brands, lead to decreased supply in the used car market. Also, constrictions in consumer credit, as well as general economic conditions, can increase overall demand for the types of vehicles the Company purchases for resale as used vehicles become more attractive than new vehicles in times of economic instability. A negative shift in used vehicle supply, combined with strong demand, results in increased used vehicle prices and thus higher purchase costs for the Company.
Sustained macro-economic pressures affecting our customers have helped keep demand high in recent years for the types of vehicles we purchase. This strong demand, coupled with modest levels of new vehicle sales in recent years, have led to a generally ongoing tight supply of used vehicles available to the Company in both quality and quantity. The impacts of the COVID-19 pandemic on the business operations of auctions and wholesalers as well as slowdowns in new car production and sales during the past fiscal year due to the pandemic and other supply chain issues further increased the price and reduced the quantity of used cars available for purchase by the Company. The Company expects these effects on used vehicle supply to continue for the short term.
The Company has devoted significant efforts to improving its purchasing processes to ensure adequate supply at appropriate prices, including 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. The Company has also increased the level of accountability for its purchasing agents including updates to sourcing and pricing guidelines. The Company continues to make corporate level purchases and form relationships with national vendors that can supply a large quantity of high-quality vehicles. Even with these efforts, the Company expects gross margin percentages to remain under pressure over the near term.
The Company believes that the amount of credit available for the sub-prime auto industry will remain relatively consistent with levels in recent years, which management expects will contribute to continued strong overall demand for most, if not all, of the vehicles the Company purchases for resale. Increased competition resulting from availability of funding to the sub-prime auto industry generally contributes to lower down payments and longer terms, which can have a negative effect on collection percentages, liquidity and credit losses when compared to historical periods. The availability of credit was somewhat dampened for consumers during fiscal year 2022, although with the high demand of used vehicles and related financing, the availability of credit has loosened more recently.
The Company’s liquidity is also impacted by our credit losses. Macro-economic factors such as unemployment levels and general inflation can significantly affect our collection results and ultimately credit losses. Currently, as our customers look to cover rising costs of non-discretionary items, such as groceries and gasoline, it may impact their ability to make their car payments. Additionally, the long-term economic impact of the COVID-19 pandemic and the resulting effects on the Company’s collections and credit loss results remains uncertain. 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 continues to strive to reduce credit losses in spite of the current economic challenges and continued competitive pressures by improving deal structures. Management continues to focus on improved execution at the dealership level, specifically as related to working individually with customers concerning collection issues.
The Company has generally leased the majority of the properties where its dealerships are located. As of April 30, 2022, the Company leased approximately 81% of its dealership properties. At April 30, 2022, the Company had $81.9 million of operating lease commitments, including $18.0 million of non-cancelable lease commitments under the lease terms, and $63.9 million of lease commitments for renewal periods at the Company’s option that are reasonably assured. Of the $81.9 million total lease obligations, $48.3 million of these commitments will become due in more than five years. The Company expects to continue to lease the majority of the properties where its dealerships are located.
The Company’s revolving credit facilities generally restrict distributions by the Company to its shareholders. The distribution limitations under the credit facilities allow the Company to repurchase the Company’s stock so long as either: (a) the aggregate amount of such repurchases after September 30, 2021 does not exceed $50 million, net of proceeds received from the exercise of stock options, and the total availability under the credit facilities is equal to or greater than 20% of the sum of the borrowing bases, in each case after giving effect to such repurchases (repurchases under this item are excluded from fixed charges for covenant calculations), 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, although the Company does routinely repurchase stock, the Company is limited in its ability to pay dividends or make other distributions to its shareholders without the consent of the Company’s lenders.
At April 30, 2022, the Company had approximately $6.9 million of cash on hand and $197.8 million of availability under its revolving credit facilities (see Note F to the Consolidated Financial Statements in Item 8). 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 or fixed interest term loans. The Company’s revolving credit facilities mature in September 2024 and the Company expects that it will be able to renew or refinance its revolving credit facilities on or before the date they mature. The Company has also recently accessed the securitization market with an inaugural issuance in April 2022 of $400 million in aggregate principal amount of non-recourse asset-backed notes. The Company expects that it will continue to access this market in diversifying and growing the business. Furthermore, while the Company has no specific plans to issue further 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 from operations and borrowings to (i) grow its finance receivables portfolio, (ii) purchase fixed assets of approximately $25 million in the next 12 months to add technology improvements and to refurbish existing dealerships and adding new dealerships, subject to strong operating results, (iii) repurchase shares of common stock when favorable conditions exist and (iv) reduce debt to the extent excess cash is available. The Company estimates that total interest payments on its outstanding debt facilities as of April 30, 2022, are approximately $240.8 million, assuming an increase in average total debt of approximately $212.0 million with an average annual rate increase of approximately 2%, with approximately $28.0 million in interest payable during fiscal 2023.
The Company believes it will have adequate liquidity to continue to grow its revenues and to satisfy its capital needs for the foreseeable future.
Off-Balance Sheet Arrangements
The Company has two standby letter of credit relating to insurance policies totaling $750,000 at April 30, 2022.
Other than its letter of credit, 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 as described in the Treasury Regulations. For financial accounting purposes, these transactions are eliminated in consolidation and a deferred income 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 250 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.
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 or interest as of April 30, 2022.
Critical Accounting Estimates
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 Consolidated Financial Statements in Item 8 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 Consolidated Financial Statements in Item 8.
The Company maintains an allowance for credit losses on an aggregate basis at a level it considers sufficient to cover estimated losses expected to be incurred on the portfolio at the measurement date in the collection of its finance receivables currently outstanding. At April 30, 2022, the weighted average total contract term was 42.9 months with 34.2 months remaining. The reserve amount in the allowance for credit losses at April 30, 2022, $247.2 million, was 24.5% of the principal balance in finance receivables of $1.1 billion, less unearned accident protection plan revenue of $48.6 million and unearned service contract revenue of $43.9 million. In the fourth quarter of fiscal 2021, the Company decreased the allowance for credit losses as a percentage of finance receivables from 26.5% to 24.5% as a result of improved credit losses and delinquencies, as well as changes in our outlook for projected losses. The decrease resulted in a $15.1 million pretax decrease to the provision for credit losses. The allowance for credit losses remained at 24.5% at April 30, 2022.
The estimated reserve amount is the Company’s anticipated future net charge-offs for losses expected to be incurred on the portfolio at the measurement 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 from one year to five years. |
|
● |
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. Approximately 50% of the unit charge-offs that will ultimately occur in the portfolio are expected to occur within 10-12 months following the balance sheet date. The average age of an account at charge-off date is 12 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. |
|
● |
An adjustment to the first twelve months to reflect the significant increase in the average amount financed and the resulting monthly payment and term length. |
|
● |
A forecast of expected losses for a period of one year, including considerations for the impact of forecasted levels of inflation and the discontinuation of COVID-19 pandemic government provided benefits. |
A historical point loss rate is produced by this analysis which is then adjusted to reflect current conditions and the Company’s reasonable and supportable forecast of expected losses for a period of one year, including the review of static pools coupled with any positive or negative subjective factors to arrive at an overall reserve amount that management considers to be a reasonable estimate of losses to be incurred on the portfolio at the measurement date. While challenging economic conditions can negatively impact credit losses, the effectiveness of the execution of internal policies and procedures within the collections area and the competitive environment on the lending side have historically had a more significant effect on collection results than macro-economic issues.
Recent Accounting Pronouncements
Occasionally, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies which the Company will adopt as of the specified effective date. Unless otherwise discussed, the Company believes the implementation of recently issued standards which are not yet effective will not have a material impact on its consolidated financial statements upon adoption.
Recently Adopted Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform. The pronouncement provides optional guidance for a limited period of time to ease the potential burden of accounting for reference rate reform. This guidance is effective for all entities as of March 12, 2020, through December 31, 2022. During April 2022, the Company replaced LIBOR as the applicable benchmark interest rate on its revolving line of credit with the daily simple Secured Overnight Financing Rate (“SOFR”). The replacement of the rate to SOFR did not have a material impact on the Company’s financial position or results of operations.
Non-GAAP Financial Measure
The reconciliation between the Company’s debt to equity ratio and adjusted debt, net of cash, to equity ratio for fiscal year ending April 30, 2022, is summarized in the table below.
April 30, 2022 |
|
Debt to Equity |
|
|
0.94 |
|
Cash to Equity |
|
|
0.09 |
|
Debt net of Cash to Equity |
|
|
0.85 |
|
Item 8. Financial Statements and Supplementary Data
The following financial statements and accountant’s report are included in Item 8 of this Annual Report on Form 10-K:
|
Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248) |
|
|
|
|
|
Consolidated Balance Sheets as of April 30, 2022 and 2021 |
|
|
|
|
|
Consolidated Statements of Operations for the years ended April 30, 2022, 2021 and 2020 |
|
|
|
|
|
Consolidated Statements of Cash Flows for the years ended April 30, 2022, 2021 and 2020 |
|
|
|
|
|
Consolidated Statements of Equity for the years ended April 30, 2022, 2021 and 2020 |
|
|
|
|
|
Notes to Consolidated Financial Statements |
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
America’s Car-Mart, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of America’s Car-Mart, Inc. (a Texas corporation) and subsidiaries (the “Company”) as of April 30, 2022 and 2021, the related consolidated statements of operations, equity, and cash flows for each of the three years in the period ended April 30, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of April 30, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended April 30, 2022, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of April 30, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated July 8, 2022 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for credit losses
As described in Note C to the financial statements, the Company had finance receivables of $1.1 billion, for which an allowance of $247.2 million was recorded as of April 30, 2022. Management estimates the allowance for credit losses on finance receivables by applying a loss-rate method using historical credit loss experience (both timing and severity of losses) and collateral values. The estimate is adjusted for current conditions and reasonable and supportable forecasts to reflect management’s expectations for credit losses on the finance receivables, which include factors such as current and expected changes in the fair market value of repossessed vehicles, the effects of macroeconomic factors such as changes in inflation, and the discontinuation of COVID-19 pandemic government provided benefits. We identified the allowance for credit losses as a critical audit matter.
The principal considerations for our determination that the allowance for credit losses is a critical audit matter were the significant judgments made by management, including the adjustment for the forecasted effects on expected losses from projected levels of inflation and the discontinuation of COVID-19 pandemic government provided benefits. These judgements led to a high degree of auditor judgment and subjectivity in performing procedures over these assumptions.
Our audit procedures related to the allowance for credit losses included the following, among others:
|
● |
We tested the design and operating effectiveness of controls relating to management’s allowance for credit losses estimation process, which included controls over the judgements related to its forecast for the effects on expected losses from projected levels of inflation and the discontinuation of COVID-19 pandemic government provided benefits. |
|
● |
We tested management’s process for determining the allowance for credit losses, including its forecast for the effects of expected losses from projected levels of inflation and the discontinuation of COVID-19 pandemic government provided benefits. |
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 1999.
Tulsa, Oklahoma
July 8, 2022
Consolidated Balance Sheets
America’s Car-Mart, Inc.
(Dollars in thousands)
| | April 30, 2022 | | | April 30, 2021 | |
Assets: | | | | | | | | |
Cash and cash equivalents | | $ | 6,916 | | | $ | 2,893 | |
Restricted cash | | | 35,671 | | | | - | |
Accrued interest on finance receivables | | | 4,926 | | | | 3,367 | |
Finance receivables, net | | | 854,290 | | | | 625,119 | |
Inventory | | | 115,302 | | | | 82,263 | |
Income taxes receivable, net | | | 274 | | | | - | |
Prepaid expenses and other assets | | | 9,044 | | | | 6,120 | |
Right-of-use asset | | | 58,828 | | | | 60,398 | |
Goodwill | | | 8,623 | | | | 7,280 | |
Property and equipment, net | | | 51,438 | | | | 34,719 | |
| | | | | | | | |
Total Assets | | $ | 1,145,312 | | | $ | 822,159 | |
| | | | | | | | |
Liabilities, mezzanine equity and equity: | | | | | | | | |
Liabilities: | | | | | | | | |
Accounts payable | | $ | 20,055 | | | $ | 18,208 | |
Income taxes payable, net | | | - | | | | 150 | |
Deferred accident protection plan revenue | | | 43,936 | | | | 32,704 | |
Deferred service contract revenue | | | 48,555 | | | | 24,106 | |
Accrued liabilities | | | 32,630 | | | | 31,278 | |
Deferred income tax liabilities, net | | | 28,233 | | | | 20,007 | |
Lease liability | | | 61,481 | | | | 62,886 | |
Non-recourse notes payable | | | 395,986 | | | | - | |
Revolving line of credit | | | 44,670 | | | | 225,924 | |
Total liabilities | | | 675,546 | | | | 415,263 | |
| | | | | | | | |
Commitments and contingencies (Note L) | | | | | | | | |
| | | | | | | | |
Mezzanine equity: | | | | | | | | |
Mandatorily redeemable preferred stock | | | 400 | | | | 400 | |
| | | | | | | | |
Equity: | | | | | | | | |
| | | | | | | | |
Preferred stock, par value $.01 per share, 1,000,000 shares authorized; none issued or outstanding | | | - | | | | - | |
Common stock, par value $.01 per share, 50,000,000 shares authorized; 13,642,185 and 13,591,889 issued at April 30, 2022 and April 30, 2021, respectively, of which 6,371,977 and 6,625,885 were outstanding at April 30, 2022 and April 30, 2021, respectively | | | 136 | | | | 136 | |
Additional paid-in capital | | | 103,113 | | | | 98,812 | |
Retained earnings | | | 658,242 | | | | 564,975 | |
Less: Treasury stock, at cost, 7,270,208 and 6,966,004 shares at April 30, 2022 and April 30, 2021, respectively | | | (292,225 | ) | | | (257,527 | ) |
Total stockholders' equity | | | 469,266 | | | | 406,396 | |
Non-controlling interest | | | 100 | | | | 100 | |
Total equity | | | 469,366 | | | | 406,496 | |
| | | | | | | | |
Total Liabilities, mezzanine equity and equity | | $ | 1,145,312 | | | $ | 822,159 | |
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Operations
America’s Car-Mart, Inc.
(Dollars in thousands except per share amounts)
|
|
Years Ended April 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
1,060,512 |
|
|
$ |
808,065 |
|
|
$ |
652,992 |
|
Interest and other income |
|
|
151,853 |
|
|
|
110,545 |
|
|
|
91,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
1,212,365 |
|
|
|
918,610 |
|
|
|
744,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, excluding depreciation |
|
|
663,631 |
|
|
|
479,153 |
|
|
|
388,475 |
|
Selling, general and administrative |
|
|
156,130 |
|
|
|
130,855 |
|
|
|
117,762 |
|
Provision for credit losses |
|
|
257,101 |
|
|
|
163,662 |
|
|
|
162,246 |
|
Interest expense |
|
|
10,919 |
|
|
|
6,820 |
|
|
|
8,052 |
|
Depreciation and amortization |
|
|
4,033 |
|
|
|
3,719 |
|
|
|
3,839 |
|
Loss (gain) on disposal of property and equipment |
|
|
149 |
|
|
|
(40 |
) |
|
|
(114 |
) |
Total costs and expenses |
|
|
1,091,963 |
|
|
|
784,169 |
|
|
|
680,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
120,402 |
|
|
|
134,441 |
|
|
|
64,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
27,095 |
|
|
|
30,302 |
|
|
|
13,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
93,307 |
|
|
$ |
104,139 |
|
|
$ |
51,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Dividends on mandatorily redeemable preferred stock |
|
|
40 |
|
|
|
40 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders |
|
$ |
93,267 |
|
|
$ |
104,099 |
|
|
$ |
51,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
14.33 |
|
|
$ |
15.70 |
|
|
$ |
7.74 |
|
Diluted |
|
$ |
13.67 |
|
|
$ |
14.95 |
|
|
$ |
7.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
6,509,673 |
|
|
|
6,628,749 |
|
|
|
6,630,023 |
|
Diluted |
|
|
6,823,481 |
|
|
|
6,961,575 |
|
|
|
6,945,652 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Cash Flows
America’s Car-Mart, Inc.
(In thousands)
| | Years Ended April 30, | |
Operating activities: | | 2022 | | | 2021 | | | 2020 | |
Net income | | $ | 93,307 | | | $ | 104,139 | | | $ | 51,343 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
Provision for credit losses | | | 257,101 | | | | 163,662 | | | | 162,246 | |
Losses on claims for accident protection plan | | | 21,871 | | | | 18,954 | | | | 17,966 | |
Depreciation and amortization | | | 4,033 | | | | 3,719 | | | | 3,839 | |
Amortization of debt issuance costs | | | 775 | | | | 391 | | | | 273 | |
Loss (gain) on disposal of property and equipment | | | 149 | | | | (40 | ) | | | (114 | ) |
Stock-based compensation | | | 5,496 | | | | 5,962 | | | | 4,732 | |
Deferred income taxes | | | 8,226 | | | | 7,028 | | | | (1,280 | ) |
Change in operating assets and liabilities: | | | | | | | | | | | | |
Finance receivable originations | | | (1,009,859 | ) | | | (762,716 | ) | | | (604,497 | ) |
Finance receivable collections | | | 417,796 | | | | 370,254 | | | | 322,180 | |
Accrued interest on finance receivables | | | (1,559 | ) | | | (269 | ) | | | (750 | ) |
Inventory | | | 50,881 | | | | 5,019 | | | | 53,827 | |
Prepaid expenses and other assets | | | (2,924 | ) | | | (1,679 | ) | | | 193 | |
Accounts payable and accrued liabilities | | | 5,166 | | | | 14,766 | | | | 1,009 | |
Deferred accident protection plan revenue | | | 11,232 | | | | 8,224 | | | | 3,113 | |
Deferred service contract revenue | | | 24,449 | | | | 12,465 | | | | 1,049 | |
Income taxes, net | | | (424 | ) | | | (3,691 | ) | | | 5,788 | |
Net cash (used in) provided by operating activities | | | (114,284 | ) | | | (53,812 | ) | | | 20,917 | |
| | | | | | | | | | | | |
Investing Activities: | | | | | | | | | | | | |
Purchase of investments | | | (1,343 | ) | | | - | | | | (4,648 | ) |
Purchases of property and equipment | | | (20,921 | ) | | | (8,952 | ) | | | (5,422 | ) |
Proceeds from sale of property and equipment | | | 20 | | | | 694 | | | | 184 | |
Net cash used in investing activities | | | (22,244 | ) | | | (8,258 | ) | | | (9,886 | ) |
| | | | | | | | | | | | |
Financing Activities: | | | | | | | | | | | | |
Exercise of stock options | | | (1,488 | ) | | | 4,034 | | | | 1,533 | |
Issuance of common stock | | | 293 | | | | 258 | | | | 190 | |
Purchase of common stock | | | (34,698 | ) | | | (10,616 | ) | | | (16,009 | ) |
Dividend payments | | | (40 | ) | | | (40 | ) | | | (40 | ) |
Debt issuance costs | | | (6,108 | ) | | | (282 | ) | | | (505 | ) |
Change in cash overdrafts | | | (1,802 | ) | | | 1,802 | | | | (1,274 | ) |
Issuances of non-recourse notes payable | | | 399,994 | | | | - | | | | - | |
Principal payments on notes payable | | | - | | | | (524 | ) | | | (509 | ) |
Proceeds from revolving credit facilities | | | 331,113 | | | | 73,337 | | | | 442,490 | |
Payments on revolving credit facilities | | | (511,042 | ) | | | (62,566 | ) | | | (379,099 | ) |
Net cash provided by financing activities | | | 176,222 | | | | 5,403 | | | | 46,777 | |
| | | | | | | | | | | | |
Increase (decrease) in cash, cash equivalents, and restricted cash | | | 39,694 | | | | (56,667 | ) | | | 57,808 | |
Cash, cash equivalents, and restricted cash beginning of period | | | 2,893 | | | | 59,560 | | | | 1,752 | |
| | | | | | | | | | | | |
Cash, cash equivalents, and restricted cash end of period | | $ | 42,587 | | | $ | 2,893 | | | $ | 59,560 | |
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Equity
America’s Car-Mart, Inc.
(Dollars in thousands)
For the Years Ended April 30, 2022, 2021 and 2020
| | | | | | | | | | Additional | | | | | | | | | | | Non- | | | | | |
| | Common Stock | | | Paid-In | | | Retained | | | Treasury | | | Controlling | | | Total | |
| | Shares | | | Amount | | | Capital | | | Earnings | | | Stock | | | Interest | | | Equity | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at April 30, 2019 | | | 13,376,030 | | | $ | 134 | | | $ | 81,605 | | | $ | 409,573 | | | $ | (230,902 | ) | | $ | 100 | | | $ | 260,510 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock | | | 9,760 | | | | - | | | | 190 | | | | - | | | | - | | | | - | | | | 190 | |
Stock options exercised | | | 92,943 | | | | 1 | | | | 1,532 | | | | - | | | | - | | | | - | | | | 1,533 | |
Purchase of 182,805 treasury shares | | | - | | | | - | | | | - | | | | - | | | | (16,009 | ) | | | - | | | | (16,009 | ) |
Stock based compensation | | | - | | | | - | | | | 4,732 | | | | - | | | | - | | | | - | | | | 4,732 | |
Issuance of restricted stock | | | | | | | | | | | 500 | | | | | | | | | | | | | | | | 500 | |
Dividends on subsidiary preferred stock | | | - | | | | - | | | | - | | | | (40 | ) | | | - | | | | - | | | | (40 | ) |
Net income | | | - | | | | - | | | | - | | | | 51,343 | | | | - | | | | - | | | | 51,343 | |
Balance at April 30, 2020 | | | 13,478,733 | | | $ | 135 | | | $ | 88,559 | | | $ | 460,876 | | | $ | (246,911 | ) | | $ | 100 | | | $ | 302,759 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock | | | 2,921 | | | | - | | | | 258 | | | | - | | | | - | | | | - | | | | 258 | |
Stock options exercised | | | 110,235 | | | | 1 | | | | 4,033 | | | | - | | | | - | | | | - | | | | 4,034 | |
Purchase of 106,590 treasury shares | | | - | | | | - | | | | - | | | | - | | | | (10,616 | ) | | | - | | | | (10,616 | ) |
Stock based compensation | | | - | | | | - | | | | 5,962 | | | | - | | | | - | | | | - | | | | 5,962 | |
Dividends on subsidiary preferred stock | | | - | | | | - | | | | - | | | | (40 | ) | | | - | | | | - | | | | (40 | ) |
Net income | | | - | | | | - | | | | - | | | | 104,139 | | | | - | | | | - | | | | 104,139 | |
Balance at April 30, 2021 | | | 13,591,889 | | | $ | 136 | | | $ | 98,812 | | | $ | 564,975 | | | $ | (257,527 | ) | | $ | 100 | | | $ | 406,496 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock | | | 9,721 | | | | - | | | | 293 | | | | - | | | | - | | | | - | | | | 293 | |
Stock options exercised | | | 40,575 | | | | - | | | | (1,488 | ) | | | - | | | | - | | | | - | | | | (1,488 | ) |
Purchase of 304,204 treasury shares | | | - | | | | - | | | | - | | | | - | | | | (34,698 | ) | | | - | | | | (34,698 | ) |
Stock based compensation | | | - | | | | - | | | | 5,496 | | | | - | | | | - | | | | - | | | | 5,496 | |
Dividends on subsidiary preferred stock | | | - | | | | - | | | | - | | | | (40 | ) | | | - | | | | - | | | | (40 | ) |
Net income | | | - | | | | - | | | | - | | | | 93,307 | | | | - | | | | - | | | | 93,307 | |
Balance at April 30, 2022 | | | 13,642,185 | | | $ | 136 | | | $ | 103,113 | | | $ | 658,242 | | | $ | (292,225 | ) | | $ | 100 | | | $ | 469,366 | |
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
America’s Car-Mart, Inc.
A - Organization and Business
America’s Car-Mart, Inc., a Texas corporation (the “Company”), is one of the largest publicly held automotive retailers 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 conducted principally 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 difficulties. As of April 30, 2022, the Company operated 154 dealerships located primarily in small cities throughout the South-Central United States.
B - Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of America’s Car-Mart, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated.
Segment Information
Each dealership is an operating segment with its results regularly reviewed by the Company’s chief operating decision maker in an effort to make decisions about resources to be allocated to the segment and to assess its performance. Individual dealerships meet the aggregation criteria for reporting purposes under the current accounting guidance. The Company operates in the Integrated Auto Sales and Finance segment of the used car market, also referred to as the Integrated Auto Sales and Finance industry. In this industry, the nature of the sale and the financing of the transaction, financing processes, the type of customer and the methods used to distribute the Company’s products and services, including the actual servicing of the contracts as well as the regulatory environment in which the Company operates, all have similar characteristics. Each individual dealership is similar in nature and only engages in the selling and financing of used vehicles. All individual dealerships have similar operating characteristics. As such, individual dealerships have been aggregated into one reportable segment.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect 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 period. Actual results could differ from those estimates. Significant estimates include, but are not limited to, the Company’s allowance for credit losses.
Concentration of Risk
The Company provides financing in connection with the sale of substantially all of its vehicles. These sales are made primarily to customers residing in Alabama, Arkansas, Georgia, Illinois, Kentucky, Mississippi, Missouri, Oklahoma, Tennessee, and Texas, with approximately 27.4% of revenues resulting from sales to Arkansas customers.
44
As of April 30, 2022, and periodically throughout the year, the Company maintained cash in financial institutions in excess of the amounts insured by the federal government. The cash is held in several highly rated banking institutions. The Company regularly monitors its counterparty credit risk and mitigates exposure by limiting the amount it invests in one institution. The Company’s revolving credit facilities mature in September 2024.
Restrictions on Distributions/Dividends
The Company’s revolving credit facilities generally restrict distributions by the Company to its shareholders. The distribution limitations under the credit facilities allow the Company to repurchase the Company’s stock so long as either: (a) the aggregate amount of such repurchases after September 30, 2021 does not exceed $50 million, net of proceeds received from the exercise of stock options, and the total availability under the credit facilities is equal to or greater than 20% of the sum of the borrowing bases, in each case after giving effect to such repurchases (repurchases under this item are excluded from fixed charges for covenant calculations), 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, although the Company does routinely repurchase stock, the Company is limited in its ability to pay dividends or make other distributions to its shareholders without the consent of the Company’s lenders.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents.
Restricted Cash
Restricted cash is related to the financing and securitization transaction discussed below and are held by the securitization trust.
Restricted cash from collections on auto finance receivables includes collections of principal, interest, and fee payments on auto finance receivables that are restricted for payment to holders of non-recourse notes payable pursuant to the applicable agreements.
The restricted cash on deposit in reserve accounts is for the benefit of holders of non-recourse notes payable and these funds are not expected to be available to the Company or its creditors. If the cash generated by the related receivables in a given period was insufficient to pay the interest, principal, and other required payments, the balances on deposit in the reserve accounts would be used to pay those amounts.
Restricted cash consists of the following at April 30, 2022:
(In thousands) | | April 30, 2022 | |
| | | | |
Restricted cash from collections on auto finance receivables | | $ | 24,242 | |
Restricted cash on deposit in reserve accounts | | | 11,429 | |
| | | | |
Restricted Cash | | $ | 35,671 | |
There was no restricted cash as of April 30, 2021.
Financing and Securitization Transactions
The Company utilized a term securitization to provide long-term funding for a portion of the auto finance receivables initially funded through the debt facilities. In these transactions, a pool of auto finance receivables is sold to a 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.
45
The Company is required to evaluate term securitization trusts for consolidation. In the Company’s role as servicer, it has the power to direct the activities of the trust that most significantly impact the economic performance of the trust. In addition, the obligation to absorb losses (subject to limitations) and the rights to receive any returns of the trust, remain with the Company. Accordingly, the Company is the primary beneficiary of the trust and is required to consolidate it.
The Company recognizes transfers of auto finance receivables into the term securitization as secured borrowings, which result in recording the auto finance receivables and the related non-recourse notes payable on our consolidated balance sheet. These auto finance receivables can only be used as collateral to settle obligations of the related non-recourse notes payable. The term securitization investors have no recourse to the Company’s assets beyond the related auto finance receivables, the amounts on deposit in the reserve account, and the restricted cash from collections on auto finance receivables. See Notes C and F for additional information on auto finance receivables and non-recourse notes payable.
Finance Receivables, Repossessions and Charge-offs and Allowance for Credit Losses
The Company originates installment sale contracts from the sale of used vehicles at its dealerships. These installment sale contracts carry an average interest rate of approximately 16.5% using the simple effective interest method including any deferred fees. Contract origination costs are not significant. The installment sale contracts are not pre-computed contracts whereby borrowers are obligated to pay back principal plus the full amount of interest that will accrue over the entire term of the contract. Finance receivables are collateralized by vehicles sold and consist of contractually scheduled payments from installment contracts net of unearned finance charges and an allowance for credit losses. Unearned finance charges represent the balance of interest receivable to be earned over the entire term of the related installment contract, less the earned amount ($4.9 million at April 30, 2022 and $3.4 million at April 30, 2021 on the Consolidated Balance Sheets), and as such, have been reflected as a reduction to the gross contract amount in arriving at the principal balance in finance receivables.
An account is considered delinquent when the customer is one day or more behind on their contractual payments. While the Company does not formally place contracts on nonaccrual status, the immaterial amount of interest that may accrue after an account becomes delinquent up until the point of resolution via repossession or write-off, is reserved for against the accrued interest on the Consolidated Balance Sheets. Delinquent contracts are addressed and either made current by the customer, which is the case in most situations, or the vehicle is repossessed or written off if the collateral cannot be recovered quickly. Customer payments are set to match their payday with approximately 78% of payments due on either a weekly or bi-weekly basis. The frequency of the payment due dates combined with the general decline in the value of the collateral lead to prompt resolutions on problem accounts. At April 30, 2022, 3.0% of the Company’s finance receivables balances were 30 days or more past due compared to 2.6% at April 30, 2021.
Substantially all of the Company’s automobile contracts involve contracts made to individuals with impaired or limited credit histories, or higher debt-to-income ratios than permitted by traditional lenders. Contracts made with buyers who are restricted in their ability to obtain financing from traditional lenders generally entail a higher risk of delinquency, default and repossession, and higher losses than contracts made with buyers with better credit. At the time of originating a finance agreement, the Company requires customers to meet certain criteria that demonstrate their intent and ability to pay for the financed principal and interest on the vehicle they are purchasing. However, the Company recognizes that their customer base is at a higher risk of default given their impaired or limited credit histories.
The Company strives to keep its delinquency percentages low, and not to repossess vehicles. Accounts one to three days late are contacted by telephone or text messaging notifications. Notes from each contact are electronically maintained in the Company’s computer system. The Company also utilizes text messaging notifications that allows customers the option to receive due date reminders and late notifications, if applicable. The Company attempts to resolve payment delinquencies amicably prior to repossessing a vehicle. If a customer becomes severely delinquent in his or her payments, and management determines that timely collection of future payments is not probable, the Company will take steps to repossess the vehicle.
46
Periodically, the Company enters into contract modifications with its customers to extend or modify the payment terms. The Company only enters into a contract modification or extension if it believes such action will increase the amount of monies the Company will ultimately realize on the customer’s account and will increase the likelihood of the customer being able to pay off the vehicle contract. At the time of modification, the Company expects to collect amounts due including accrued interest at the contractual interest rate for the period of delay. No other concessions are granted to customers, beyond the extension of additional time, at the time of modifications. Modifications are minor and are made for payday changes, minor vehicle repairs and other reasons. For those vehicles that are repossessed, the majority are returned or surrendered by the customer on a voluntary basis. Other repossessions are performed by Company personnel or third-party repossession agents. Depending on the condition of a repossessed vehicle, it is either resold on a retail basis through a Company dealership or sold for cash on a wholesale basis primarily through physical or online auctions.
The Company takes steps to repossess a vehicle when the customer becomes delinquent in his or her payments and management determines that timely collection of future payments is not probable. Accounts are charged-off after the expiration of a statutory notice period for repossessed accounts, or when management determines that the timely collection of future payments is not probable for accounts where the Company has been unable to repossess the vehicle. For accounts with respect to which the vehicle was repossessed, the fair value of the repossessed vehicle is charged as a reduction of the gross finance receivables balance charged-off. On average, accounts are approximately 75 days past due at the time of charge-off. For previously charged-off accounts that are subsequently recovered, the amount of such recovery is credited to the allowance for credit losses.
The Company maintains an allowance for credit losses on an aggregate basis at an amount it considers sufficient to cover losses expected to be incurred on the portfolio at the measurement date. The Company accrues an estimated loss for the amount it believes will not be collected. The allowance for credit losses represents management’s best estimate of lifetime expected losses based on reasonable and supportable forecasts, historical credit loss experience and other quantitative considerations, such as changes in contract characteristics (i.e., average amount financed and term), delinquency levels, collateral values, current economic conditions and underwriting and collection practices. The allowance for credit losses is periodically reviewed by management with any changes reflected in current operations. Although credit losses remained low in fiscal year 2022, credit losses did begin to normalize to pre-pandemic levels and there is still possible further deterioration in economic conditions due to high inflation and lingering COVID-19 impacts. 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. 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 from one year to five years. |
| ● | 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. Approximately 50% of the charge-offs that will ultimately occur in the portfolio are expected to occur within 11-12 months following the balance sheet date. The average age of an account at charge-off date is 12 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. |
| ● | An adjustment to the previous twelve months to reflect the significant increase in the average amount financed and the resulting monthly payment and term length. |
| ● | A forecast of expect losses for a period of one year, including considerations for the impact of forecasted levels of inflation and the discontinuation of COVID-19 pandemic government provided benefits. |
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A historical point loss rate is produced by this analysis which is then adjusted to reflect current conditions and the Company’s reasonable and supportable forecast of expected losses for a period of one year, including the review of static pools coupled with any positive or negative subjective factors to arrive at an overall reserve amount that management considers to be a reasonable estimate of losses to be incurred on the portfolio at the measurement date. While challenging economic conditions can negatively impact credit losses, the effectiveness of the execution of internal policies and procedures within the collections area and the competitive environment on the lending side have historically had a more significant effect on collection results than macro-economic issues.
In most states, the Company offers retail customers who finance their vehicle the option of purchasing an accident protection plan product as an add-on to the installment sale contract. This product contractually obligates the Company to cancel the remaining principal outstanding for any contract where the retail customer has totaled the vehicle, as defined by the product, or the vehicle has been stolen. The Company periodically evaluates anticipated losses to ensure that if anticipated losses exceed deferred accident protection plan revenues, an additional liability is recorded for such difference. No such liability was required at April 30, 2022 or 2021.
Inventory
Inventory consists of used vehicles and is valued at the lower of cost or net realizable value on a specific identification basis. Vehicle reconditioning costs are capitalized as a component of inventory. Repossessed vehicles and trade-in vehicles are recorded at fair value, which approximates wholesale value. The cost of used vehicles sold is determined using the specific identification method.
Goodwill
Goodwill reflects the excess of purchase price over the fair value of specifically identified net assets purchased. Goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to qualitative annual impairment tests at the Company’s year-end. The impairment tests are based on the comparison of the fair value of the reporting unit to the carrying value of such unit. The implied goodwill is compared to the carrying value of the goodwill to determine the impairment, if any. There was no impairment of goodwill during fiscal 2022 or fiscal 2021.
The Company had $8.6 million and $7.3 million of goodwill for the periods ended April 30, 2022 and 2021, respectively. The increase of $1.3 million during the year ended April 30, 2022 was primarily due to the acquisition of ongoing dealership assets during the current year and changes in the assessment of the fair value of previous acquisitions.
Property and Equipment
Property and equipment are stated at cost. Expenditures for additions, remodels and improvements are capitalized. Costs of repairs and maintenance are expensed as incurred. Leasehold improvements are amortized over the shorter of the estimated life of the improvement or the lease period. The lease period includes the primary lease term plus any extensions that are reasonably assured. Depreciation is computed principally using the straight-line method generally over the following estimated useful lives:
Furniture, fixtures and equipment (years) | 3 | to | 7 |
Leasehold improvements (years) | 5 | to | 15 |
Buildings and improvements (years) | 18 | to | 39 |
Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying values of the impaired assets exceed the fair value of such assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
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Cash Overdraft
As checks are presented for payment from the Company’s primary disbursement bank account, monies are automatically drawn against cash collections for the day and, if necessary, are drawn against one of its revolving credit facilities. Any cash overdraft balance principally represents outstanding checks, net of any deposits in transit that as of the balance sheet date had not yet been presented for payment. Any cash overdraft balance is reflected in accrued liabilities on the Company’s Consolidated Balance Sheets.
Deferred Sales Tax
Deferred sales tax represents a sales tax liability of the Company for vehicles sold on an installment basis in the states of Alabama and Texas. Under Alabama and Texas law, for vehicles sold on an installment basis, the related sales tax is due as the payments are collected from the customer, rather than at the time of sale. Deferred sales tax liabilities are reflected in accrued liabilities on the Company’s Consolidated Balance Sheets.
Income Taxes
Income taxes are accounted for under the liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates expected to apply in the years in which these differences are expected to be recovered or settled.
Occasionally, the Company is audited by taxing authorities. These audits could result in proposed assessments of additional taxes. The Company believes that its tax positions comply in all material respects with applicable tax law; however, tax law is subject to interpretation, and interpretations by taxing authorities could be different from those of the Company, which could result in the imposition of additional taxes.
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company applies this methodology to all tax positions for which the statute of limitations remains open.
The Company is subject to income taxes in the U.S. federal jurisdiction and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for the fiscal years before 2018.
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 or interest as of April 30, 2022 and 2021, respectively.
Revenue Recognition
Revenues are generated principally from the sale of used vehicles, which in most cases includes a service contract and an accident protection plan product, as well as interest income and late fees earned on finance receivables. Revenues are net of taxes collected from customers and remitted to government agencies. Cost of vehicle sales include costs incurred by the Company to prepare the vehicle for sale including license and title costs, gasoline, transport services and repairs.
The Company’s performance obligations are clearly identifiable, and the transaction price is explicitly stated on the customers’ contracts. The Company collects payments in accordance with the terms of the customers’ accounts, ranging between 18 to 54 months. Revenues from the sale of used vehicles are recognized when the sales contract is signed, the customer has taken possession of the vehicle and, if applicable, financing has been approved. Revenues from the sale of vehicles sold at wholesale are recognized at the time the proceeds are received. Revenues from the sale of service contracts are recognized ratably over the expected duration of the product. Service contract revenues are included in sales and the related expenses are included in cost of sales. Accident Protection Plan (previously called payment protection plan) revenues are initially deferred and then recognized to income using the “Rule of 78’s” interest method over the life of the contract so that revenues are recognized in proportion to the amount of cancellation protection provided. Accident Protection Plan revenues are included in sales and related losses are included in cost of sales as incurred. Interest income is recognized on all active finance receivables accounts using the simple effective interest method. Active accounts include all accounts except those that have been paid-off or charged-off.
Sales consist of the following for the years ended April 30, 2022, 2021 and 2020:
| | Years Ended April 30, | |
(In thousands) | | 2022 | | | 2021 | | | 2020 | |
| | | | | | | | | | | | |
Sales – used autos | | $ | 927,043 | | | $ | 713,925 | | | $ | 567,816 | |
Wholesales – third party | | | 51,641 | | | | 34,286 | | | | 28,966 | |
Service contract sales | | | 49,154 | | | | 33,028 | | | | 31,480 | |
Accident protection plan revenue | | | 32,674 | | | | 26,826 | | | | 24,730 | |
| | | | | | | | | | | | |
Total | | $ | 1,060,512 | | | $ | 808,065 | | | $ | 652,992 | |
At April 30, 2022 and 2021, finance receivables more than 90 days past due were approximately $3.0 million and $2.1 million, respectively. Late fee revenues totaled approximately $3.1 million, $2.5 million and $2.3 million for the fiscal years ended 2022, 2021 and 2020, respectively. Late fee revenue is recognized when collected and is reflected within Interest and other income on the Consolidated Statements of Operations.
During the years ended April 30, 2022 and 2021, the Company recognized $16.5 million and $10.3 million of revenues that were included in deferred service contract revenues for the years ended April 30, 2021 and 2020, respectively.
Advertising Costs
Advertising costs are expensed as incurred and consist principally of television, radio, print media and digital marketing costs. Advertising costs amounted to $5.0 million, $2.9 million and $3.1 million for the years ended April 30, 2022, 2021 and 2020, respectively.
Employee Benefit Plans
The Company has 401(k) plans for all of its employees meeting certain eligibility requirements. The plans provide for voluntary employee contributions and the Company matches 50% of employee contributions up to a maximum of 6% of each employee’s compensation. The Company contributed approximately $1.2 million, $908,000, and $769,000 to the plans for the years ended April 30, 2022, 2021 and 2020, respectively.
The Company offers employees the right to purchase common shares at a 15% discount from market price under the 2006 Employee Stock Purchase Plan which was approved by shareholders in October 2006. The Company takes a charge to earnings for the 15% discount, included in stock-based compensation. Amounts for fiscal years 2022, 2021 and 2020 were not material individually or in the aggregate. A total of 200,000 shares were registered and 133,621 remain available for issuance under this plan at April 30, 2022.
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Earnings per Share
Basic earnings per share are computed by dividing net income attributable to common stockholders by the average number of common shares outstanding during the period. Diluted earnings per share are computed by dividing net income attributable to common stockholders by the average number of common shares outstanding during the period plus dilutive common stock equivalents. The calculation of diluted earnings per share takes into consideration the potentially dilutive effect of common stock equivalents, such as outstanding stock options and non-vested restricted stock, which if exercised or converted into common stock would then share in the earnings of the Company. In computing diluted earnings per share, the Company utilizes the treasury stock method and anti-dilutive securities are excluded.
Stock-Based Compensation
The Company recognizes the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant over the requisite service period. The Company uses the Black-Scholes option pricing model to determine the fair value of stock option awards. The Company may issue either new shares or treasury shares upon exercise of these awards. Stock-based compensation plans, related expenses, and assumptions used in the Black-Scholes option pricing model are more fully described in Note K. If an award contains a performance condition, expense is recognized only for those shares for which it is considered reasonably probable as of the current period end that the performance condition will be met. The Company accounts for forfeitures as they occur and records any excess tax benefits or deficiencies from equity awards in the Consolidated Statements of Operations in the reporting period in which the exercises occur. As a result, the Company’s income tax expenses and associated effective tax rate will be impacted by fluctuations in stock price between the grant dates and exercise dates of equity awards.
Treasury Stock
The Company purchased 304,204, 106,590, and 182,805 shares of its common stock to be held as treasury stock for a total cost of $34.7 million, $10.6 million and $16.0 million during the years ended April 30, 2022, 2021 and 2020, respectively. Treasury stock may be used for issuances under the Company’s stock-based compensation plans or for other general corporate purposes. The Company has a reserve account of 10,000 shares of treasury stock to secure outstanding service contracts issued in Iowa in accordance with the regulatory requirements of that state and another reserve account of 14,000 shares of treasury stock for its subsidiary, ACM Insurance Company, in accordance with the requirements of the Arkansas Department of Insurance.
Facility Leases
The Company’s leases primarily consist of operating leases related to retail stores, office space, and land. For more information on financing obligations, see Note F.
The initial term for real property leases is typically 3 to 10 years. Most leases include one or more options to renew, with renewal terms that can extend the lease term from 3 to 10 years or more. The Company includes options to renew (or terminate) in the lease term, and as part of the right-of-use (“ROU”) asset and lease liability, when it is reasonably certain that the options will be exercised. The weighted average remaining lease term as of April 30, 2022 was 13.8 years.
The ROU asset and the related lease liability are initially measured at the present value of future lease payments over the lease term. As most leases do not provide an implicit interest rate, the Company obtains a quote for a collateralized debt obligation from a group of lenders each quarter to determine the present value of future payments of leases commenced for that quarter. The weighted average discount rate as of April 30, 2022 was 4.33%.
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The Company includes variable lease payments in the initial measurement of ROU assets and lease liabilities only to the extent they depend on an index or rate. Changes in such indices or rates are accounted for in the period the change occurs, and do not result in the remeasurement of the ROU asset or liability. The Company is also responsible for payment of certain real estate taxes, insurance, and other expenses on leases. These amounts are generally considered to be variable and are not included in the measurement of the ROU asset and lease liability. Non-lease components are generally accounted for separately from lease components. The Company’s leases do not contain any material residual value guarantees or material restricted covenants.
Recent Accounting Pronouncements
Occasionally, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies which the Company will adopt as of the specified effective date. Unless otherwise discussed, the Company believes the implementation of recently issued standards which are not yet effective will not have a material impact on its consolidated financial statements upon adoption.
Recently Adopted Accounting Pronouncements
Reference Rate Reform. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform. The pronouncement provides optional guidance for a limited period of time to ease the potential burden of accounting for reference rate reform. This guidance is effective for all entities as of March 12, 2020, through December 31, 2022. During April 2022, the Company replaced LIBOR as the applicable benchmark interest rate on its revolving line of credit with the daily simple Secured Overnight Financing Rate (“SOFR”). The replacement of the rate to SOFR did not have a material impact on the Company’s financial position or results of operations.
C - Finance Receivables, Net
The Company originates installment sale contracts from the sale of used vehicles at its dealerships. These installment sale contracts, which carry a fixed interest rate of 16.5% per annum (19.5% to 21.5% in Illinois), are collateralized by the vehicle sold and typically provide for payments over periods ranging from 18 to 54 months. The Company’s finance receivables are defined as one segment and one class of loans, which is sub-prime consumer automobile contracts. The level of risks in our financing receivables is managed as one homogeneous pool. The components of finance receivables as of April 30, 2022 and 2021 are as follows:
(In thousands) | | April 30, 2022 | | | April 30, 2021 | |
| | | | | | | | |
Gross contract amount | | $ | 1,378,803 | | | $ | 980,757 | |
Less unearned finance charges | | | (277,306 | ) | | | (171,220 | ) |
Principal balance | | | 1,101,497 | | | | 809,537 | |
Less allowance for credit losses | | | (247,207 | ) | | | (184,418 | ) |
| | | | | | | | |
Finance receivables, net | | $ | 854,290 | | | $ | 625,119 | |
As of April 30, 2022, auto finance receivables collateralizing the non-recourse notes payable related to the financing and securitization transaction completed during the fiscal year 2022, were $550.3 million.
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Changes in the finance receivables, net for the years ended April 30, 2022, 2021 and 2020 are as follows:
| | Years Ended April 30, | |
(In thousands) | | 2022 | | | 2021 | | | 2020 | |
| | | | | | | | | | | | |
Balance at beginning of period | | $ | 625,119 | | | $ | 466,141 | | | $ | 415,486 | |
Finance receivable originations | | | 1,009,859 | | | | 762,716 | | | | 604,497 | |
Finance receivable collections | | | (417,796 | ) | | | (370,254 | ) | | | (322,180 | ) |
Provision for credit losses | | | (257,101 | ) | | | (163,662 | ) | | | (162,246 | ) |
Losses on claims for accident protection plan | | | (21,871 | ) | | | (18,954 | ) | | | (17,966 | ) |
Inventory acquired in repossession and accident protection plan claims | | | (83,920 | ) | | | (50,868 | ) | | | (51,450 | ) |
| | | | | | | | | | | | |
Balance at end of period | | $ | 854,290 | | | $ | 625,119 | | | $ | 466,141 | |
Changes in the finance receivables allowance for credit losses for the years ended April 30, 2022, 2021 and 2020 are as follows:
| | Years Ended April 30, | |
(In thousands) | | 2022 | | | 2021 | | | 2020 | |
| | | | | | | | | | | | |
Balance at beginning of period | | $ | 184,418 | | | $ | 155,041 | | | $ | 127,842 | |
Provision for credit losses | | | 257,101 | | | | 163,662 | | | | 162,246 | |
Charge-offs, net of recovered collateral | | | (194,312 | ) | | | (134,285 | ) | | | (135,047 | ) |
| | | | | | | | | | | | |
Balance at end of period | | $ | 247,207 | | | $ | 184,418 | | | $ | 155,041 | |
Amounts recovered from previously written-off accounts were $2.4 million, $1.9 million, and $1.7 million for the years ended April 30, 2022, 2021 and 2020, respectively.
In the first quarter of fiscal 2020, the Company reduced its allowance for credit losses from 25.0% to 24.5% as a result of improvements in net charge-offs as a percentage of average receivables, the quality of the portfolio and the allowance analysis. However, in the fourth quarter of fiscal 2020, COVID-19 impacted our customers, resulting in an increased past-due amount as a percentage of receivables (to 6.2% from 2.9%). As a result, the Company increased the allowance for credit losses from 24.5% to 26.5%. The net increase resulted in a $9.1 million pre-tax charge to the provision for credit losses ($7.0 million after tax effects, $1.02 per diluted share). As a result of improved credit losses during the fiscal year 2021, as well as the Company’s outlook for projected losses, the Company decreased the allowance for credit losses in the fourth quarter of fiscal 2021 from 26.5% to 24.5%, resulting in a $15.1 million pre-tax decrease in the provision for credit losses ($11.5 million after tax effects, $1.65 per diluted share). The allowance for credit losses remains at 24.5% at April 30, 2022.
The factors which influenced management’s judgment in determining the amount of the current period provision for credit losses are described below.
The historical level of actual charge-offs, net of recovered collateral, is the most important factor in determining the provision for credit losses. This is due to the fact that once a contract becomes delinquent the account is either made current by the customer, the vehicle is repossessed, or the account is written off if the collateral cannot be recovered. Net charge-offs as a percentage of average finance receivables were 20.2% for fiscal 2022 as compared to 19.3% for fiscal 2021. The frequency of losses increased compared to the prior year as credit losses began to normalize to pre-pandemic levels. The prior year credit losses were positively impacted by stimulus payments and lower default rates.
Collections and delinquency levels can have a significant effect on additions to the allowance and are reviewed frequently. Principal collections as a percentage of average finance receivables were 43.5% for the year ended April 30, 2022, compared to 53.2% for the year ended April 30, 2021. Principal collections decreased due to the term extensions coupled with fiscal year 2021 being positively impacted by stimulus payments. Delinquencies greater than 30 days increased slightly to 3.0% at April 30, 2022 compared to 2.6% at April 30, 2021.
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In addition to the objective factors discussed above, the Company also considers macro-economic factors that would affect its customers non-discretionary income, such as changes in unemployment levels, gasoline prices, and prices for staple items to develop reasonable and supportable forecasts for the lifetime expected losses. These economic forecasts are utilized alongside historical loss information in order to estimate expected losses in the portfolio over the following twelve-month period, at which point the Company will immediately revert to the point estimate produced by the Company’s analysis of historical loss information to estimate expected losses from the portfolio for the remaining contractual lives of its finance receivables. See “Finance Receivables, Repossessions and Charge-offs and Allowance for Credit Losses” in Note B for a description of the historical data included in this analysis.
Credit quality information for finance receivables is as follows:
(Dollars in thousands) | | April 30, 2022 | | | April 30, 2021 | |
| | | | | | | | | | | | | | | | |
| | Principal | | | Percent of | | | Principal | | | Percent of | |
| | Balance | | | Portfolio | | | Balance | | | Portfolio | |
Current | | $ | 958,808 | | | | 87.05 | % | | $ | 717,520 | | | | 88.64 | % |
3 - 29 days past due | | | 109,873 | | | | 9.97 | % | | | 71,269 | | | | 8.80 | % |
30 - 60 days past due | | | 22,477 | | | | 2.04 | % | | | 13,058 | | | | 1.61 | % |
61 - 90 days past due | | | 7,360 | | | | 0.67 | % | | | 5,551 | | | | 0.69 | % |
> 90 days past due | | | 2,979 | | | | 0.27 | % | | | 2,139 | | | | 0.26 | % |
Total | | $ | 1,101,497 | | | | 100.00 | % | | $ | 809,537 | | | | 100.00 | % |
Accounts one and two days past due are considered current for this analysis, due to the varying payment dates and variation in the day of the week at each period end. Delinquencies may vary from period to period based on the average age of the portfolio, seasonality within the calendar year, the day of the week and overall economic factors. The above categories are consistent with internal operational measures used by the Company to monitor credit results.
Substantially all of the Company’s automobile contracts involve contracts made to individuals with impaired or limited credit histories, or higher debt-to-income ratios than permitted by traditional lenders. Contracts made with buyers who are restricted in their ability to obtain financing from traditional lenders generally entail a higher risk of delinquency, default and repossession, and higher losses than contracts made with buyers with better credit. The Company monitors customer scores, contract term length, down payment percentages, and collections for credit quality indicators.
| | Twelve Months Ended April 30, | |
| | 2022 | | | 2021 | |
| | | | | | | | |
Average total collected per active customer per month | | $ | 513 | | | $ | 478 | |
Principal collected as a percent of average finance receivables | | | 43.5 | % | | | 53.2 | % |
Average down-payment percentage | | | 6.4 | % | | | 7.1 | % |
Average originating contract term (in months) | | | 40.2 | | | | 34.6 | |
| | | | | | | | |
| | April 30, 2022 | | | April 30, 2021 | |
Portfolio weighted average contract term, including modifications (in months) | | | 42.9 | | | | 37.3 | |
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Collections remained strong with the reduction of principal collected in line with the expected change due to the average term increases. The prior year fiscal fourth quarter included the impact of the pandemic related stimulus payments which contributed to a higher collection percentage. The portfolio weighted average contract term increased primarily due to the increased average selling price, up $3,028 or 22.2%, from fiscal year 2021.
When customers apply for financing, the Company’s proprietary scoring models rely on the customers’ credit histories and certain application information to evaluate and rank their risk. The Company obtains credit histories and other credit data that includes information such as number of different addresses, age of oldest record, high risk credit activity, job time, time at residence and other factors. 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 6 rated 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 maximum amount financed, term length and minimum down payment. After origination, credit grades are generally not updated.
The Company uses a combination of the initial credit grades and historical performance to monitor the credit quality of the finance receivables on an ongoing basis, and the accuracy of the scoring model is validated periodically. Loan performance is reviewed on a recurring basis to identify whether the assigned grades adequately reflect the customers’ likelihood of repayment.
The following table presents a summary of finance receivables by credit quality indicator, as of April 30, 2022 segregated by customer score.
| | | Customer Score by Fiscal Year of Origination | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | Prior to | | | | | | | | | |
(Dollars in thousands) | | | 2022 | | | 2021 | | | 2020 | | | 2019 | | | 2018 | | | 2018 | | | Total | | | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1-2 | | | $ | 37,916 | | | $ | 11,493 | | | $ | 2,221 | | | $ | 77 | | | $ | - | | | $ | 2 | | | $ | 51,709 | | | | 4.7 | % |
3-4 | | | | 260,298 | | | | 84,118 | | | | 13,537 | | | | 587 | | | | 14 | | | | 15 | | | | 358,569 | | | | 32.5 | % |
5-6 | | | | 488,257 | | | | 172,843 | | | | 28,193 | | | | 1,803 | | | | 115 | | | | 8 | | | | 691,219 | | | | 62.8 | % |
Total | | | $ | 786,471 | | | $ | 268,454 | | | $ | 43,951 | | | $ | 2,467 | | | $ | 129 | | | $ | 25 | | | $ | 1,101,497 | | | | 100.0 | % |
The following table presents a summary of finance receivables by credit quality indicator, as of April 30, 2021 segregated by customer score.
| | | Customer Score by Fiscal Year of Origination | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | Prior to | | | | | | | | | |
(Dollars in thousands) | | | 2021 | | | 2020 | | | 2019 | | | 2018 | | | 2017 | | | 2017 | | | Total | | | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1-2 | | | $ | 32,946 | | | $ | 11,967 | | | $ | 1,229 | | | $ | 63 | | | $ | 8 | | | $ | - | | | $ | 46,213 | | | | 5.7 | % |
3-4 | | | | 211,939 | | | | 66,524 | | | | 8,299 | | | | 491 | | | | 26 | | | | 8 | | | | 287,287 | | | | 35.5 | % |
5-6 | | | | 346,461 | | | | 108,576 | | | | 19,006 | | | | 1,868 | | | | 121 | | | | 5 | | | | 476,037 | | | | 58.8 | % |
Total | | | $ | 591,346 | | | $ | 187,067 | | | $ | 28,534 | | | $ | 2,422 | | | $ | 155 | | | $ | 13 | | | $ | 809,537 | | | | 100.0 | % |
D - Property and Equipment
A summary of property and equipment is as follows:
(In thousands) | | April 30, 2022 | | | April 30, 2021 | |
| | | | | | | | |
Land | | $ | 11,749 | | | $ | 7,594 | |
Buildings and improvements | | | 13,876 | | | | 13,717 | |
Furniture, fixtures and equipment | | | 16,189 | | | | 15,401 | |
Leasehold improvements | | | 36,392 | | | | 33,450 | |
Construction in progress | | | 14,234 | | | | 2,421 | |
Accumulated depreciation and amortization | | | (41,002 | ) | | | (37,864 | ) |
| | | | | | | | |
Property and equipment, net | | $ | 51,438 | | | $ | 34,719 | |
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E - Accrued Liabilities
A summary of accrued liabilities is as follows:
(In thousands) | | April 30, 2022 | | | April 30, 2021 | |
| | | | | | | | |
Employee compensation and benefits | | $ | 12,865 | | | $ | 14,664 | |
Cash overdrafts (see Note B) | | | - | | | | 1,802 | |
Deferred sales tax (see Note B) | | | 7,388 | | | | 5,904 | |
Reserve for accident protection plan claims | | | 4,761 | | | | 3,737 | |
Fair value of contingent consideration | | | 3,544 | | | | 3,175 | |
Other | | | 4,072 | | | | 1,996 | |
| | | | | | | | |
Accrued liabilities | | $ | 32,630 | | | $ | 31,278 | |
F – Debt
A summary of debt is as follows:
(In thousands) | | 2022 | | | 2021 | |
| | | | | | | | |
Revolving line of credit | | $ | 46,674 | | | $ | 226,602 | |
Debt issuance costs | | | (2,004 | ) | | | (678 | ) |
| | | | | | | | |
Revolving line of credit, net | | $ | 44,670 | | | $ | 225,924 | |
| | | | | | | | |
Non-recourse notes payable | | $ | 399,994 | | | $ | - | |
Debt issuance costs | | | (4,008 | ) | | | - | |
| | | | | | | | |
Non-recourse notes payable, net | | $ | 395,986 | | | $ | - | |
| | | | | | | | |
Total debt | | $ | 440,656 | | | $ | 225,924 | |
Revolving Line of Credit
On September 30, 2019, the Company and its subsidiaries, Colonial, Car-Mart of Arkansas (“ACM”) and Texas Car-Mart, Inc. (“TCM”) entered into a Third Amended and Restated Loan and Security Agreement (the “Agreement”), which amended and restated the Company’s revolving credit facilities. Under the Agreement, BMO Harris Bank, N.A. replaced Bank of America, N.A. as agent, lead arranger and book manager, and Wells Fargo Bank, N.A. joined the group of lenders. The Agreement also extended the term of the Company’s revolving credit facilities to September 30, 2022 and increased the total permitted borrowings from $215 million to $241 million, including an increase in the Colonial revolving line of credit from $205 million to $231 million. The ACM-TCM revolving line of credit commitment remained the same at $10 million. The Agreement also increased the accordion feature from $50 million to $100 million.
On October 29, 2020, the Company and its subsidiaries entered into Amendment No. 1 to the Agreement to expand the Company’s borrowing base by removing the limitations on the inclusion in the borrowing base of finance receivable balances on medium- and long-term vehicle contracts (those having an original contract term between 36 and 42 months or between 42 and 60 months, respectively), which were previously limited to 15% and 5%, respectively, and an aggregate of 15% of the eligible finance receivable balances for purposes of determining the Company’s borrowing base. Under Amendment No. 1, finance receivables from vehicle contracts not exceeding 60 months in duration that meet certain other conditions are eligible for inclusion in the borrowing base calculation.
Amendment No. 1 also allows the Company to make certain strategic business acquisitions and expanded the Company’s ability to dispose of real estate, equipment and other property, subject to certain limitations. Amendment No. 1 permits the Company to acquire strategic targets engaged in the same or a reasonably related business to the Company’s business, provided that, among other requirements, the aggregate consideration paid for all acquired businesses in any one fiscal year does not exceed $20.0 million. Amendment No. 1 also permits the Company to dispose of up to $5.0 million and $1.0 million of real estate and other property, respectively, subject to certain conditions, and also permits the Company to select one or more additional lenders, subject to the written consent of BMO Harris Bank, N.A., as agent, to participate in any increase of the Colonial revolving line of credit under the Agreement’s accordion feature.
On December 31, 2020, the Company through its operating subsidiaries exercised an option under the Agreement to increase its total revolving credit facilities by $85 million from $241 million to $326 million pursuant to the Agreement’s accordion feature. In connection with this increase, MUFG Union Bank, N.A. joined the lending group as a new lender. In addition to the increased permitted borrowings, the Company designated BOKF, NA d/b/a BOK Financial and Wells Fargo Bank, N.A. as co-syndication agents and First Horizon Bank and MUFG Union Bank, N.A. as co-documentation agents under the Agreement.
On February 10, 2021, the Company and its subsidiaries entered into Amendment No. 2 to the Agreement to increase the Company’s permissible capital expenditure amount from $10,000,000 to $25,000,000 in the aggregate during any fiscal year.
On September 29, 2021, the Company and its subsidiaries entered into Amendment No. 3 to the Agreement, which extends the term of the revolving credit facilities to September 29, 2024 and increases the total permitted borrowings by $274 million from $326 million to $600 million. In connection with the increase, CIBC Bank USA and Axos Bank joined the group of lenders. Additionally, Amendment No. 3 amended the distribution limitation to renew the aggregate limit on the Company’s repurchases of its common stock, increased the Company’s permissible capital expenditure amount from $25 million to $35 million in the aggregate, during any fiscal year, restores the accordion feature back to $100 million, and adds certain mechanics for the replacement of LIBOR as the applicable benchmark interest rate under the Agreement, including mechanics to transition upon the cessation of LIBOR to a rate based upon the secured overnight financing rate published by the Federal Reserve Bank of New York.
On April 22, 2022, the Company and its subsidiaries entered into Amendment No. 4 to the Agreement, which permits the sale, contribution, or transfer of vehicle contracts to, and certain repurchases of such contracts from, a special purpose subsidiary of the Company in connection with a securitization transaction, in each case subject to specified conditions. Amendment No. 4 also replaces LIBOR as the applicable benchmark interest rate with SOFR and increases the unused line fee rate from 0.25% to 0.375% if the average daily amount outstanding during the preceding month is less than 50% of the revolver commitments.
The revolving credit facilities are collateralized primarily by finance receivables and inventory, are cross collateralized and contain a guarantee by the Company. Interest is payable monthly under the revolving credit facilities. The credit facilities provide for four pricing tiers for determining the applicable interest rate, based on the Company’s consolidated leverage ratio for the preceding fiscal quarter. The current applicable interest rate under the credit facilities is generally SOFR plus 2.35%, with a minimum of 2.25%. At April 30, 2022 and 2021, the interest rate under the credit facilities was 2.85%. The credit facilities contain various reporting and performance covenants including (i) maintenance of certain financial ratios and tests, (ii) limitations on borrowings from other sources, (iii) restrictions on certain operating activities and (iv) restrictions on the payment of dividends or distributions (see note B).
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The Company was in compliance with the covenants at April 30, 2022. The amount available to be drawn under the credit facilities is a function of eligible finance receivables and inventory; based upon eligible finance receivables and inventory at April 30, 2022, the Company had additional availability of approximately $197.8 million under the revolving credit facilities.
The Company recognized $775,000, $391,000 and $273,000 of amortization for the twelve months ended April 30, 2022, 2021 and 2020, respectively, related to debt issuance costs. The amortization is reflected as interest expense in the Company’s Consolidated Statements of Operations.
During the years ended April 30, 2022 and April 30, 2021, the Company incurred approximately $2.1 million and $282,000, respectively, in debt issuance costs related to amendments of the credit facilities. Debt issuance costs of approximately $2.0 million and $678,000 as of April 30, 2022 and 2021, respectively, are shown as a deduction from the revolving credit facilities in the Consolidated Balance Sheet.
Non-Recourse Notes Payable
The non-recourse notes payable were issued in four classes on April 27, 2022 with a weighted average fixed coupon rate of 5.14% per annum and collateralized by auto loans directly originated by the Company. Credit enhancement for the non-recourse notes payable consists of overcollateralization, a reserve account funded with an initial amount of not less than 2.0% of the pool balance, excess interest on the auto finance receivables, and in some cases, the subordination of certain payments to noteholders of less senior classes of notes. 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 finance receivables. Notes payable related to the term securitization transaction accrue interest predominately at fixed rates and have scheduled maturities through April 20, 2029, but may mature earlier, depending upon repayment rate of the underlying auto finance receivables. See Note B for additional information.
G – Fair Value Measurements
| | April 30, 2022 | | | April 30, 2021 | |
(In thousands) | | Carrying Value | | | Fair Value | | | Carrying Value | | | Fair Value | |
| | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 6,916 | | | $ | 6,916 | | | $ | 2,893 | | | $ | 2,893 | |
Restricted cash | | | 35,671 | | | | 35,671 | | | | - | | | | - | |
Finance receivables, net | | | 854,290 | | | | 677,421 | | | | 625,119 | | | | 497,865 | |
Accounts payable | | | 20,055 | | | | 20,055 | | | | 18,208 | | | | 18,208 | |
Revolving line of credit | | | 44,670 | | | | 44,670 | | | | 225,924 | | | | 225,924 | |
Non-recourse notes payable | | | 395,986 | | | | 395,986 | | | | - | | | | - | |
Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance also establishes a fair value hierarchy that requires the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. Topic 820 describes three levels of inputs that may be used to measure fair value:
| ● | Level 1 Inputs – Quoted prices in active markets for identical assets or liabilities. |
| ● | Level 2 Inputs – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices for similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| ● | Level 3 Inputs – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
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Because no market exists for certain of the Company’s financial instruments, fair value estimates are based on judgments and estimates regarding yield expectations of investors, credit risk and other risk characteristics, including interest rate and prepayment risk. These estimates are subjective in nature and involve uncertainties and matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates. The methodology and assumptions utilized to estimate the fair value of the Company’s financial instruments are as follows:
Financial Instrument | Valuation Methodology |
| |
Cash, cash equivalents, and restricted cash | The carrying amount is considered to be a reasonable estimate of fair value due to the short-term nature of the financial instruments (Level 1). |
| |
Finance receivables, net | The Company estimated the fair value of its receivables at what a third-party purchaser might be willing to pay. The Company has had discussions with third parties and has bought and sold portfolios and has had a third-party appraisal in January 2019 that indicates a range of 34% to 39% discount to face would be a reasonable fair value in a negotiated third-party transaction. The sale of finance receivables from Car-Mart of Arkansas to Colonial is made at a 38.5% discount. For financial reporting purposes these sale transactions are eliminated (Level 2). |
| |
Accounts payable | The carrying amount is considered to be a reasonable estimate of fair value due to the short-term nature of the financial instrument (Level 2). |
| |
Revolving line of credit | The fair value approximates carrying value due to the variable interest rates charged on the borrowings, which reprice frequently (Level 2). |
| |
Non-recourse notes payable | The fair value was based upon inputs derived from prices for similar instruments at period end. |
The estimated fair values, and related carrying amounts, of the financial instruments included in the Company’s financial statements at April 30, 2022 and 2021 are as follows:
| | April 30, 2022 | | | April 30, 2021 | |
(In thousands) | | Carrying Value | | | Fair Value | | | Carrying Value | | | Fair Value | |
| | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 6,916 | | | $ | 6,916 | | | $ | 2,893 | | | $ | 2,893 | |
Restricted cash | | | 35,671 | | | | 35,671 | | | | - | | | | - | |
Finance receivables, net | | | 854,290 | | | | 677,421 | | | | 625,119 | | | | 497,865 | |
Accounts payable | | | 20,055 | | | | 20,055 | | | | 18,208 | | | | 18,208 | |
Revolving line of credit | | | 44,670 | | | | 44,670 | | | | 225,924 | | | | 225,924 | |
Non-recourse notes payable | | | 395,986 | | | | 395,986 | | | | - | | | | - | |
H - Income Taxes
The provision for income taxes was as follows:
| | Years Ended April 30, | |
(In thousands) | | 2022 | | | 2021 | | | 2020 | |
Provision for income taxes | | | | | | | | | | | | |
Current | | $ | 18,869 | | | $ | 23,274 | | | $ | 14,288 | |
Deferred | | | 8,226 | | | | 7,028 | | | | (1,280 | ) |
Total | | $ | 27,095 | | | $ | 30,302 | | | $ | 13,008 | |
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The provision for income taxes is different from the amount computed by applying the statutory federal income tax rate to income before income taxes for the following reasons:
| | Years Ended April 30, | |
(In thousands) | | 2022 | | | 2021 | | | 2020 | |
Tax provision at statutory rate | | $ | 25,284 | | | $ | 28,233 | | | $ | 13,514 | |
State taxes, net of federal benefit | | | 3,612 | | | | 4,033 | | | | 1,931 | |
Tax benefit from option exercises | | | (1,356 | ) | | | (1,401 | ) | | | (1,498 | ) |
Other, net | | | (445 | ) | | | (563 | ) | | | (939 | ) |
Total | | $ | 27,095 | | | $ | 30,302 | | | $ | 13,008 | |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred income tax assets and liabilities were as follows:
| | Years Ended April 30, | |
(In thousands) | | 2022 | | | 2021 | |
Deferred income tax liabilities related to: | | | | | | | | |
Finance receivables | | $ | 35,466 | | | $ | 26,373 | |
Property and equipment | | | 1,368 | | | | 372 | |
Goodwill | | | 194 | | | | 141 | |
Total | | | 37,028 | | | | 26,886 | |
Deferred income tax assets related to: | | | | | | | | |
Accrued liabilities | | | 2,524 | | | | 2,140 | |
Inventory | | | 316 | | | | 213 | |
Share based compensation | | | 3,561 | | | | 3,109 | |
State net operating loss | | | 168 | | | | 42 | |
Deferred revenue | | | 2,226 | | | | 1,375 | |
Total | | | 8,795 | | | | 6,879 | |
Deferred income tax liabilities, net | | $ | 28,233 | | | $ | 20,007 | |
I – Capital Stock
The Company is authorized to issue up to 50,000,000 shares of common stock, par value $0.01 per share, and up to 1,000,000 shares of preferred stock, par value $0.01 per share. Each share of the Company’s common stock has the same relative rights as, and is identical in all respects to, each other share of the Company’s common stock. The shares of preferred stock may be issued in one or more series having such respective terms, rights and preferences as are designated by the Board of Directors. The Company has not issued any preferred stock.
A subsidiary of the Company has issued 500,000 shares of $1.00 par value preferred stock which carries an 8% cumulative dividend. The Company’s subsidiary can redeem the preferred stock at any time at par value plus any unpaid dividends. After April 30, 2017, a holder of 400,000 shares of the subsidiary preferred stock can require the Company’s subsidiary to redeem such stock for $400,000 plus any unpaid dividends.
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J – Weighted Average Shares Outstanding
Weighted average shares of common stock outstanding used in the calculation of basic and diluted earnings per share were as follows:
| | Years Ended April 30, | |
| | 2022 | | | 2021 | | | 2020 | |
| | | | | | | | | | | | |
Weighted average shares outstanding-basic | | | 6,509,673 | | | | 6,628,749 | | | | 6,630,023 | |
Dilutive options and restricted stock | | | 313,808 | | | | 332,826 | | | | 315,629 | |
| | | | | | | | | | | | |
Weighted average shares outstanding-diluted | | | 6,823,481 | | | | 6,961,575 | | | | 6,945,652 | |
| | | | | | | | | | | | |
Antidilutive securities not included: | | | | | | | | | | | | |
Options | | | 120,000 | | | | 152,500 | | | | 118,750 | |
Restricted Stock | | | 4,784 | | | | 2,479 | | | | 7,224 | |
K – Stock-Based Compensation Plans
The Company has stock-based compensation plans available to grant non-qualified stock options, incentive stock options and restricted stock to employees, directors and certain advisors of the Company. The current stock-based compensation plans being utilized at April 30, 2022 are the Amended and Restated Stock Option Plan and the Amended and Restated Stock Incentive Plan. The Company recorded total stock-based compensation expense for all plans of approximately $5.5 million ($4.2 million after tax effects), $6.0 million ($4.6 million after tax effects) and $4.7 million ($3.6 million after tax effects) for the years ended April 30, 2022, 2021 and 2020, respectively. Tax benefits were recognized for these costs at the Company’s overall effective tax rate, excluding discrete income tax benefits related to excess benefits on share-based compensation.
Stock Option Plan
The Company has options outstanding under a stock option plan approved by the shareholders, the Amended and Restated Stock Option Plan. The shareholders of the Company approved the Amended and Restated Stock Option Plan (the “Restated Option Plan”) on August 5, 2015, which extended the term of the Stock Option Plan to June 10, 2025 and increased the number of shares of common stock reserved for issuance under the plan by an additional 300,000 shares to 1,800,000 shares. On August 29, 2018, the shareholders of the Company approved an amendment to the Restated Option Plan increasing the number of shares of common stock reserved for issuance under the plan by an additional 200,000 shares to 2,000,000 shares. On August 26, 2020, the shareholders of the Company approved an amendment to the Restated Option Plan increasing the number of shares of common stock reserved for issuance under the plan by an additional 200,000 shares to 2,200,000 shares. The Restated Option Plan provides for the grant of options to purchase shares of the Company’s common stock to employees, directors and certain advisors of the Company at a price not less than the fair market value of the stock on the date of grant and for periods not to exceed ten years. Options outstanding under the Company’s stock option plans expire in the calendar years 2022 through 2031.
| | | Restated Option Plan |
Minimum exercise price as a percentage of fair market value at date of grant | | | 100% |
Last expiration date for outstanding options | | | May 1, 2031 |
Shares available for grant at April 30, 2022 | | | 215,000 |
The aggregate intrinsic value of outstanding options at April 30, 2022 and 2021 was $8.4 million and $44.4 million, respectively.
The fair value of options granted is estimated on the date of grant using the Black-Scholes option pricing model based on the assumptions in the table below.
| | April 30, 2022 | | | April 30, 2021 | | | April 30, 2020 | |
Expected terms (years) | | | 5.5 | | | | 5.5 | | | | 5.5 | |
Risk-free interest rate | | | 0.86% | | | | 0.36% | | | | 1.75% | |
Volatility | | | 51% | | | | 50% | | | | 39% | |
Dividend yield | | | - | | | | - | | | | - | |
The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on historical volatility of the Company’s common stock. The Company has not historically issued dividends and does not expect to do so in the foreseeable future.
There were 30,000 options granted during each of fiscal 2022 and 2021. The grant-date fair value of options granted during fiscal 2022, 2021 and 2020 was $2.1 million, $2.0 million and $9.3 million, respectively. The options were granted at fair market value on date of grant. Generally, options vest after three to five years, except for options issued to directors which are immediately vested at date of grant.
The following is an aggregate summary of the activity in the Company’s stock option plans from April 30, 2019 to April 30, 2022:
| | Number | | | Exercise | | | Proceeds | | | Weighted Average | |
| | of | | | Price | | | on | | | Exercise Price per | |
| | Options | | | per Share | | | Exercise | | | Share | |
| | | | | | | | | | (in thousands) | | | | | |
Outstanding at April 30, 2019 | | | 565,500 | | | | | | | $ | 26,087 | | | $ | 46.13 | |
Granted | | | 225,000 | | | 99.0505 to109.06.06 | | | | 24,287 | | | | 107.95 | |
Exercised | | | (121,250 | ) | | 22.8787 to53.02.02 | | | | (4,517 | ) | | | 37.25 | |
Cancelled | | | (1,500 | ) | | | $ 53.02 | | | | (80 | ) | | | 53.02 | |
Outstanding at April 30, 2020 | | | 667,750 | | | | | | | $ | 45,777 | | | $ | 68.55 | |
Granted | | | 30,000 | | | | $ 65.95 | | | | 30 | | | | 65.95 | |
Exercised | | | (131,350 | ) | | 24.6969 to99.05.05 | | | | (6,730 | ) | | | 51.24 | |
Outstanding at April 30, 2021 | | | 566,400 | | | | | | | $ | 39,077 | | | $ | 72.43 | |
Granted | | | 30,000 | | | | $ 150.83 | | | | 30 | | | | 150.83 | |
Exercised | | | (94,000 | ) | | 26.3737 to150.83.83 | | | | (6,276 | ) | | | 66.76 | |
Cancelled | | | (1,000 | ) | | | $ 41.86 | | | | (42 | ) | | $ | 41.86 | |
Outstanding at April 30, 2022 | | | 501,400 | | | | | | | $ | 32,789 | | | | | |
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Stock option compensation expense on a pre-tax basis was $4.5 million ($3.4 million after tax effects), $3.9 million ($3.0 million after tax effects) and $3.6 million ($2.9 million after tax effects) for the years ended April 30, 2022, 2021 and 2020, respectively. As of April 30, 2022, the Company had approximately $2.5 million of total unrecognized compensation cost related to unvested options that are expected to vest. These options have a weighted average remaining vesting period of 0.9 years.
The Company had the following options exercised for the periods indicated. The impact of these cash receipts is included in financing activities in the accompanying Consolidated Statements of Cash Flows.
| | Years Ended April 30, | |
(Dollars in thousands) | | 2022 | | | 2021 | | | 2020 | |
| | | | | | | | | | | | |
Options Exercised | | | 94,000 | | | | 131,350 | | | | 121,250 | |
Cash Received from Options Exercised | | $ | 591 | | | $ | 5,120 | | | $ | 2,928 | |
Intrinsic Value of Options Exercised | | $ | 7,124 | | | $ | 7,894 | | | $ | 7,580 | |
During the year ended April 30, 2022, there were 80,000 options exercised through net settlements in accordance with plan provisions, wherein the shares issued were reduced by 53,425 shares to satisfy the exercise price and applicable withholding taxes to acquire 26,575 shares.
As of April 30, 2022, there were 261,400 vested and exercisable stock options outstanding with an aggregate intrinsic value of $5.3 million and a weighted average remaining contractual life of 5.5 years and a weighted average exercise price of $74.84.
Stock Incentive Plan
On August 5, 2015, the shareholders of the Company approved the Amended and Restated Stock Incentive Plan (the “Restated Incentive Plan”), which extended the term of the Company’s Stock Incentive Plan to June 10, 2025. On August 29, 2018, the shareholders of the Company approved an amendment to the Restated Stock Incentive Plan that increased the number of shares of common stock that may be issued under the Restated Incentive Plan by 100,000 shares to 450,000. For shares issued under the Stock Incentive Plan, the associated compensation expense is generally recognized equally over the vesting periods established at the award date and is subject to the employee’s continued employment by the Company.
The following is a summary of the activity in the Company’s Stock Incentive Plan:
| | Number of Shares | | | Weighted Average Grant Date Fair Value | |
| | | | | | | | |
Unvested shares at April 30, 2019 | | | 180,500 | | | $ | 46.16 | |
Shares granted | | | 12,328 | | | | 102.03 | |
Shares vested | | | (7,000 | ) | | | 52.10 | |
Shares cancelled | | | (1,000 | ) | | | 37.07 | |
Unvested shares at April 30, 2020 | | | 184,828 | | | $ | 49.71 | |
Shares granted | | | 7,690 | | | | 98.43 | |
Shares vested | | | - | | | | - | |
Shares cancelled | | | (500 | ) | | | 35.00 | |
Unvested shares at April 30, 2021 | | | 192,018 | | | $ | 51.70 | |
Shares granted | | | 11,287 | | | | 121.17 | |
Shares vested | | | (6,500 | ) | | | 39.14 | |
Shares cancelled | | | (15,691 | ) | | | 59.99 | |
Unvested shares at April 30, 2022 | | | 181,114 | | | $ | 55.76 | |
The fair value at vesting for awards under the stock incentive plan was $10.1 million, $9.9 million, and $9.2 million in fiscal 2022, 2021 and 2020, respectively.
During the fiscal year 2022, 5,750 shares were granted with a fair value of $102.40, 4,500 shares were granted with a fair value of $150.83 and 1,037 shares were granted with a fair value of $96.49. During the fiscal year 2021, 2,000 shares were granted with a fair value of $65.95, and 5,690 shares were granted with a fair value of $109.84. During the fiscal year 2020, 3,000 restricted shares were granted with a fair value of $99.05, 4,224 shares were granted with a fair value of $109.06 and 5,104 shares were granted with a fair value of $97.97. A total of 91,413 shares remain available for award at April 30, 2022.
The Company recorded compensation cost of approximately $981,000 ($749,000 after tax effects), $1.1 million ($878,000 after tax effects) and $1.1 million ($839,000 after tax effects) related to the Restated Incentive Plan during the years ended April 30, 2022, 2021 and 2020, respectively. As of April 30, 2022, the Company had $5.3 million of total unrecognized compensation cost related to unvested awards granted under the Restated Incentive Plan, which the Company expects to recognize over a weighted-average remaining period of 4.5 years.
L - Commitments and Contingencies
Letter of Credit
The Company has two standby letters of credit relating to insurance policies totaling $750,000 at April 30, 2022.
Facility Leases
The Company leases certain dealership and office facilities under various non-cancelable operating leases. Dealership leases are generally for periods from three to five years and contain multiple renewal options. As of April 30, 2022, the aggregate rentals due under such leases, including renewal options that are reasonably assured, were as follows:
Years Ending | | Amount | |
April 30, | | (In thousands) | |
| | | | |
2023 | | $ | 7,532 | |
2024 | | | 7,025 | |
2025 | | | 6,893 | |
2026 | | | 6,376 | |
2027 | | | 5,852 | |
Thereafter | | | 48,271 | |
Total undiscounted operating lease payments | | | 81,949 | |
Less: imputed interest | | | 20,468 | |
Present value of operating lease liabilities | | $ | 61,481 | |
The $81.9 million of operating lease commitments includes $18.0 million of non-cancelable lease commitments under the lease terms, and $63.9 million of lease commitments for renewal periods at the Company’s option that are reasonably assured. For the years ended April 30, 2022, 2021 and 2020, rent expense for all operating leases amounted to approximately $8.0 million, $8.0 million and $6.9 million, respectively. In fiscal 2022 the Company obtained $7.9 million in lease assets in exchange for lease obligations.
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Litigation
In the ordinary course of business, the Company has become a defendant in various types of legal proceedings. The Company does not expect the final outcome of any of these actions, individually or in the aggregate, to have a material adverse effect on the Company’s financial position, annual results of operations or cash flows. The results of legal proceedings cannot be predicted with certainty, however, and an unfavorable resolution of one or more of these legal proceedings could have a material adverse effect on the Company’s financial position, annual results of operations or cash flows.
Related Finance Company
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 as described in the Treasury Regulations. For financial accounting purposes, these transactions are eliminated in consolidation, and a deferred income 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. 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.
M - Supplemental Cash Flow Information
Supplemental cash flow disclosures for the years ended April 30, 2022, 2021 and 2020 are as follows:
| | Years Ended April 30, | |
(in thousands) | | 2022 | | | 2021 | | | 2020 | |
Supplemental disclosures: | | | | | | | | | | | | |
Interest paid | | $ | 10,421 | | | $ | 7,029 | | | $ | 8,152 | |
Income taxes paid, net | | | 19,238 | | | | 26,964 | | | | 8,505 | |
| | | | | | | | | | | | |
Non-cash transactions: | | | | | | | | | | | | |
Inventory acquired in repossession and accident protection plan claims | | | 83,919 | | | | 50,868 | | | | 51,450 | |
Loss accrued on disposal of property and equipment | | | - | | | | - | | | | 3 | |
Net settlement option exercises | | | 5,685 | | | | 1,610 | | | | 1,589 | |